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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  |                                                                                        
|  |  | For the quarterly period ended December 31, 2003                                       

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  |                                                                                         
|  |  | For the transition period
from  to                                                      

Commission file number: 0-23576

CELERITEK, INC.

(Exact name of registrant as specified in its charter)


|                                                                          |  |                                                   
|------------------------------------------------------------------------- |  | --------------------------------------------------
|California
(State or other jurisdiction of
incorporation or organization) |  | 77-0057484
(I.R.S. Employer
Identification Number)
|                                                                          |  |                                                   
|3236 Scott Blvd.
Santa Clara, CA
(Address of principal executive offices) |  | 95054
(Zip Code)                                  

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

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

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

Yes x No o

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

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: 12,458,128 shares as of January 25, 2004



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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 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  
|INDEX TO EXHIBITS           
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                



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CELERITEK, INC.

Table of Contents

|                              |                                                                                               |                                                                                                         |    |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                              |                                                                                               |                                                                                                         |    | Page No.
|                              |                                                                                               |                                                                                                         |    |         
|PART I: FINANCIAL INFORMATION |                                                                                               |                                                                                                         | 1  |         
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                                         |    | 1        |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets: December 31, 2003 and March 31, 2003                             |    |          | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations: Three and
nine months ended December 31, 2003 and 2002 |    |          | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows: Nine months
ended December 31, 2003 and 2002           |    |          | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                    |    |          | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                         |    | 12       |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                         |    | 28       |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                         |    | 29       |  
|PART II: OTHER INFORMATION    |                                                                                               |                                                                                                         | 29 |         
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                         |    | 29       |  
|SIGNATURES                    |                                                                                               |                                                                                                         | 30 |         

-i-





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PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

|                                                                                                                                                  |                                           |                           |         |              |        |           |         |        |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------- | ------- | ------------ | ------ | --------- | ------- | ------ | ------- | 
|                                                                                                                                                  |                                           |                           |         | December 31, |        | March 31,
|                                                                                                                                                  |                                           |                           |         | 2003         |        | 2003     
|                                                                                                                                                  |                                           |                           |         |              |        |          
|                                                                                                                                                  |                                           |                           |         | (Unaudited)  |        | (Note)   
|ASSETS                                                                                                                                            |                                           |                           |         |              |        |           |         |       
|Current assets:                                                                                                                                   |                                           |                           |         |              |        |           |         |       
|                                                                                                                                                  | Cash and cash equivalents                 |                           | $       | 12,406       |        |           | $       | 28,909 |        
|                                                                                                                                                  | Short-term investments                    |                           |         | 71,219       |        |           |         | 66,727 |        
|                                                                                                                                                  | Accounts receivable, net                  |                           |         | 5,375        |        |           |         | 4,483  |        
|                                                                                                                                                  | Inventories                               |                           |         | 3,135        |        |           |         | 3,599  |        
|                                                                                                                                                  | Prepaid expenses and other current assets |                           |         | 1,638        |        |           |         | 1,925  |        
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       
|                                                                                                                                                  |                                           | Total current assets      |         |              | 93,773 |           |         |        | 105,643 | 
|Property and equipment, net                                                                                                                       |                                           |                           | 5,693   |              |        |           | 11,029  |       
|Intangible assets                                                                                                                                 |                                           |                           |        |              |        |           | 931     |       
|Other assets                                                                                                                                      |                                           |                           | 4,673   |              |        |           | 4,857   |       
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       
|Total assets                                                                                                                                      |                                           | $                         | 104,139 |              |        | $         | 122,460 |       
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       
|LIABILITIES & SHAREHOLDERS EQUITY                                                                                                                |                                           |                           |         |              |        |           |         |       
|Current liabilities:                                                                                                                              |                                           |                           |         |              |        |           |         |       
|                                                                                                                                                  | Accounts payable                          |                           | $       | 3,161        |        |           | $       | 4,355  |        
|                                                                                                                                                  | Accrued payroll                           |                           |         | 1,288        |        |           |         | 1,601  |        
|                                                                                                                                                  | Accrued liabilities                       |                           |         | 4,968        |        |           |         | 4,201  |        
|                                                                                                                                                  | Current portion of long-term debt         |                           |         | 2,741        |        |           |         | 2,543  |        
|                                                                                                                                                  | Current obligations under capital leases  |                           |         | 1,135        |        |           |         | 597    |        
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       
|                                                                                                                                                  |                                           | Total current liabilities |         |              | 13,293 |           |         |        | 13,297  | 
|Long-term debt, less current portion                                                                                                              |                                           |                           | 39      |              |        |           | 2,126   |       
|Non-current obligations under capital leases                                                                                                      |                                           |                           | 7       |              |        |           | 793     |       
|Shareholders equity (12,454,128 and
12,342,163 common and no preferred shares
outstanding at December 31, 2003 and March 31,
2003, respectively) |                                           |                           | 90,800  |              |        |           | 106,244 |       
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       
|Total liabilities and shareholders equity                                                                                                        |                                           | $                         | 104,139 |              |        | $         | 122,460 |       
|                                                                                                                                                  |                                           |                           |         |              |        |           |         |       



|Note: |  | The balance sheet at March 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

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

|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|-------------------------------------------------------------- | ---------------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                               |                                                      |   | Three Months Ended |       | Nine Months Ended
|                                                               |                                                      |   | December 31,       |       | December 31,     
|                                                               |                                                      |   |                    |       |                  
|                                                               |                                                      |   | 2003               |       | 2002              |   | 2003    |       | 2002
|                                                               |                                                      |   |                    |       |                   |   |         |       |     
|Net sales                                                      |                                                      | $ | 7,714              |       |                   | $ | 10,523  |       |      | $ | 21,369  |       |  | $ | 41,348  |      
|Cost of goods sold                                             |                                                      |   | 5,084              |       |                   |   | 8,601   |       |      |   | 16,805  |       |  |   | 31,591  |      
|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|Gross profit                                                   |                                                      |   | 2,630              |       |                   |   | 1,922   |       |      |   | 4,564   |       |  |   | 9,757   |      
|Operating expenses:                                            |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|                                                               | Research and development                             |   |                    | 1,861 |                   |   |         | 2,530 |      |   |         | 7,690 |  |   |         | 7,973 | 
|                                                               | Selling, general and
administrative                  |   |                    | 1,913 |                   |   |         | 2,267 |      |   |         | 6,307 |  |   |         | 7,184 | 
|                                                               | Cost related to shareholder
and strategic activities |   |                    | 323   |                   |   |         | 221   |      |   |         | 3,036 |  |   |         | 721   | 
|                                                               | Special charges                                      |   |                    | 1,939 |                   |   |         | 2,783 |      |   |         | 4,540 |  |   |         | 2,783 | 
|                                                               | In-process research and
development                  |   |                    |      |                   |   |         | 4,414 |      |   |         |      |  |   |         | 4,414 | 
|                                                               | Intangible asset amortization                        |   |                    |      |                   |   |         | 86    |      |   |         | 257   |  |   |         | 86    | 
|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|Total operating expenses                                       |                                                      |   | 6,036              |       |                   |   | 12,301  |       |      |   | 21,830  |       |  |   | 23,161  |      
|Loss from operations                                           |                                                      |   | (3,406             | )     |                   |   | (10,379 | )     |      |   | (17,266 | )     |  |   | (13,404 | )    
|Impairment of strategic investment                             |                                                      |   |                   |       |                   |   |        |       |      |   |        |       |  |   | (330    | )    
|Interest income and other, net                                 |                                                      |   | 258                |       |                   |   | 329     |       |      |   | 1,490   |       |  |   | 1,249   |      
|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|Net loss                                                       |                                                      | $ | (3,148             | )     |                   | $ | (10,050 | )     |      | $ | (15,776 | )     |  | $ | (12,485 | )    
|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|Basic and diluted loss per share                               |                                                      | $ | (0.25              | )     |                   | $ | (0.82   | )     |      | $ | (1.27   | )     |  | $ | (1.02   | )    
|                                                               |                                                      |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|Weighted average common shares
outstanding  basic and diluted |                                                      |   | 12,408             |       |                   |   | 12,301  |       |      |   | 12,375  |       |  |   | 12,271  |      

See accompanying notes.

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

|                                                                                         |                                                         |              |          |                   |     |              |          |        |     | 
|---------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | -------- | ----------------- | --- | ------------ | -------- | ------ | --- | 
|                                                                                         |                                                         |              |          | Nine Months Ended
|                                                                                         |                                                         |              |          |                  
|                                                                                         |                                                         |              |          | December 31,      |     | December 31,
|                                                                                         |                                                         |              |          | 2003              |     | 2002        
|                                                                                         |                                                         |              |          |                   |     |             
|Operating activities                                                                     |                                                         |              |          |                   |     |              |          |       
|Net loss                                                                                 |                                                         | $            | (15,776  | )                 |     | $            | (12,485  | )     
|Adjustment to reconcile net loss to net cash (used in)
provided by operating activities: |                                                         |              |          |                   |     |              |          |       
|                                                                                         | Depreciation, amortization and other                    |              |          | 6,651             |     |              |          | 6,202  |    
|                                                                                         | Changes in operating assets and liabilities             |              |          | 5                 |     |              |          | 13,319 |    
|                                                                                         |                                                         |              |          |                   |     |              |          |       
|Net cash (used in) provided by operating activities                                      |                                                         |              | (9,120   | )                 |     |              | 7,036    |       
|Investing activities                                                                     |                                                         |              |          |                   |     |              |          |       
|Purchase of property and equipment                                                       |                                                         |              | (717     | )                 |     |              | (2,312   | )     
|Sale of property and equipment                                                           |                                                         |              |         |                   |     |              | 6        |       
|Purchases of short-term investments                                                      |                                                         |              | (111,186 | )                 |     |              | (108,290 | )     
|Purchases of strategic investments                                                       |                                                         |              |         |                   |     |              | (1,992   | )     
|Maturities and sale of short-term investments                                            |                                                         |              | 106,646  |                   |     |              | 119,598  |       
|                                                                                         |                                                         |              |          |                   |     |              |          |       
|Net cash (used in) provided by investing activities                                      |                                                         |              | (5,257   | )                 |     |              | 7,010    |       
|Financing activities                                                                     |                                                         |              |          |                   |     |              |          |       
|Payments on long-term debt                                                               |                                                         |              | (2,016   | )                 |     |              | (1,718   | )     
|Payments on obligations under capital leases                                             |                                                         |              | (488     | )                 |     |              | (541     | )     
|Proceeds from issuance of common stock                                                   |                                                         |              | 378      |                   |     |              | 471      |       
|                                                                                         |                                                         |              |          |                   |     |              |          |       
|Net cash used in financing activities                                                    |                                                         |              | (2,126   | )                 |     |              | (1,788   | )     
|(Decrease) increase in cash and cash equivalents                                         |                                                         |              | (16,503  | )                 |     |              | 12,258   |       
|Cash and cash equivalents at beginning of period                                         |                                                         |              | 28,909   |                   |     |              | 8,096    |       
|                                                                                         |                                                         |              |          |                   |     |              |          |       
|Cash and cash equivalents at end of period                                               |                                                         | $            | 12,406   |                   |     | $            | 20,354   |       
|                                                                                         |                                                         |              |          |                   |     |              |          |       
|Supplemental disclosures of cash flow information:                                       |                                                         |              |          |                   |     |              |          |       
|                                                                                         | Cash paid during the period for:                        |              |          |                   |     |              |          |        |    
|                                                                                         |                                                         | Income taxes |          | $                 | 1   |              |          | $      | 75  | 
|                                                                                         |                                                         | Interest     |          |                   | 351 |              |          |        | 560 | 
|                                                                                         | Capital lease obligations incurred to acquire equipment |              |          | 240               |     |              |          | 100    |    

See accompanying notes.

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Celeritek, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

December 31, 2003



|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 consists of a thirteen-week period ending
on the Sunday closest to the calendar month end. The third quarters of
fiscal 2004 and fiscal 2003 ended December 28, 2003 and December 29, 2002,
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 nine months ended December 31, 2003
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2004. This financial information should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Companys annual report on Form 10-K for the
year ended March 31, 2003 as filed with the Securities and Exchange
Commission.                                                                                                                          
|  
|   |  | Certain amounts reported in previous years and interim periods have been
reclassified to conform to the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|2. |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair value of the
shares on the date of grant. The Company records compensation related to
employees stock awards under the intrinsic value method and accordingly,
no compensation expense is recognized in the Companys financial
statements in connection with stock options granted to employees with
exercise prices not less than fair value.                                                                                                         
|  
|   |  | Pro forma information regarding net loss and net loss per share under the
fair value method is presented below (in thousands, except per share
amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|                                      |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                      |                                                                                                                                    |  | Three months ended |        | Nine months ended
|                                      |                                                                                                                                    |  | December 31,       |        | December 31,     
|                                      |                                                                                                                                    |  |                    |        |                  
|                                      |                                                                                                                                    |  | 2003               |        | 2002              |  | 2003 |         | 2002
|                                      |                                                                                                                                    |  |                    |        |                   |  |      |         |     
|Net loss                              |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |        
|                                      | As
reported                                                                                                                        |  | $                  | (3,148 | )                 |  | $    | (10,050 | )    |  | $ | (15,776 | ) |  | $ | (12,485 | )
|                                      | Add: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax
effects |  |                    | (1,205 | )                 |  |      | (1,000  | )    |  |   | (3,526  | ) |  |   | (3,483  | )
|                                      |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |        
|                                      | Pro forma net
loss                                                                                                                 |  | $                  | (4,353 | )                 |  | $    | (11,050 | )    |  | $ | (19,302 | ) |  | $ | (15,968 | )
|Basic and diluted net loss per share: |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |        
|                                      | As
reported                                                                                                                        |  | $                  | (0.25  | )                 |  | $    | (0.82   | )    |  | $ | (1.27   | ) |  | $ | (1.02   | )
|                                      |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |        
|                                      | Pro
forma                                                                                                                          |  | $                  | (0.35  | )                 |  | $    | (0.90   | )    |  | $ | (1.56   | ) |  | $ | (1.30   | )
|                                      |                                                                                                                                    |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |        



| |  | Pro forma information regarding net loss and net loss per share is
required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation (SFAS 123), as amended by SFAS
148, and has been determined as if the Company had accounted for its stock
options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair market value for options granted was estimated
at the date of grant using the
Black-Scholes option-pricing model. The Company valued its employee stock
options using the following weighted-average assumptions:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |                    |   |                   |  |         |      |         |  |         |      |   |  |  |      |  
|------------------------ |  | ------------------ | - | ----------------- |  | ------- | ---- | ------- |  | ------- | ---- | - |  |  | ---- | -
|                         |  | Three months ended |   | Nine months ended
|                         |  | December 31,       |   | December 31,     
|                         |  |                    |   |                  
|                         |  | 2003               |   | 2002              |  | 2003    |      | 2002   
|                         |  |                    |   |                   |  |         |      |        
|Risk-free interest rate  |  |                    |  |                   |  |         | 4.1  | %       |  |         | 3.5  | % |  |  | 4.1  | %
|Dividend yield           |  |                    |  |                   |  |         | 0.0  | %       |  |         | 0.0  | % |  |  | 0.0  | %
|Volatility               |  |                    |  |                   |  |         | 88.7 | %       |  |         | 87.3 | % |  |  | 88.7 | %
|Expected life of options |  |                    |  |                   |  | 5 years |      | 5 years |  | 5 years



| |  | The Company granted no stock options nor Employee Stock Purchase shares
during the three months ended December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair market value estimate, in managements opinion, the existing
models do not necessarily provide a reliable measure of the fair market
value of its options.
|
| |  | The weighted average grant date fair value of options granted during the
nine months ended December 31, 2003 was $5.12 and during the three and
nine months ended December 31, 2002 was $5.00 and $5.92, respectively.
The weighted average grant date fair value of Employee Stock                                                                                                                                                                                                                                                                                                                                                                                                       

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|   |  | Purchases
shares issued during the nine months ended December 31, 2003 and 2002 was
$2.61 and $3.24, respectively.                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Inventories                                                                                                                                                                       
|  
|   |  | Inventories, stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out method) or market, consists of the
following components (in thousands):

|                |  |              |       |           |  |   |       | 
|--------------- |  | ------------ | ----- | --------- |  | - | ----- | 
|                |  | December 31, |       | March 31,
|                |  | 2003         |       | 2003     
|                |  |              |       |          
|Raw materials   |  | $            | 755   |           |  | $ | 666   | 
|Work-in-process |  |              | 2,380 |           |  |   | 2,933 | 
|                |  |              |       |           |  |   |       | 
|                |  | $            | 3,135 |           |  | $ | 3,599 | 
|                |  |              |       |           |  |   |       | 



|4. |  | 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. The common equivalent shares from
stock options excluded from the three and nine month periods ended
December 31, 2003 were 160,744 and 168,651, respectively. The common
equivalent shares from stock options excluded from the three and nine
month periods ended December 31, 2002 were 113,571 and 173,409,
respectively.
|  
|   |  | The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                        |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                        |  | Three months ended |        | Nine months ended
|                                        |  | December 31,       |        | December 31,     
|                                        |  |                    |        |                  
|                                        |  | 2003               |        | 2002              |  | 2003 |         | 2002
|                                        |  |                    |        |                   |  |      |         |     
|Basic and Diluted                       |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Net loss                                |  | $                  | (3,148 | )                 |  | $    | (10,050 | )    |  | $ | (15,776 | ) |  | $ | (12,485 | )
|                                        |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Weighted common
shares outstanding      |  |                    | 12,408 |                   |  |      | 12,301  |      |  |   | 12,375  |   |  |   | 12,271  |  
|                                        |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Basic and diluted
loss per common
share |  | $                  | (0.25  | )                 |  | $    | (0.82   | )    |  | $ | (1.27   | ) |  | $ | (1.02   | )
|                                        |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  

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|5. |  | Comprehensive Loss                                                                                                                       
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of comprehensive loss for the three and nine month periods
ended December 31, 2003 and 2002 are as follows (in thousands):

|                                   |                                                    |   |                    |    |                   |   |         |    |      |   |         |     |   |   |         |    | 
|---------------------------------- | -------------------------------------------------- | - | ------------------ | -- | ----------------- | - | ------- | -- | ---- | - | ------- | --- | - | - | ------- | -- | 
|                                   |                                                    |   | Three months ended |    | Nine months ended
|                                   |                                                    |   | December 31,       |    | December 31,     
|                                   |                                                    |   |                    |    |                  
|                                   |                                                    |   | 2003               |    | 2002              |   | 2003    |    | 2002
|                                   |                                                    |   |                    |    |                   |   |         |    |     
|Net loss                           |                                                    | $ | (3,148             | )  |                   | $ | (10,050 | )  |      | $ | (15,776 | )   |   | $ | (12,485 | ) 
|Other comprehensive income (loss): |                                                    |   |                    |    |                   |   |         |    |      |   |         |     |   |   |         |   
|                                   | Unrealized gains (losses) on
marketable securities |   |                    | 62 |                   |   |         | 32 |      |   |         | (42 | ) |   |         | 70 | 
|                                   |                                                    |   |                    |    |                   |   |         |    |      |   |         |     |   |   |         |   
|Other comprehensive income (loss)  |                                                    |   | 62                 |    |                   |   | 32      |    |      |   | (42     | )   |   |   | 70      |   
|                                   |                                                    |   |                    |    |                   |   |         |    |      |   |         |     |   |   |         |   
|Comprehensive loss                 |                                                    | $ | (3,086             | )  |                   | $ | (10,018 | )  |      | $ | (15,818 | )   |   | $ | (12,415 | ) 
|                                   |                                                    |   |                    |    |                   |   |         |    |      |   |         |     |   |   |         |   



|6. |  | Strategic Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company regularly reviews its investments for circumstances of other
than temporary impairment and assesses the carrying value of the assets
against market value. When an other than temporary 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 dependent on the performance of the companies
invested in, as well as the marketability of these investments. In
assessing potential other than temporary 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 $0.5 million in a Korean handset
design company. On April 1, 2002, the Company invested an additional $2.0
million in the handset design company. The Company does not have
significant influence over the management of the handset design company
and accordingly has accounted for the investment on a cost basis in all
reported periods. The Company reviewed the investment as of December 31,
2003 and determined no indicators of impairment were present that would
indicate the current carrying value of the investment was impaired.                                                                                                                                                                                                                                         
|  
|   |  | GaAs Foundry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In December 2000, the Company invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan in exchange for a strategic
interest in the foundry. The Company does not have significant influence
over the management of the GaAs foundry and accordingly has accounted for
the investment on a cost basis in all reported periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | During the fourth quarter of fiscal 2002 and the first and fourth quarter
of fiscal 2003, the Company recorded impairment charges of approximately
$1.7 million, $0.3 million and $0.1 million, respectively, against its
strategic investment in the Taiwanese foundry, which was deemed, in those                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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|   |  | respective periods, to have an other than temporary decline in value. The
Company reviewed the investment as of December 31, 2003 and determined no
indicators of further impairment were present that would indicate the
current carrying value of the investment was impaired.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | Intangible Assets                                                                                                                                                                                                                                                               
|  
|   |  | Intangible assets consist of the following (in thousands):                                                                                                                                                                                                                      

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



|   |  | In late September 2003, the Company exited the wireless handset power
amplifier market and was in final negotiations to sell certain tangible
assets and all of its intangible assets. As a result, the Company
reclassified certain tangible and intangible assets to be sold, as Assets
Held for Sale as part of prepaid expenses and other current assets
(note 8).                                                                                                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Assets Held for Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Assets held for sale as of September 30, 2003 were intangible and tangible
assets actively being marketed for disposal. The assets were stated at the
lower of their carrying amounts and estimated fair value, net of selling
costs, and were classified as current assets. The Company completed the
sale of the identified assets on October 15, 2003 for cash at the
estimated fair value, net of selling costs. No gain or loss arose on the
disposal in the three months ended December 31, 2003.
|  
|9. |  | Special Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The special charges of $1.9 million recorded during the third quarter of
fiscal 2004 were due to the Companys decision to exit the wireless
handset power amplifier market and included $0.7 million in
employee termination expenses, $1.1 million in building consolidation
costs, and $0.1 million to close the Companys Korean subsidiary.                                                                                                                                                       

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| |  | The special charges of $2.6 million recorded during the second quarter of
fiscal 2004 were due to the Companys restructuring activities at its
Belfast facility in July 2003, and the Companys decision to exit the
wireless handset power amplifier market in September 2003. The special
charges of $2.6 million are comprised of approximately $0.2 million of
impairment charges related to the write down of carrying values for
certain tangible and intangible assets to be sold, $1.8 million of
equipment impairment charges related to exiting the wireless handset power
amplifier market, and $0.6 million of equipment impairment charges related
to restructuring at the Belfast facility.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At March 31, 2003, the Company held an accrual for $1.2 million relating
to the fiscal 2003 restructuring described above. Employee termination
accruals of $0.1 million were paid out over the following six month
period. Lease termination cost accruals of $1.1 million represented the
present value of future minimum payments under operating leases covering
unused equipment. Such amounts will be paid through to lease expiry in
fiscal 2005.                                                                                                                                                                                                                                                  
|
| |  | The following table summarizes the Companys special charges activity (in
thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ----------- | ---- | --------- |  | ------------- | ------ | ---------- |  | ----- | ---- | - |  | ----------- | ----- | - |  | - | ------ | -
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  | Lease       |       |   |  |  
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  | Termination |       |   |  |  
|                                                                           |  | Employee    |      |           |  |               |        | Impairment |  | and   |      |   |  |            
|                                                                           |  | Termination |      | Excess    |  | of Assets     |        | Relocation |  |       |      |  
|                                                                           |  | Costs       |      | Equipment |  | held for sale |        | Costs      |  | Total
|                                                                           |  |             |      |           |  |               |        |            |  |      
|Accrual balances, March 31, 2003                                           |  |             | 123  |           |  |               |       |            |  |       |     |   |  |             | 1,050 |   |  |   | 1,173  |  
|Fiscal 2004, second quarter special
charges                                |  |             |     |           |  |               | 2,418  |            |  |       | 183  |   |  |             |      |   |  |   | 2,601  |  
|Fiscal 2004, third quarter special
charges                                 |  |             | 734  |           |  |               | 200    |            |  |       |     |   |  |             | 1,005 |   |  |   | 1,939  |  
|Cash paid through the first nine
months of fiscal 2004 for special
charges |  |             | (656 | )         |  |               |       |            |  |       |     |   |  |             | (670  | ) |  |   | (1,326 | )
|Non-cash adjustments                                                       |  |             | (100 | )         |  |               | (2,618 | )          |  |       | (183 | ) |  |             |      |   |  |   | (2,901 | )
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  
|Accrual balances, December 31, 2003                                        |  | $           | 101  |           |  | $             |       |            |  | $     |     |   |  | $           | 1,385 |   |  | $ | 1,486  |  
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  



|10. |  | Product Warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company warrants its products against defects in design, materials,
and workmanship, generally for one year from the date of shipment for all
of its products. The actual term could vary depending on the specific
customers. An accrual for estimated future costs relating to warranty
expense is recorded, as a percentage of revenue based on prior experience,
when revenue is recorded and is included in cost of goods sold. Factors
that affect the Companys warranty liability include historical and
anticipated rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
|   
|    |  | Changes in the Companys product liability during the three and nine
months ended December 31, 2003 and 2002 were as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  
|------------------------- |  | ------------------ | --- | ----------------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                          |  | Three months ended |     | Nine months ended
|                          |  | December 31,       |     | December 31,     
|                          |  |                    |     |                  
|                          |  | 2003               |     | 2002              |  | 2003 |     | 2002
|                          |  |                    |     |                   |  |      |     |     
|Beginning accrual balance |  | $                  | 401 |                   |  | $    | 501 |      |  | $ | 400  |   |  | $ | 500  |  
|Warranties issued         |  |                    | 40  |                   |  |      | 63  |      |  |   | 153  |   |  |   | 305  |  
|Charges incurred          |  |                    | (41 | )                 |  |      | (64 | )    |  |   | (153 | ) |  |   | (305 | )
|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  
|Ending accrual balance    |  | $                  | 400 |                   |  | $    | 500 |      |  | $ | 400  |   |  | $ | 500  |  
|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  



|11. |  | Cost Related to Shareholder and Strategic Actions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In the fourth quarter of fiscal 2003, a group of shareholders (the
Shareholder Committee) called a special meeting to remove the Companys
Board of Directors from office and replace them with a different slate of
candidates. In May 2003 the Companys Board of Directors entered into an
agreement with the Shareholder Committee. Under the terms of the
agreement, the Company has expanded its Board of Directors from six
directors to seven. The new Board is now composed of three of the
Companys directors who were directors prior to the agreement, three
directors nominated by the Shareholder Committee and one member who is not
affiliated with either the Company or the Shareholder Committee. In the
first nine months of fiscal 2004, expenses of $1.4 million related to the
special meeting of shareholders and $1.7 million in investment banking
fees were incurred and reported in loss from operations under the caption
Cost related to shareholder and strategic actions.                                                                                                                                                                                                                                                                                                                      
|   
|12. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending after
December 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company adopted FIN 46 in
the third quarter of fiscal 2004 and its adoption did not have a material
impact on the Companys financial position or results of operations.
|   
|    |  | In May 2003, the FASB issued Statement Number 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). This Statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity. SFAS 150                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|    |  | generally requires liability classification for two
broad classes of financial instruments: (1) instruments that represent, or
are indexed to, an obligation to buy back the issuers shares, and (2)
obligations that can be settled in shares, but are subject to certain
conditions. SFAS 150 applies to all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of
the first interim period beginning after July 1, 2003. As the Company has
not created or modified any financial instruments since the effective date
of SFAS 150, the Company does not believe this Statement will have a
material impact on the Companys financial statements.                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21 Accounting for Revenue Arrangements with
Multiple Deliverables. The EITF concluded that revenue arrangements with
multiple elements should be divided into separate units of accounting if
the deliverables in the arrangement have value to the customer on a
standalone basis, if there is objective and reliable evidence of the fair
value of the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by the Company. The provisions
of EITF Issue No. 00-21 are applicable to agreements entered into in
fiscal periods beginning after June 15, 2003. Management adopted the
consensus in the second quarter of fiscal 2004, and it did not have a
material effect on the Companys results of operations or financial
condition.
|   
|13. |  | Rights Plan Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | On June 6, 2003, the Company amended its shareholder rights plan (the
Rights Plan) to accelerate the final expiration date of the Preferred
Share Purchase Rights issued thereunder from April 8, 2009 to June 13,
2003. The Company terminated the Rights Plan upon expiration of the
purchase rights on June 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|14. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | On January 14, 2004, the Companys Board of Directors announced it had
declared an extraordinary cash dividend of $4.50 per share to shareholders
of record on February 5, 2004. The dividend will be paid on March 11,
2004 and will be recorded as a return of capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | As a result of the extraordinary cash dividend, the Company will violate
certain lending covenants on March 11, 2004, based on current agreements
in place on approximately $2.3 million in capital leases and debt.
Therefore, the Company has classified the total amount of $2.3 million
under current liabilities. The Company has received notice from one
lender that a capital lease of $0.9 million is payable in full by March
11, 2004. The Company is in the process of renegotiating the covenants on
the remaining balance of $1.4 million in debt. There can be no assurance
that the Company will successfully renegotiate the covenants, in which
case the $1.4 million in debt may also become due on March 11, 2004.                                                                                                                                                      
|   
|15. |  | Contingent Liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The Companys sales to foreign customers are subject to export
regulations, and foreign sales of some of the Companys products require
export licenses from the U.S. Department of State or the U.S. Department
of Commerce. In particular, the Company has received notice from the
Department of State suggesting that some products that the Company had
treated as subject to the Department of
Commerces Export Administration Regulations are in fact defense articles
subject to the State Departments International Traffic in Arms
Regulations. The Company believes that this matter will be resolved
without a significant adverse effect on its business. However, there is a
possibility that                                                                                                                                                                               

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| |  | the Company could be subject to substantial fines and/or
other penalties that would adversely affect the Companys results of
operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------




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: focusing our resources
on market areas where we believe our core competencies will allow us the
greatest opportunity of success in our goal of returning to profitability;
anticipated annual cost savings in the range of $9.0 to $10.0 million as a
result of exiting the wireless handset power amplifier market; our future gross
margins; research and development expenses; expected investment banking fees
and selling, general and administrative expenses; and our belief that our cash
resources after the payment of the extraordinary cash dividend will 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. 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 have a material adverse
impact on our operations and financial position.

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

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

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

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

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

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

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

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

Overview

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

As a result of this action, we incurred $2.6 million in special charges in
the second quarter of fiscal 2004 for fixed and intangible asset impairment
charges. The special charges of $2.6 million are comprised of approximately
$0.2 million of impairment charges related to the reassessment of carrying
values for certain tangible and intangible assets to be sold, $1.8 million of
equipment impairment charges related to exiting the

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wireless handset power
amplifier market, and $0.6 million of equipment impairment charges related to
restructuring at the Belfast facility.

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

We anticipate realizing annual cost savings in the range of $9.0 to $10.0
million compared to our expense rate before these actions were taken.

Result of Operations  Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003:

Total net sales were $7.7 million for the third quarter of fiscal 2004,
compared to $10.5 million for the third quarter of fiscal 2003, a decrease of
27%.

Semiconductor sales were $3.0 million in the third quarter of fiscal 2004,
compared to $5.5 million in the third quarter of fiscal 2003, a decrease of
45%. Semiconductor sales, excluding sales related to power amplifier modules
for handsets and a milestone achievement in a development contract, were
approximately $2.0 million in the third quarter of fiscal 2004. Comparatively,
semiconductor sales, excluding power amplifier modules for handsets were
approximately $2.0 million in the third quarter of fiscal 2003. Due to our
decision to exit the wireless handset market, we do not expect any future sales
for handset related products. Subsystem sales in the third quarter of fiscal
2004 were $4.7 million, compared to $4.9 million in the second quarter of
fiscal 2003, a decrease of 4%. 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.

Gross margin was 34% of net sales in the third quarter of fiscal 2004,
compared to 18% of net sales in the third quarter of fiscal 2003. The increase
in gross margin was primarily due to the unanticipated sale of approximately
$0.7 million of power amplifier modules for handsets where the corresponding
costs were written off in prior periods as obsolete inventory and $0.4 million
of sales for a milestone achievement in a contract to develop power amplifier
modules for satellite handsets with the corresponding costs recorded in
research and development expense. The increased revenue without a
corresponding cost of sales contributed 10% to the gross margin improvement.
The remaining improvement in gross margin is due to reduced overhead expenses,
which are the result of headcount reductions and asset and lease impairments.
We do not expect significant improvement in gross margin until sales volumes
increase because of fixed costs related to our fabrication facility.

Research and development expenses were $1.9 million, or 24% of net sales,
in the third quarter of fiscal 2004, compared to $2.5 million, or 24% of net
sales, in the third quarter of fiscal 2003, a decrease of 26%. Research and
development expenses decreased from the prior year due to our decision to exit
the wireless handset market and the closure of our Lincoln design facility. A
significant part of our research and development efforts were focused on
developing wireless handset power amplifier products for the market in
South Korea. These decreases in spending were somewhat offset by
increased spending on the development of defense products.

Selling, general and administrative expenses were $1.9 million, or 25% of
net sales, in the third quarter of fiscal 2004, compared to $2.3 million, or
22% of net sales, in the third quarter of fiscal 2003, a decrease of

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16%. The
decrease was primarily due to lower personnel costs associated with reduced
headcount related to our cost reduction measures.

The $0.3 million in costs related to shareholder and strategic actions in
the third quarter of fiscal 2004 was primarily for investment banking fees.
The $0.2 million in costs related to shareholder actions in the third quarter
of fiscal 2003 was primarily for investment advisors in response to an
unsolicited offer from Anaren Microwave, Inc. We expect to incur additional
investment banking fees of at least $0.3 million through March 2004.

The special charges of $1.9 million in the third quarter of fiscal 2004
are comprised of approximately $0.9 million of building lease termination
costs, $0.2 million of facilities consolidation costs, approximately $0.7
million in employee termination expense and $0.1 million to close our Korean
sales office.

Amortization of intangibles was zero in the third quarter of fiscal 2004,
compared to $0.1 million in the third quarter of fiscal 2003. The assets that
were acquired as part of the Tavanza acquisition were sold in October 2003;
therefore no amortization expense will be recorded in future periods.

Interest income and other, net was $0.3 million in the third quarters of both
fiscal 2004 and 2003.

Result of Operations  First Nine Months of Fiscal 2004 Compared to the First Nine Months of Fiscal 2003:

Total net sales were $21.4 million for the first nine months of fiscal
2004, compared to $41.3 million for the first nine months of fiscal 2003, a
decrease of 48%.

Semiconductor sales were $6.7 million in the first nine months of fiscal
2004, compared to $26.3 million in the first nine months of fiscal 2003, a
decrease of 75%. Semiconductor sales, excluding sales related to power
amplifier modules for handsets and a milestone achievement in a development
contract, were approximately $5.7 million for the first nine months of fiscal
2004. Comparatively, semiconductor sales, excluding power amplifier modules for
handsets, were approximately $4.4 million for the first nine months of fiscal
2003. Due to our decision to exit the wireless handset market, we do not expect
any future sales for handset related products. Subsystem sales in the first
nine months of fiscal 2004 were $14.7 million, compared to $15.0 million in the
first nine months of fiscal 2003, a decrease of 2%. 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.

Gross margin was 21% of net sales in the first nine months of fiscal 2004,
compared to 24% of net sales in the first nine months of fiscal 2003. The
decrease in gross margin was primarily due to decreased semiconductor sales
volume. During the third quarter of fiscal 2004, we sold approximately $0.7
million of power amplifier modules for handsets where the corresponding costs
were written off in prior periods as obsolete inventory and $0.4 million of
revenue for a milestone achievement in a contract to develop power amplifier
modules for satellite handsets with the corresponding costs recorded in
research and development expense. The increase in revenue without a
corresponding cost of sales contributed 4% to the gross margin. We do not
expect significant improvement in gross margin until sales volumes increase
because of fixed costs related to our fabrication facility.

Research and development expenses were $7.7 million, or 36% of net sales,
in the first nine months of fiscal 2004, compared to $8.0 million, or 19% of
net sales, in the first nine months of fiscal 2003, a decrease of 4%. Research
and development expenses decreased due to the closure of our Lincoln design
center partially offset by the increased expense related to the Tavanza
acquisition. A significant part of our research

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and development efforts were
focused on developing wireless handset power amplifier products for the market
in South Korea.

Selling, general and administrative expenses were $6.3 million, or 30% of
net sales, in the first nine months of fiscal 2004, compared to $7.2 million,
or 17% of net sales, in the first nine months of fiscal 2003, a decrease of
12%. The decrease was primarily due to lower selling costs driven by the
decrease in revenues and lower personnel costs. In addition, we incurred
management information systems consulting costs of approximately $0.2 million
in the first nine months of fiscal 2003, which were not incurred in the first
nine months of fiscal 2004.

The $3.0 million in costs related to shareholder and strategic actions in
the first nine months of fiscal 2004 consisted of approximately $1.4 million in
expense related to the special meeting of shareholders and $1.6 million in
investment banking fees. The $0.7 million in costs related to shareholder
actions in the first nine months of fiscal 2003 was for legal and investment
advisors in response to an unsolicited offer from Anaren Microwave, Inc. We
expect to incur additional investment banking fees of at least $0.3 million
through March 2004.

The special charges of $4.5 million are comprised of approximately $0.2
million of impairment charges related to the reassessment of carrying values
for certain tangible and intangible assets to be sold, $1.8 million of
equipment impairment charges related to exiting the wireless handset power
amplifier market, $0.6 million of equipment impairment charges related to
restructuring at the Belfast facility, $0.7 million in employee termination
charges, $0.9 million for building lease termination costs, $0.2 million of
facilities consolidation costs, and $0.1 million to close our Korean sales
office.

At March 31, 2003, the Company held an accrual for $1.2 million relating
to the fiscal 2003 restructuring described above. Employee termination
accruals of $0.1 million were paid out over the following six month
period. Lease termination cost accruals of $1.1 million represented the
present value of future minimum payments under operating leases covering
unused equipment. Such amounts will be paid through to lease expiry in
fiscal 2005.

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

|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ----------- | ---- | --------- |  | ------------- | ------ | ---------- |  | ----- | ---- | - |  | ----------- | ----- | - |  | - | ------ | -
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  | Lease       |       |   |  |  
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  | Termination |       |   |  |  
|                                                                           |  | Employee    |      |           |  |               |        | Impairment |  | and   |      |   |  |            
|                                                                           |  | Termination |      | Excess    |  | of Assets     |        | Relocation |  |       |      |  
|                                                                           |  | Costs       |      | Equipment |  | held for sale |        | Costs      |  | Total
|                                                                           |  |             |      |           |  |               |        |            |  |      
|Accrual balances, March 31, 2003                                           |  |             | 123  |           |  |               |       |            |  |       |     |   |  |             | 1,050 |   |  |   | 1,173  |  
|Fiscal 2004, second quarter special
charges                                |  |             |     |           |  |               | 2,418  |            |  |       | 183  |   |  |             |      |   |  |   | 2,601  |  
|Fiscal 2004, third quarter special
charges                                 |  |             | 734  |           |  |               | 200    |            |  |       |     |   |  |             | 1,005 |   |  |   | 1,939  |  
|Cash paid through the first nine
months of fiscal 2004 for special
charges |  |             | (656 | )         |  |               |       |            |  |       |     |   |  |             | (670  | ) |  |   | (1,326 | )
|Non-cash adjustments                                                       |  |             | (100 | )         |  |               | (2,618 | )          |  |       | (183 | ) |  |             |      |   |  |   | (2,901 | )
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  
|Accrual balances, December 31, 2003                                        |  | $           | 101  |           |  | $             |       |            |  | $     |     |   |  | $           | 1,385 |   |  | $ | 1,486  |  
|                                                                           |  |             |      |           |  |               |        |            |  |       |      |   |  |             |       |   |  |   |        |  

Amortization of intangibles was $0.3 million during the first nine months
of fiscal 2004, compared to $0.1 million in the first nine months of fiscal
2003. The assets that were acquired as part of the Tavanza acquisition were
sold in October 2003; therefore no amortization expense will be recorded in
future periods.

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The $0.3 million 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. The additional impairment charge was determined after
analysis of changes in the market values of public companies in the GaAs market
from March 2002 to June 2002. We reviewed the investment as of December 31,
2003 and determined no indicators of further impairment were present that would
indicate the current carrying value of the investment was impaired.

Interest income and other, net was $1.5 million in the first nine months
of fiscal 2004 compared to $1.2 million in the first nine months of fiscal
2003. The increase in interest income and other, net, was due to the
collection of a customers order cancellation charge of $0.8 million in
September 2003, offset by lower interest rates on lower cash balances.

Liquidity and Capital Resources

We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of December 31, 2003, we had
$12.4 million in cash and cash equivalents, $71.2 million in short-term
investments and $81.2 million in working capital.

Net cash used by operating activities was $9.1 million in the first nine
months of fiscal 2004 and was due primarily to the quarterly net losses
partially offset by non-cash impairment charges and depreciation charges. Net
cash provided by operating activities was $7.0 million in the first nine months
of fiscal 2003 and was due primarily to decreases in accounts receivable and
inventory and increases in accounts payable and other current liabilities. The
net cash provided by changes in operating assets and liabilities was
significantly higher in the first nine months of fiscal 2003 as compared to the
first nine months of fiscal 2004. The decrease in accounts receivables and
inventory during the first nine months of fiscal 2003 was due to a significant
decline in our business levels and revenues. In addition, our accounts payable
and accrued liabilities also increased during the first nine months of fiscal
2003 because of accrued costs related to our Tavanza acquisition and operating
lease impairment charges.

Net cash used by investing activities was $5.3 million in the first nine
months of fiscal 2004 and was due to the net purchases, sales and maturities of
short-term investments of approximately $4.5 million and the purchase of
property and equipment of approximately $0.7 million. Net cash provided by
investing activities was $7.0 million in the first nine months of fiscal 2003
and was due to the net purchases, sales and maturities of short-term
investments of approximately $11.3 million, offset by the purchase of property
and equipment of approximately $2.3 million, and further investment of
approximately $2.0 million in a Korean handset design company.

Net cash used by financing activities was $2.1 million in the first nine
months of fiscal 2004 and was due to principal payments on long-term debt of
approximately $2.0 million and payments on capital leases of approximately $0.5
million offset by cash proceeds of $0.4 million from the issuance of common
stock. Net cash used by financing activities was approximately $1.8 million in
the first nine months of fiscal 2003 and was due to principal payments on
long-term debt of approximately $1.7 million and payments on capital leases of
approximately $0.5 million off set by cash proceeds of $0.5 million from the
issuance of common stock. As of December 31, 2003, we had $0.5 million in
outstanding letters of credit, which are secured by certificates of deposits.
Given our cash position, we currently do not have a line of credit.

On January 14, 2004, we announced our intention to pay an extraordinary
cash dividend of $4.50 per share to shareholders of record as of February 5,
2004, payable on March 11, 2004. We expect the total dividend to be
approximately $56.0 million.

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As a result of the extraordinary cash dividend, the Company will violate
certain lending covenants on March 11, 2004, based on current agreements in
place on approximately $2.3 million in capital leases and debt. Therefore, the
Company has classified the total amount of $2.3 million under current
liabilities. The Company has received notice from one lender that a capital
lease of $0.9 million is payable in full by March 11, 2004. The Company is in
the process of renegotiating the covenants on the remaining balance of $1.4
million in debt. There can be no assurance that the Company will successfully
renegotiate the covenants, in which case the $1.4 million in
debt may also become
due on March 11, 2004.

We believe that our cash resources after the payment of the extraordinary
cash dividend and $2.3 million in capital leases and debt, will 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 current and former employees totaling
approximately $1.4 million at December 31, 2003. The notes are relocation
loans collateralized by certain real property assets, bear no interest and have
maturities through 2019. The principal will be repaid at various dates. If an
employee voluntarily ceases being employed by us, the principal outstanding
will be due and payable within 90 days.

We have various equipment notes outstanding with lenders, which are
secured by the equipment. Several of these notes have covenants pertaining to
liquidity levels and minimum tangible net worth. As a result of the
extraordinary cash dividend, we will violate certain lending covenants on March
11, 2004, based on current agreements in place on approximately $2.3 million in
capital leases and debt. Therefore, we have classified the total amount of
$2.3 million under current liabilities. We have received notice from one
lender that a capital lease of $0.9 million is payable in full by March 11,
2004. We are in the process of renegotiating
the covenants on the remaining balance of $1.4 million in debt. There can
be no assurance that we will successfully renegotiate the covenants, in which
case the $1.4 million in debt may also become due on March 11, 2004.

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

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Contractual Obligations

|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |     |  |  |   |    |  |  |   |    | 
|------------------------------- |  | ----------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | --- |  |  | - | -- |  |  | - | -- | 
|                                |  | Fiscal Year
|                                |  |            
|                                |  | Total       |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2008
|                                |  |             |        |      |  |      |       |      |  |      |       |     
|Long-term debt obligations      |  | $           | 2,945  |      |  | $    | 1905  |      |  | $    | 1,040 |      |  | $ |    |  |  | $ |   |  |  | $ |   | 
|Capital lease obligations       |  |             | 1,405  |      |  |      | 1,101 |      |  |      | 304   |      |  |   |    |  |  |   |   |  |  |   |   | 
|Operating lease obligations     |  |             | 5,361  |      |  |      | 924   |      |  |      | 3,400 |      |  |   | 934 |  |  |   | 73 |  |  |   | 30 | 
|Open purchase order
commitments |  |             | 1,429  |      |  |      | 977   |      |  |      | 452   |      |  |   |    |  |  |   |   |  |  |   |   | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |     |  |  |   |    |  |  |   |    | 
|Total                           |  | $           | 11,140 |      |  | $    | 4,907 |      |  | $    | 5,196 |      |  | $ | 934 |  |  | $ | 73 |  |  | $ | 30 | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |     |  |  |   |    |  |  |   |    | 

The table records cash obligations, including future interest repayments,
and includes operating lease obligations for equipment that no longer has
economic value for us, for which a special charge of $1.3 million was recorded
in the third quarter of fiscal 2003 in the statement of operations and includes
an operating lease obligation for a building that is no longer in use, for
which a special charge of $0.9 million was recorded in the third quarter of
fiscal 2004.

In addition, we have contractual commitments as of December 31, 2003,
relating to our engagement of financial advisory firms pursuant to which we
will be required to incur aggregate minimum future costs of approximately $0.3
million through March 2004. However, as is customary for contracts of this
type, these commitments may increase above the minimum depending on the value
of any strategic transaction we may complete, or the value of our common stock
in the event that there is no strategic transaction.

We have outstanding letters of credit, secured by certificates of
deposits, of approximately $0.5 million as security for equipment leases.

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RISK FACTORS

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

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

Our business requires us to maintain manufacturing equipment and related
support infrastructure that we must pay for regardless of our level of sales.
To support our manufacturing capacity we also incur costs for maintenance and
repairs and employ personnel for manufacturing and process engineering
functions. These expenses, along with depreciation costs, are fixed and do not
vary greatly, if at all, when our net sales decrease. In addition, the lead
time for developing and manufacturing our products often requires us to invest
in manufacturing capacity in anticipation of future demand. The recent decline
in market demand has resulted in infrastructure costs in excess of current
needs and has resulted in lower earnings. Although we recently exited the
wireless handset power amplifier market  which we believe will result in
reduced expenses  we are nevertheless still relying on increased sales to
manufacturers of commercial communications equipment and defense contractors in
order to realize a significant increase in revenues. If these sales do not
materialize, and if our revenues do not significantly increase to a level
commensurate with our installed capacity, we will be unable to achieve
profitability.

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

In late September 2003, we exited the wireless handset power amplifier
business in order to focus our resources on market areas where we believe our
core competencies will allow us the greatest opportunity of success in our goal
of returning to profitability. There is, however, no guarantee that our exit
from the wireless handset power amplifier business will enable us to reach
profitability on a more expedited basis, or at all. In particular, we now face
increased reliance on the sales of our defense products and semiconductor
products for commercial communications, both of which markets may have lower
growth potential than the wireless handset market. In addition, we may fail to
manage successfully our exit from the wireless handset power amplifier
business. If we do not properly manage our exit from the handset business, or
if our projections with respect to the sales of our defense products and
semiconductors products for commercial communications are incorrect, we may
fail to achieve profitability and our business may suffer.

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

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



| |  |  | the timing, cancellation or delay of customer orders or
shipments, particularly from our largest customers;
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuating demand from our defense customers;                                                             
|
| |  |  | the timing of our introduction of new products and the introduction of new products by our competitors;    
|
| |  |  | variations in average selling prices of our products;                                                      

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| |  |  | the mix of products that we sell;                                                           
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | our ability to secure manufacturing capacity and effectively utilize the capacity;          
|
| |  |  | the availability and cost of components;                                                    
|
| |  |  | GaAs semiconductor component and GaAs-based subsystem failures and associated support costs;
|
| |  |  | variations in our manufacturing yields related to our GaAs semiconductor components;        
|
| |  |  | market acceptance of our products; and                                                      
|
| |  |  | changes in our inventory levels.                                                            

Any unfavorable changes in the factors listed above or general industry
and global economic conditions could significantly harm our business, operating
results and financial condition. For example, during the third quarter of
fiscal 2003, Motorola, our largest customer, began transitioning to new handset
platforms for which we were not the selected supplier of power amplifier
modules and our sales were negatively impacted. In addition, in late September
2003, we exited the wireless handset power amplifier market entirely. Due to
fluctuations in our net sales and operating expenses, we believe that period to
period comparisons of our results of operations are not good indications of our
future performance. It is possible that in some future quarter or quarters, our
operating results will be below the expectations of securities analysts or
investors. In that case, our stock price could decline.

We may be subject to fines or other penalties as a result of violations of
export regulations.

Our sales to foreign customers are subject to export regulations, and foreign
sales of some of our products require export licenses from the U.S. Department
of State or the U.S. Department of Commerce. In particular, we have received
notice from the Department of State suggesting that some products that we had
treated as subject to the Department of Commerces Export Administration
Regulations are in fact defense articles subject to the State Departments
International Traffic in Arms Regulations. We believe that this matter will be
resolved without a significant adverse effect on our business. However, there
is a possibility
that we could be subject to substantial fines and/or other penalties that would
adversely affect our results of operations.

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

We expect that sales to a limited number of customers will account for a large
percentage of our net sales in the future and will be a very important
component in our plans for returning to profitability. If we lose any of our
existing major customers, our operating results and business would be harmed.
In the first nine months of fiscal year 2004, sales to our top ten customers
accounted for approximately 62% of our net sales, with one customer making up
approximately 15% and another customer making up approximately 10% of those net
sales. In fiscal year 2003, sales to our top ten customers accounted for
approximately 75% of our net sales, with Motorola making up approximately 41%
of those net sales. In fiscal year 2002, sales to our top ten customers
accounted for approximately 76% of our net sales, with Motorola making up
approximately 43% of those net sales. We had been a sole source supplier of
power amplifier modules to Motorola for its model 120v handset platform.
However, Motorola transitioned to new platforms, and it selected a sole source
supplier other than us for its new platforms. Though we had $0.7 million of
revenues in the third quarter of fiscal 2004 from sales of power amplifier
modules, we do not expect revenue sufficient to replace the Motorola revenue in
the next several quarters. Furthermore, as discussed above, we have exited the
wireless handset power amplifier market entirely. If we were to lose a major
customer, or if orders by any of our major customers were to otherwise decrease
or be delayed, our business, operating results and financial condition would be
seriously harmed.

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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 and our ability to grow will depend substantially on our ability to
continue to apply our GaAs semiconductor components expertise to existing and
emerging wireless communications markets. New process technologies could be
developed that have characteristics that are superior to our current processes.
If we are unable to develop and maintain competitive processes or design
products using new technologies, and if we are unable to secure production
orders for these products, we will not achieve the significant increase in
revenues necessary to achieve profitability, and our business and operating
results will suffer. We cannot assure you that we will be able to respond to
technological advances, changes in customer requirements or changes in
regulatory requirements or industry standards. Any significant delays in our
development, introduction or shipment of products could seriously harm our
business, operating results and financial condition.

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

Our business is subject to the effects of general economic conditions in
the United States and globally, and, in particular, market conditions in the
wireless communications and defense industries. In recent quarters, our
operating results have been adversely affected as a result of unfavorable
economic conditions and reduced capital spending in the United States, Europe
and Asia. In particular, sales to customers who supply equipment to service
providers of voice and data services have been adversely affected due to
significant decline in demand in the wireless infrastructure markets. If the
economic conditions in the United States and globally do not improve, if we
experience a worsening in the global economic slowdown or if the
wireless infrastructure markets do not recover, we may continue to
experience material adverse impacts on our business, operating results and
financial condition.

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

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

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

Sales to international customers accounted for 31% of our net sales in the
first nine months of fiscal 2004, 67% of our net sales in fiscal 2003 and 31%
of our net sales in 2002. The decline in the percentage of sales to
international customers in fiscal 2004, as compared to fiscal 2003, is the
result of the decline in sales of power amplifiers to Motorola. Almost all of
our wireless handset power amplifier products were sold to Motorolas foreign
subsidiaries and contractors. We expect that international sales will continue
to account for a significant portion of our net sales in the future. In
addition, many of our domestic customers sell their products outside of the
United States. These sales expose us to a number of inherent risks, including:

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| |  |  | 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.

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

Our backlog may not result in sales.

Our backlog primarily represents signed purchase orders for products due
to ship within the next year. As of December 31, 2003, our backlog was
approximately $15.8 million, of which 76% was from defense customers and 24%
was from commercial customers. Backlog is not necessarily indicative of future
sales as our customers may cancel or defer orders without penalty.
Nevertheless, we make a number of management decisions based on our backlog,
including purchasing materials, hiring personnel and other matters that may
increase our production capabilities and costs. Cancellation of pending
purchase orders or termination or reduction of purchase orders in progress
could significantly harm our business. We do not believe that our backlog as of
any particular date is representative of actual sales for any succeeding
period, and we do not know whether our current order backlog will necessarily
lead to sales in any future period.

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

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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. We cannot assure you that we will not experience problems
with our production yields in the future. Decreases in our yields can result in
substantially higher costs for our products. If we cannot maintain acceptable
yields in the future, our business, operating results and financial condition
will suffer.

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

Our current semiconductor product strategy is to design standard products
that can be used by different customers for a variety of applications. Any
significant increase in our sales volume is dependent on our achieving a
considerable number of design wins. Additionally, where our products are
designed into an original equipment manufacturers product, our sales volumes
will be dependent upon the commercial success
of the original equipment manufacturers product. Sales of our major
customers products can vary significantly from quarter to quarter.
Accordingly, our sales could be adversely affected by a reduction in demand for
wireless and defense communications systems. Our operating results have been
significantly harmed in the past by the failure of anticipated orders to be
realized and by deferrals or cancellations of orders as a result of changes in
demand for our customers products.

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

We acquire some of the components for our existing products from single
sources, and some of the other components for our products are presently
available or acquired only from a limited number of suppliers. Our
single-sourced components include substrates, millimeter wave components and
semiconductor packages. Some of these components are critical to the products
we sell to our major customers. In the event that any of these suppliers are
unable to fulfill our requirements in a timely manner, we may experience an
interruption in production until we locate alternative sources of supply. If we
encounter shortages in component supply, we may be forced to adjust our product
designs and production schedules. The failure of one or more of our key
suppliers or vendors to fulfill our orders in a timely manner and with
acceptable quality and yields could cause us to not meet our contractual
obligations, could damage our customer relationships (including relationships
with major customers) and could harm our business.

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

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



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

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

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

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



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

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

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

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

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legal claims that could damage our reputation and our business,
increase our expenses and impair our operating results.

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

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

In addition, our inventory can rapidly become outdated due to the short
life cycle of the end products that incorporate our products. In fiscal 2003,
we wrote off outdated inventory when one of our customers stopped producing the
mobile handsets that incorporated our power amplifier. Our business, operating
results and financial condition could be harmed by excess or outdated inventory
levels if our customers products evolve more rapidly than anticipated or if
demand for a product does not materialize.

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

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

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

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

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

In addition to patent and copyright protection, we also rely on trade
secrets, technical know-how and other unpatented proprietary information
relating to our product development and manufacturing activities. We try to
protect this information with confidentiality agreements with our employees and
other parties. We cannot

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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 design center
in the United Kingdom. We contract with third parties located primarily in Asia
for many of our assembly and test requirements. Our need to successfully manage
and retain these personnel will intensify if in the future our production
volumes are required to increase significantly from expected levels. Demand for
people with these skills is intense and we cannot assure you that we will be
successful in retaining sufficient personnel with these critical skills. Our
business has been harmed in the past by our inability to hire and retain people
with these critical skills, and we cannot assure you that similar problems will
not reoccur.

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

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

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

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

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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.

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

In October 2002, we acquired Tavanza, Inc., and we may make additional
investments in or acquire complementary companies, products or technologies.
These acquisitions involve numerous risks, including problems combining or
integrating the purchased operations, technologies or products; unanticipated
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. For example, although we acquired Tavanza in October
2002, we recently exited the wireless handset power amplifier market, and we
sold the assets that we acquired from Tavanza for significantly less than we
originally paid for them. In addition, in the event of any such investments or
acquisitions, we could issue stock that would dilute our current shareholders
percentage ownership, incur debt, assume liabilities, incur amortization or
impairment expenses related to goodwill and other intangible assets, or incur
large and immediate write-offs. We cannot assure you that we will be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future.




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 December 31, 2003, our investment portfolio comprised
approximately $13.1 million in money market funds and certificate of deposits
and $70.7 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
December 31, 2003 levels, the fair value of our portfolio would decline by
approximately $0.2 million. The modeling technique used measures the change in
fair values arising from an immediate hypothetical shift in market interest
rates.

Foreign Currency Exchange Risk

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

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Item 4. CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our chief executive
officer and our chief financial officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our chief executive officer and
our chief financial officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




PART II OTHER INFORMATION




Item 6.   EXHIBITS AND REPORTS ON FORM 8-K



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

|        |  |                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                      
|        |  |                                                                                                                                                                                  
|31.1    |  | Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                  
|31.2    |  | Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                  
|32.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.   



| | (b)                                                                                                                               |  | Reports on Form 8-K.
| | --------------------------------------------------------------------------------------------------------------------------------- |  | --------------------
| |                                                                                                                                   |  |                     
| | We filed one report on Form 8-K with the Securities and Exchange
Commission during the period covered by this report, as follows:





| | 1. |  | Report on Form 8-K filed on October 15, 2003 under
Item 12 (Results of Operations and Financial Condition),
regarding our second quarter 2004 financial results.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

|                        |  |                                      
|----------------------- |  | -------------------------------------
|                        |  | CELERITEK, INC.                      
|                        |  |                                      
|Date: February 13, 2004 |  | /s/ MARGARET E. SMITH                
|                        |  |                                      
|                        |  | Margaret E. Smith, Vice President,   
|                        |  | Chief Financial Officer and Assistant
|                        |  | Secretary                            

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                      
|        |  |                                                                                                                                                                                  
|31.1    |  | Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                  
|31.2    |  | Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                  
|32.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.   

31