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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------
|  |                                                                                        
|  | For the quarterly period ended December 31, 2002                                       

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 ofincorporation or
organization)  |  | 77-0057484(I.R.S. EmployerIdentification 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 repequired 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 x  No o

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: 12,340,644 shares as of January 31, 2003



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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                  
|CERTIFICATIONS              
|Exhibit Index               
|EXHIBIT 99.1                



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CELERITEK, INC.

Table of Contents

|                              |                                                                                               |                                                                                                         |    |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                              |                                                                                               |                                                                                                         |    | Page No.
|                              |                                                                                               |                                                                                                         |    |         
|PART I: FINANCIAL INFORMATION |                                                                                               |                                                                                                         | 1  |         
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                                         |    | 1        |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets: December 31, 2002 and March 31, 2002                             |    |          | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations: Three and nine months ended December 31, 2002 and 2001 |    |          | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows: Nine months ended December 31, 2002 and 2001           |    |          | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                    |    |          | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                         |    | 11       |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                         |    | 30       |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                         |    | 30       |  
|PART II: OTHER INFORMATION    |                                                                                               |                                                                                                         | 31 |         
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                         |    | 31       |  
|SIGNATURES                    |                                                                                               |                                                                                                         | 32 |         

-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,
|                                                                             |                                           |                           |         | 2002         |         | 2002     
|                                                                             |                                           |                           |         |              |         |          
|                                                                             |                                           | (Unaudited)               |         | (Note)      
|ASSETS                                                                       |                                           |                           |         |              |         |           |         |       
|Current assets:                                                              |                                           |                           |         |              |         |           |         |       
|                                                                             | Cash and cash equivalents                 |                           | $       | 20,354       |         |           | $       | 8,096  |        
|                                                                             | Short-term investments                    |                           |         | 79,365       |         |           |         | 90,597 |        
|                                                                             | Accounts receivable, net                  |                           |         | 3,397        |         |           |         | 10,001 |        
|                                                                             | Inventories                               |                           |         | 5,727        |         |           |         | 9,372  |        
|                                                                             | Prepaid expenses and other current assets |                           |         | 3,137        |         |           |         | 3,671  |        
|                                                                             |                                           |                           |         |              |         |           |         |       
|                                                                             |                                           | Total current assets      |         |              | 111,980 |           |         |        | 121,737 | 
|Property and equipment, net                                                  |                                           |                           | 11,966  |              |         |           | 14,839  |       
|Intangible assets                                                            |                                           |                           | 1,060   |              |         |           |        |       
|Other assets                                                                 |                                           |                           | 5,010   |              |         |           | 3,112   |       
|                                                                             |                                           |                           |         |              |         |           |         |       
|Total assets                                                                 |                                           | $                         | 130,016 |              |         | $         | 139,688 |       
|                                                                             |                                           |                           |         |              |         |           |         |       
|LIABILITIES & SHAREHOLDERS EQUITY                                           |                                           |                           |         |              |         |           |         |       
|Current liabilities:                                                         |                                           |                           |         |              |         |           |         |       
|                                                                             | Accounts payable                          |                           | $       | 6,143        |         |           | $       | 4,583  |        
|                                                                             | Accrued payroll                           |                           |         | 1,309        |         |           |         | 1,505  |        
|                                                                             | Accrued liabilities                       |                           |         | 5,165        |         |           |         | 3,098  |        
|                                                                             | Current portion of long-term debt         |                           |         | 2,483        |         |           |         | 2,312  |        
|                                                                             | Current obligations under capital leases  |                           |         | 587          |         |           |         | 669    |        
|                                                                             |                                           |                           |         |              |         |           |         |       
|                                                                             |                                           | Total current liabilities |         |              | 15,687  |           |         |        | 12,167  | 
|Long-term debt, less current portion                                         |                                           |                           | 2,786   |              |         |           | 4,675   |       
|Non-current obligations under capital leases                                 |                                           |                           | 981     |              |         |           | 1,340   |       
|Shareholders equity (12,301,259 common and no
preferred shares outstanding) |                                           |                           | 110,562 |              |         |           | 121,506 |       
|                                                                             |                                           |                           |         |              |         |           |         |       
|Total liabilities and shareholders equity                                   |                                           | $                         | 130,016 |              |         | $         | 139,688 |       
|                                                                             |                                           |                           |         |              |         |           |         |       

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

See accompanying notes.





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

|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |        | 
|-------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ----- | ----------------- | - | ------- | ------ | ---- | - | ------- | ----- |  | - | ------- | ------ | 
|                                                               |                                     |   | Three Months Ended |       | Nine Months Ended
|                                                               |                                     |   | December 31,       |       | December 31,     
|                                                               |                                     |   |                    |       |                  
|                                                               |                                     |   | 2002               |       | 2001              |   | 2002    |        | 2001
|                                                               |                                     |   |                    |       |                   |   |         |        |     
|Net sales                                                      |                                     | $ | 10,523             |       |                   | $ | 14,680  |        |      | $ | 41,348  |       |  | $ | 43,823  |       
|Cost of goods sold                                             |                                     |   | 8,601              |       |                   |   | 11,811  |        |      |   | 31,591  |       |  |   | 41,306  |       
|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|Gross profit                                                   |                                     |   | 1,922              |       |                   |   | 2,869   |        |      |   | 9,757   |       |  |   | 2,517   |       
|Operating expenses:                                            |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|                                                               | Research and development            |   |                    | 2,530 |                   |   |         | 2,279  |      |   |         | 7,973 |  |   |         | 6,853  | 
|                                                               | Selling, general and administrative |   |                    | 2,267 |                   |   |         | 2,281  |      |   |         | 7,184 |  |   |         | 7,425  | 
|                                                               | Special charges                     |   |                    | 2,783 |                   |   |         | 10,891 |      |   |         | 2,783 |  |   |         | 10,960 | 
|                                                               | In-process research and development |   |                    | 4,414 |                   |   |         |       |      |   |         | 4,414 |  |   |         |       | 
|                                                               | Costs
related to Anaren proposal    |   |                    | 221   |                   |   |         |       |      |   |         | 721   |  |   |         |       | 
|                                                               | Intangible asset amortization       |   |                    | 86    |                   |   |         |       |      |   |         | 86    |  |   |         |       | 
|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|Total operating expenses                                       |                                     |   | 12,301             |       |                   |   | 15,451  |        |      |   | 23,161  |       |  |   | 25,238  |       
|Loss from operations                                           |                                     |   | (10,379            | )     |                   |   | (12,582 | )      |      |   | (13,404 | )     |  |   | (22,721 | )     
|Impairment of strategic investment                             |                                     |   |                   |       |                   |   |        |        |      |   | (330    | )     |  |   |        |       
|Interest income and other, net                                 |                                     |   | 329                |       |                   |   | 663     |        |      |   | 1,249   |       |  |   | 2,951   |       
|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|Net loss                                                       |                                     | $ | (10,050            | )     |                   | $ | (11,919 | )      |      | $ | (12,485 | )     |  | $ | (19,770 | )     
|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|Basic and diluted loss per share                               |                                     | $ | (0.82              | )     |                   | $ | (0.99   | )      |      | $ | (1.02   | )     |  | $ | (1.64   | )     
|                                                               |                                     |   |                    |       |                   |   |         |        |      |   |         |       |  |   |         |       
|Weighted average common shares outstanding -
basic and diluted |                                     |   | 12,301             |       |                   |   | 12,097  |        |      |   | 12,271  |       |  |   | 12,043  |       

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,
|                                                                                      |                                                         |              |          | 2002              |     | 2001        
|                                                                                      |                                                         |              |          |                   |     |             
|Operating activities                                                                  |                                                         |              |          |                   |     |              |          |       
|Net loss                                                                              |                                                         | $            | (12,485  | )                 |     | $            | (19,770  | )     
|Adjustment to reconcile net loss to net cash provided
(used) in operating activities: |                                                         |              |          |                   |     |              |          |       
|                                                                                      | Depreciation, amortization and other                    |              |          | 6,202             |     |              |          | 15,000 |    
|                                                                                      | Changes in operating assets and liabilities             |              |          | 13,319            |     |              |          | 4,096  |    
|                                                                                      |                                                         |              |          |                   |     |              |          |       
|Net cash provided (used) in operating activities                                      |                                                         |              | 7,036    |                   |     |              | (674     | )     
|Investing activities                                                                  |                                                         |              |          |                   |     |              |          |       
|Purchase of property and equipment                                                    |                                                         |              | (2,312   | )                 |     |              | (6,017   | )     
|Sale of property and equipment                                                        |                                                         |              | 6        |                   |     |              | 4        |       
|Purchases of short-term investments                                                   |                                                         |              | (108,290 | )                 |     |              | (131,463 | )     
|Purchases of strategic investments                                                    |                                                         |              | (1,992   | )                 |     |              | (512     | )     
|Maturities and sale of short-term investments                                         |                                                         |              | 119,598  |                   |     |              | 145,343  |       
|                                                                                      |                                                         |              |          |                   |     |              |          |       
|Net cash provided by investing activities                                             |                                                         |              | 7,010    |                   |     |              | 7,355    |       
|Financing activities                                                                  |                                                         |              |          |                   |     |              |          |       
|Payments on long-term debt                                                            |                                                         |              | (1,718   | )                 |     |              | (1,241   | )     
|Borrowings on long-term debt                                                          |                                                         |              |         |                   |     |              | 3,708    |       
|Payments on obligations under capital leases                                          |                                                         |              | (541     | )                 |     |              | (509     | )     
|Proceeds from issuance of common stock                                                |                                                         |              | 471      |                   |     |              | 1,047    |       
|                                                                                      |                                                         |              |          |                   |     |              |          |       
|Net cash (used) provided by financing activities                                      |                                                         |              | (1,788   | )                 |     |              | 3,005    |       
|Increase in cash and cash equivalents                                                 |                                                         |              | 12,258   |                   |     |              | 9,686    |       
|Cash and cash equivalents at beginning of period                                      |                                                         |              | 8,096    |                   |     |              | 3,515    |       
|                                                                                      |                                                         |              |          |                   |     |              |          |       
|Cash and cash equivalents at end of period                                            |                                                         | $            | 20,354   |                   |     | $            | 13,201   |       
|                                                                                      |                                                         |              |          |                   |     |              |          |       
|Supplemental disclosures of cash flow information:                                    |                                                         |              |          |                   |     |              |          |       
|                                                                                      | Cash paid during the period for:                        |              |          |                   |     |              |          |        |    
|                                                                                      |                                                         | Income taxes |          | $                 | 75  |              |          | $      | 27  | 
|                                                                                      |                                                         | Interest     |          |                   | 560 |              |          |        | 484 | 
|                                                                                      | Capital lease obligations incurred to acquire equipment |              |          | 100               |     |              |          | 150    |    

See accompanying notes.

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Celeritek, Inc.




Notes to Condensed Consolidated Financial Statements
(Unaudited)

December 31, 2002



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included.
|  
|   |  | The Companys reporting period consisted of a thirteen-week period ending
on the Sunday closest to the calendar month end. The third quarters of
fiscal 2003 and fiscal 2002 ended December 29, 2002 and December 30, 2001,
respectively. For convenience, the accompanying financial statements have
been shown as ending on the last day of the calendar month.                                                                                                                                                                                                                         
|  
|   |  | Operating results for the three and nine months ended December 31, 2002
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2003. This financial information should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Companys annual report on Form 10-K for the year
ended March 31, 2002 as filed with the Securities and Exchange Commission.                                                                                                                                  
|  
|   |  | Certain amounts reported in previous years have been reclassified to
conform to the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The components of inventory consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                |  |                |       |           |  |   |       | 
|--------------- |  | -------------- | ----- | --------- |  | - | ----- | 
|                |  | December 31,   |       | March 31,
|                |  | 2002           |       | 2002     
|                |  |                |       |          
|                |  | (In thousands)
|Raw materials   |  | $              | 777   |           |  | $ | 2,346 | 
|Work-in-process |  |                | 4,950 |           |  |   | 7,026 | 
|                |  |                |       |           |  |   |       | 
|                |  | $              | 5,727 |           |  | $ | 9,372 | 
|                |  |                |       |           |  |   |       | 



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

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| |  | 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,     
|                                        |  |                    |         |                  
|                                        |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                                        |  |                    |         |                   |  |      |         |     
|Basic and Diluted                       |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Net loss                                |  | $                  | (10,050 | )                 |  | $    | (11,919 | )    |  | $ | (12,485 | ) |  | $ | (19,770 | )
|                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Weighted common
shares outstanding      |  |                    | 12,301  |                   |  |      | 12,097  |      |  |   | 12,271  |   |  |   | 12,043  |  
|                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Basic and diluted
loss per common
share |  | $                  | (0.82   | )                 |  | $    | (0.99   | )    |  | $ | (1.02   | ) |  | $ | (1.64   | )
|                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  



|4. |  | Comprehensive loss                                                                                                                       
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of comprehensive loss for the three and nine month periods
ended December 31, 2002 and 2001 are as follows (in thousands):

|                                   |                                                    |   |                    |    |                   |   |         |      |      |   |         |    |  |   |         |      |  
|---------------------------------- | -------------------------------------------------- | - | ------------------ | -- | ----------------- | - | ------- | ---- | ---- | - | ------- | -- |  | - | ------- | ---- | -
|                                   |                                                    |   | Three months ended |    | Nine months ended
|                                   |                                                    |   | December 31,       |    | December 31,     
|                                   |                                                    |   |                    |    |                  
|                                   |                                                    |   | 2002               |    | 2001              |   | 2002    |      | 2001
|                                   |                                                    |   |                    |    |                   |   |         |      |     
|Net loss                           |                                                    | $ | (10,050            | )  |                   | $ | (11,919 | )    |      | $ | (12,485 | )  |  | $ | (19,770 | )   
|Other comprehensive income (loss): |                                                    |   |                    |    |                   |   |         |      |      |   |         |    |  |   |         |     
|                                   | Unrealized gains (losses) on
marketable securities |   |                    | 32 |                   |   |         | (117 | )    |   |         | 70 |  |   |         | (372 | )
|                                   |                                                    |   |                    |    |                   |   |         |      |      |   |         |    |  |   |         |     
|Other comprehensive income (loss)  |                                                    |   | 32                 |    |                   |   | (117    | )    |      |   | 70      |    |  |   | (372    | )   
|                                   |                                                    |   |                    |    |                   |   |         |      |      |   |         |    |  |   |         |     
|Comprehensive loss                 |                                                    | $ | (10,018            | )  |                   | $ | (12,036 | )    |      | $ | (12,415 | )  |  | $ | (20,142 | )   
|                                   |                                                    |   |                    |    |                   |   |         |      |      |   |         |    |  |   |         |     



|5. |  | Strategic investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company regularly reviews its investments for circumstances of
impairment and assesses the carrying value of the assets against market
value. When an impairment exists, the Company records an expense to the
extent that the carrying value exceeds fair market value in the period the
assessment was made. The fair value of strategic investments is dependant
on the performance of the companies invested in, as well as the
marketability of these investments. In assessing potential impairment of
these investments, management considers these factors as well as
forecasted financial performance of the investees. If these forecasts are
not met or if market conditions change, the Company may have to record
additional impairment charges.

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|   |  | 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,
2002 and determined no indicators of impairment were present that would
indicate the current carrying value of the investment was impaired.                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In December 2002, the Company made a loan of $0.5 million to the handset
design company. The loan carries interest at the market rate and has a
six-month term. In the event of default, common stock equivalent to the
value of the loan would serve as collateral.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | GaAs Foundry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In December 2000, the Company invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan in exchange for a strategic
interest. The Company has accounted for this investment using the cost
basis in all reported periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | During the fourth quarter of fiscal 2002 and the first quarter of fiscal
2003, the Company recorded impairment charges of approximately $1.7
million and $0.3 million, respectively, against its strategic investment
in the Taiwanese foundry, which was deemed, in those respective periods,
to have an other than temporary decline in value. The Company reviewed
the investment as of December 31, 2002 and determined no indicators of
further impairment were present that would indicate the current carrying
value of the investment was impaired.                                                                                                                                                                                                                                                                                                                                                  
|  
|6. |  | Costs related to Anaren proposal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | During the second quarter of fiscal 2003, the Company received an
unsolicited offer from Anaren Microwave Inc. for all of the outstanding
shares of the Companys common stock. The Board of Directors voted
unanimously to reject the offer as not in the best interests of the
Companys shareholders. Expenses for legal and investment advisors of $0.7
million for the nine months ended December 31, 2002 have been
incurred relating to the Anaren proposal and have been reported in operating
income under the caption Costs related to Anaren proposal. The
Company anticipates that it will incur additional expenses of at least
$0.4 million over the next two quarters related to the Anaren proposal for
legal and investment advisors. However, expenses related to the Anaren
proposal could be significantly greater than expected, which could
negatively impact the Companys business.

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|7. |  | Asset Acquisition                                                                                                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On October 29, 2002, the Company acquired the assets of Tavanza, Inc.
(Tavanza) a privately held, fabless designer of power amplifier modules
and components for cellular and wireless LAN products. The total purchase
price of $6.1 million consists of the following (in thousands):

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



| |  | At the acquisition date, Tavanza did not meet the criteria to be
considered a business as defined by EITF 98-3, Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business, and the guidance used by SFAS 141, Business Combinations, to
determine whether an asset or group of assets is considered a business.
Because Tavanza did not meet the criteria to be considered a business, the
Company accounted for this transaction as an acquisition of assets.
Accordingly, the Company allocated the acquisition purchase price to the
tangible assets, liabilities, and intangible assets acquired based on
their estimated fair values. Since the transaction was not accounted for
as a business combination, no goodwill was recognized. Excess purchase
price over the already allocated fair value of assets acquired was
allocated on a pro rata basis to the intangible assets. The fair value
assigned to intangible assets acquired was determined through established
valuation techniques. These valuation techniques included estimating the
stage of development of each in-process research and development project
at the date of acquisition, estimating cash flows resulting from the
expected revenue generated from such projects, and discounting the net
cash flows back to their present value using an appropriate discount rate.
The discount rate used represents a premium to the Companys cost of
capital. All of the projections used are based on managements estimates
of market size and growth, expected trends in technology and the expected
timing of new product introductions.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, purchased intangible assets with definite useful lives are being
amortized over that useful life beginning in the third quarter of fiscal
2003. The Company has no intangible assets with indefinite useful lives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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

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

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|8. |  | Intangible Assets
|-- |  | -----------------



| |                                                           
| | ----------------------------------------------------------
| | Intangible assets consist of the following (in thousands):

|                    |  |              |  |          |     |                   |       |                 |     |   |     |   |     |   |       | 
|------------------- |  | ------------ |  | -------- | --- | ----------------- | ----- | --------------- | --- | - | --- | - | --- | - | ----- | 
|                    |  |              |  |          |     | December 31, 2002
|                    |  |              |  |         
|                    |  |              |  |          |     | Gross             |       |                 |     |   |     |   |     |  
|                    |  | Amortization |  | Carrying |     | Accumulated       |       | Net            
|                    |  | Period       |  | Amount   |     | Amortization      |       | Carrying Amount
|                    |  |              |  |          |     |                   |       |                
|Patent application  |  | 4 years      |  | $        | 233 |                   |       | $               | (10 | ) |     | $ | 223 |  
|Assembled workforce |  | 2 years      |  |          | 913 |                   |       |                 | (76 | ) |     |   | 837 |  
|                    |  |              |  |          |     |                   |       |                 |     |   |     |   |     |   |       | 
|                    |  |              |  |          |     | $                 | 1,146 |                 |     | $ | (86 | ) |     | $ | 1,060 | 
|                    |  |              |  |          |     |                   |       |                 |     |   |     |   |     |   |       | 



|9. |  | Special Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The $2.8 million of special charges recorded in the third quarter of
fiscal 2003 were due to Motorolas transition from the model 120v handset
platform on which the Company was the sole source for power amplifier
modules, to new handset platforms, for which the Company is not a supplier
of power amplifier modules. As a result of this decrease in revenue and
operations, the Company closed its office in Lincoln, UK and restructured
various operations in the United States. The $2.8 million of special
charges is made up of both operating lease and fixed asset impairments and
employee termination charges. Approximately $1.3 million of the $2.8
million total charge is due to an operating lease impairment, which was
the result of the equipment covered by operating leases no longer having
economic value to the Company. Another $1.1 million of the $2.8 million
total charge is due to the write off of the Lincoln, UK fixed assets. The
Lincoln, UK building, which is owned by the Company, was reclassified to
prepaid and other current assets as a current asset for resale. The
remaining $0.4 million of the $2.8 million charge is related to employee
termination charges in the United States and in the Lincoln, UK office.
The total number of employees to be terminated according to the
restructuring plan is 44. Pursuant to the plan, 40 employees were
terminated prior to December 31, 2002 and 4 employees were terminated
subsequent to December 31, 2002.

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

|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  
|---------------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- |  |  | - | ------ | -
|                                         |  | Employee    |     
|                                         |  | Termination |      | Excess    |  | Lease       |        |       |  |  
|                                         |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                         |  |             |      |           |  |             |        |      
|Q3 FY03 Special Charges                  |  | $           | 350  |           |  | $           | 1,107  |       |  | $ | 1,326 |  |  | $ | 2,783  |  
|Cash Paid                                |  |             | (136 | )         |  |             |       |       |  |   |      |  |  |   | (136   | )
|Non-cash adjustments
and reconciliations |  |             |     |           |  |             | (1,107 | )     |  |   |      |  |  |   | (1,107 | )
|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  
|Accrual balances,
December 31, 2002      |  | $           | 214  |           |  | $           |       |       |  | $ | 1,326 |  |  | $ | 1,540  |  
|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  



| |  | In response to a decline in the wireless infrastructure and mobile handset
markets, which included several semiconductor customers reducing their
forecasted demand in the third quarter of fiscal 2002, the Company
evaluated the ongoing value of our semiconductor capital assets. As a
result of this analysis, the Company recorded an impairment charge of
$11.0 million in the first nine months of fiscal 2002 related to certain
assets for which expected future cash flows are insufficient to cover
their carrying value. Of this charge, $10.5 million was a result of the
write-down of capital assets related to excess capacity due to un-utilized
wafer fabrication equipment and leasehold improvements undertaken to
increase the wafer fabrication area. The $10.5 million write-down is
comprised of $5.4 million related to abandoned leasehold improvements
originally intended to expand the Companys wafer fabrication facility and
$5.1 million related to un-utilized wafer fabrication equipment. The fair
value used to calculate the equipment impairment was obtained from third
party sources.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The remaining $0.5 million impairment was the result of a further
impairment with respect to certain capital assets initially written down
in the fourth quarter of fiscal 2001. The capital assets were initially
written down to an estimated fair market value in the fourth quarter of
fiscal 2001 due to delayed and cancelled contracts as a result of the
declining wireless market. The Company reassessed the fair market value
based on the current resale market for this type of equipment during the
third quarter of fiscal 2002 and adjusted the capital assets carrying
value accordingly. The Company reviewed these capital assets as of
December 31, 2002 and determined no indicators of impairment were present
that would indicate the current carrying value of these capital assets was
impaired.                                                                                                                                                                                                                                                                                                      

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|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. A provision for estimated future costs relating to warranty
expense is recorded when revenue is recorded and is included in cost of
goods sold. Should actual experience in any period differ significantly
from the Companys estimates, its future results of operations could be
materially affected.
|   
|    |  | Changes in the Companys product liability during the three months and
nine months ended December 31, 2002 were as follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                 

|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  
|------------------------- |  | ------------------ | --- | ----------------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                          |  | Three months ended |     | Nine months ended
|                          |  | December 31,       |     | December 31,     
|                          |  |                    |     |                  
|                          |  | 2002               |     | 2001              |  | 2002 |     | 2001
|                          |  |                    |     |                   |  |      |     |     
|Beginning reserve balance |  | $                  | 501 |                   |  | $    | 500 |      |  | $ | 500  |   |  | $ | 502  |  
|Warranties issued         |  |                    | 63  |                   |  |      | 91  |      |  |   | 305  |   |  |   | 512  |  
|Charges incurred          |  |                    | (64 | )                 |  |      | (90 | )    |  |   | (305 | ) |  |   | (513 | )
|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  
|Ending reserve balance    |  | $                  | 500 |                   |  | $    | 501 |      |  | $ | 500  |   |  | $ | 501  |  
|                          |  |                    |     |                   |  |      |     |      |  |   |      |   |  |   |      |  



|11. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangibles (SFAS 142). Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their estimated
useful lives. The Company recorded intangible assets with finite useful
lives during the third quarter of fiscal 2003 as a result of the purchase
of Tavanza, Inc.s assets. Amortization of the intangible assets is
recorded in operating expenses based on their useful lives. The Company
has not recorded any goodwill or indefinite lived intangible assets prior
to December 31, 2002.
|   
|    |  | In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of and provides a single accounting model for
long-lived assets to be disposed of. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. This statement became
effective for the Companys 2003 fiscal year beginning April 1, 2002.                                                                                                                                                                                              
|   
|    |  | In June of 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). This statement supersedes Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). This Statement requires that
a liability for a cost associated with an exit or                                                                                                                                                                                                                                                                                                                                                     

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| |  | disposal activity be recognized when the liability is incurred. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company will
adopt this statement as of the fourth quarter of fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). The Interpretation will
significantly change current practice in the accounting for, and
disclosure of, guarantees. The Interpretation requires certain guarantees
to be recorded at fair value, which is different from current practice,
which is generally to record a liability only when a loss is probable and
reasonably estimable, as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. The Interpretation also requires a
guarantor to make significant new disclosures, even when the likelihood of
making any payments under the guarantee is remote, which is another change
from current practice. The Company adopted the disclosure requirement of
FIN 45 in the quarter ended December 31, 2002. See Note 10, Product
Warranty. FIN 45 will be adopted prospectively by the Company in the
quarter ended March 31, 2003.






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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, which are identified by
words such as anticipate, believe, plan, estimate, expect, intend
and other similar expressions. In addition, forward looking statements in this
report include, but are not limited to, those regarding: being the sole source
supplier to Motorola for the model 120v platform; the effects of Motorolas
decision on our future revenues; the handset market during this fiscal year;
sales of our infrastructure products; our gross margins; research and
development and selling, general and administrative expenses; expenses related
to Anaren Microwave; selling our Lincoln, UK building; the number of employees
expected to be terminated; our belief that we will save $4.0 million in cash
annually due to our restructuring; and our belief that our cash and borrowings
from equipment financing should be sufficient to meet our liquidity needs
through at least the next twelve months. These forward-looking statements are
subject to business and economic risks and uncertainties, and our actual
results of operations may differ materially from those contained in the
forward-looking statements. Unless required by law, we undertake no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events, or otherwise. However, readers should carefully
review the risk factors set forth in this Form 10-Q and other reports or
documents we file from time to time with the Securities and Exchange
Commission.

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

Total net sales were $10.5 million for the third quarter of fiscal 2003
compared to $14.7 million for the third quarter of fiscal 2002, a decrease of
29%.

Semiconductor sales were $5.5 million in the third quarter of fiscal 2003,
compared to $6.5 million in the third quarter of fiscal 2002, a decrease of
15%. Semiconductor sales decreased because Motorola, which is our largest
customer, is in the process of transitioning from the model 120v handset
platform on which we are the sole source for power amplifier modules, to new
handset platforms for which we will not be supplying modules. Although we
continue to be the sole source for power amplifier modules included in
Motorolas model 120v platform, sales have declined because Motorola began
transitioning to its new platforms during the third quarter of fiscal 2003. We
expect that the effects of Motorolas platform transition on our revenues will
be more significant in the fourth quarter of fiscal 2003.

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

Subsystem sales in the third quarter of fiscal 2003 were $5.0 million
compared to $8.2 million in the third quarter of fiscal 2002, a decrease of
39%. Sales of subsystems products to defense customers decreased 16% to $4.9
million in the third quarter of fiscal 2003 from $5.8 million in the third
quarter of fiscal 2002, and sales of subsystem products to commercial customers
decreased 95% to $0.1 million in the third quarter of fiscal 2003 compared to
$2.4 million in the third quarter of fiscal 2002. The decrease in sales of
subsystems products to defense customers is primarily the result of many
defense customers making purchases for specific programs, and therefore product
demand fluctuates from quarter to quarter. The decrease in commercial subsystem
sales is due to continued weakness in the communications infrastructure market.
We do not expect any significant sales this fiscal year for commercial
infrastructure products.

Gross margin was 18% of net sales in the third quarter of fiscal 2003
compared to 20% of net sales in the third quarter of fiscal 2002. The decrease
in gross margin was primarily due to decreased semiconductor sales volume. We
do not expect significant improvement in gross margin until sales volumes
increase because of fixed costs related to our fabrication facility. In fact,
we expect our products to experience rapidly declining average sales prices,
and if we do not decrease costs or develop new or enhanced products, our
margins will suffer.

Research and development expenses were $2.5 million, or 24% of net sales,
in the third quarter of fiscal 2003 compared to $2.3 million, or 16% of net
sales, in the third quarter of fiscal 2002, an increase of 9%. Research and
development expenses increased due to our acquisition of Tavanza assets, which
included an assembled workforce, and our increased focus on defense research
and development. We expect research and development expenses to remain fairly
consistent because of cost reduction strategies undertaken that have offset the
addition of research and development expenses from the acquisition of Tavanza
assets. A significant part of our research and development efforts are focused
on developing semiconductor products

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for the market in South Korea. If we are not successful in introducing
products and increasing our market share in South Korea, our revenues and
financial condition will be negatively impacted.

Selling, general and administrative expenses were $2.3 million in the
third quarters of both fiscal 2003 and 2002, which is 22% of net sales in the
third quarter of fiscal 2003 and 16% of net sales in the third quarter of
fiscal 2002. Absent any additional expenses relating to Anaren, we expect
selling, general and administrative expenses to remain fairly consistent
because of cost reduction strategies we have undertaken in past quarters.

The $2.8 million of special charges recorded in the third quarter of
fiscal 2003 were due to Motorolas decision to transition from the model 120v
handset platform on which we are the sole source for power amplifier modules,
to new handset platforms, for which we will not be supplying power amplifier
modules. As a result of this decrease in revenue and operations, we closed our
office in Lincoln, UK and restructured various operations in the United States.
The $2.8 million of special charges is made up of both operating lease and
fixed asset impairments and employee termination charges. Approximately $1.3
million of the $2.8 million total charge is due to an operating lease
impairment, which was the result of the equipment covered by operating leases
no longer having economic value to us. Another $1.1 million of the $2.8 million
total charge is due to the write off of the Lincoln, UK fixed assets. The
Lincoln, UK building, which is owned by us, was reclassified to prepaid and
other current assets as a current asset for resale. We expect to be able to
sell the building in the next twelve months. The remaining $0.4 million of
the $2.8 million charge is related to employee termination charges in the
United States and in the Lincoln, UK office. The total number of employees to
be terminated according to the restructuring plan is 44. Pursuant to the plan,
40 employees were terminated prior to December 31, 2002 and 4 employees were
terminated subsequent to December 31, 2002.

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

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

|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  
|---------------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- |  |  | - | ------ | -
|                                         |  | Employee    |      |           |  |             |        |       |  |   |       |  |  |  
|                                         |  | Termination |      | Excess    |  | Lease       |        |       |  |  
|                                         |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                         |  |             |      |           |  |             |        |      
|Q3 FY03 Special Charges                  |  | $           | 350  |           |  | $           | 1,107  |       |  | $ | 1,326 |  |  | $ | 2,783  |  
|Cash Paid                                |  |             | (136 | )         |  |             |       |       |  |   |      |  |  |   | (136   | )
|Non-cash adjustments
and reconciliations |  |             |     |           |  |             | (1,107 | )     |  |   |      |  |  |   | (1,107 | )
|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  
|Accrual balances,
December 31, 2002      |  | $           | 214  |           |  | $           |       |       |  | $ | 1,326 |  |  | $ | 1,540  |  
|                                         |  |             |      |           |  |             |        |       |  |   |       |  |  |   |        |  

The $10.9 million special charge during the third quarter of fiscal 2002
was a capital asset impairment incurred in response to a decline in the
wireless infrastructure and mobile handset markets, which included several
semiconductor customers reducing their forecasted demand in the third quarter
of fiscal 2002. We evaluated the ongoing value of our semiconductor capital
assets. As a result of this analysis, we recorded an impairment charge of $10.9
million in the third quarter of fiscal 2002 related to certain assets for which
expected future cash flows are insufficient to cover their carrying value. Of
this charge, $10.5 million was a

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result of the write-down of capital assets related to excess capacity due
to un-utilized wafer fabrication equipment and leasehold improvements
undertaken to increase the wafer fabrication area. The $10.5 million
write-down is comprised of $5.4 million related to abandoned leasehold
improvements originally intended to expand our wafer fabrication facility and
$5.1 million related to un-utilized wafer fabrication equipment. The fair value
used to calculate the equipment impairment was obtained from third party
sources.

The remaining $0.4 million impairment was the result of a further
impairment with respect to certain capital assets initially written down in the
fourth quarter of fiscal 2001. The capital assets were initially written down
to an estimated fair market value in the fourth quarter of fiscal 2001 due to
delayed and cancelled contracts as a result of the declining wireless market.
We reassessed the fair market value based on the current resale market for this
type of equipment during the third quarter of fiscal 2002 and adjusted the
capital assets carrying value accordingly. We reviewed these capital assets as
of December 31, 2002 and determined no indicators of impairment were present
that would indicate the current carrying value of these capital assets was
impaired.

Subsequent to our earnings release on January 16, 2003, we adjusted the
total Tavanza purchase price based on a correction to the number of options
assumed at the time of the acquisition. The net effect of this change resulted
in a net loss of $10.0 million in the third quarter of fiscal 2003 compared to
a net loss of $10.2 million previously reported. The $0.2 million reduction in
the purchase price effected intangible assets and in-process research and
development.

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

During the second quarter of fiscal 2003, we received an unsolicited offer
from Anaren Microwave Inc. for all of the outstanding shares of our common
stock. Our Board of Directors voted unanimously to reject the offer as not in
the best interests of our shareholders. We have incurred expenses for legal and
investment advisors of $0.2 million for the three months ended December 31,
2002 relating to the Anaren proposal, which have been reported in
operating income under the caption Costs related to Anaren
proposal. We anticipate that we will incur additional expenses of at least
$0.4 million over the next two quarters related to the Anaren proposal for
legal and investment advisors. However, expenses related to the Anaren proposal
could be significantly greater than expected, which could negatively impact our
business.

Amortization of intangibles was $0.09 million during the third quarter of
fiscal 2003. The intangible assets were acquired as part of the purchase of
Tavanzas assets during the third quarter of fiscal 2003.

Interest income and other, net was $0.3 million in the third quarter of
fiscal 2003 compared to $0.7 million in the third quarter of fiscal 2002. The
decrease in interest income and other, net, was primarily due to lower interest
rates.

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

Total net sales were $41.3 million for the first nine months of fiscal
2003 compared to $43.8 million for the first nine months of fiscal 2002, a
decrease of 6%.

Semiconductor sales were $26.3 million in the first nine months of fiscal
2003 compared to $23.7 million in the first nine months of fiscal 2002, an
increase of 11%. Semiconductor sales increased due to increased volume
shipments of power amplifier modules in the first two quarters of fiscal 2003.

Motorola, which is our largest customer, is in the process of
transitioning from the model 120v handset platform on which we are the sole
source for power amplifier modules, to new handset platforms for which we will
not be supplying modules. Although we continue to be the sole source for power
amplifier modules included in Motorolas model 120v platform, sales have
declined because Motorola began transitioning to its new platforms during the
third quarter of fiscal 2003. We expect that the effects of Motorolas
platform transition on our revenues will be more significant in the fourth
quarter of fiscal 2003.

In addition, visibility of customer demand for power amplifier modules
continues to be limited. We do not expect a strong recovery in the handset
market this fiscal year. In addition, the handset market has historically had
seasonal and consumer trends in demand, which can cause variations in revenues
in sequential quarters. The increase in semiconductor sales for the nine months
of fiscal 2003 is not indicative of future revenue levels.

Subsystem sales in the first nine months of fiscal 2003 were $15.0 million
compared to $20.1 million in the first nine months of fiscal 2002, a decrease
of 25%. Sales of subsystem products to defense customers decreased 3% to $14.1
million in the first nine months of fiscal 2003 from $14.6 million in the first
nine months of fiscal 2002, and sales of subsystem products to commercial
customers decreased 85% to $0.9 million in the first nine months of fiscal 2003
compared to $5.5 million in the first nine months of fiscal 2002. The decrease
in commercial subsystem sales is due to continued weakness in the
communications infrastructure market. We do not expect any significant sales
this fiscal year for commercial infrastructure products.

Gross margin was 24% of net sales in the first nine months of fiscal 2003
compared to 6% of net sales in the first nine months of fiscal 2002. The
increase in gross margin was primarily due to improved yields in the
semiconductor products and increased utilization of our manufacturing facility.
To a lesser extent, the improvement was due to greater inventory write-downs in
the second quarter of last fiscal year when compared to the first nine months
of fiscal 2003 and the shift in subsystems from commercial products to defense
products, which tended to have higher margins. We do not expect to maintain the
gross margin at the current nine month run rate of approximately 24% because we
expect sales volumes to decrease in the next few quarters and we have
significant fixed costs related to our fabrication facility. In fact, we expect
our products to experience rapidly declining average sales prices, and if we do
not decrease costs or develop new or enhanced products, our margins will
suffer.

Research and development expenses were $8.0 million, or 19% of net sales,
in the first nine months of fiscal 2003 compared to $6.9 million, or 16% of net
sales, in the first nine months of fiscal 2002, an increase of 16%. Research
and development expenses increased due to our acquisition of Tavanzas assets,
which included an assembled workforce, and additional investments in
semiconductor products. We expect research and development expenses to remain
fairly consistent because cost reduction strategies have offset the increased
research and development expenses as a result of purchasing Tavanzas assets.
A significant part of our research and development efforts are focused on
developing semiconductor products for the market in South Korea. If we are not
successful in introducing products and increasing our market share in South
Korea, our revenues and financial condition will be negatively impacted.

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Selling, general and administrative expenses were $7.2 million, or 17% of
net sales, in the first nine months of fiscal 2003 compared to $7.4 million, or
17% of net sales, in the first nine months of fiscal 2002, a decrease of 3%.
Absent any additional expenses relating to Anaren, we expect selling, general
and administrative expenses to remain fairly consistent because of cost
reduction strategies we have undertaken in past quarters.

The $2.8 million of special charges recorded in the third quarter of
fiscal 2003 were due to Motorolas decision to transition from the model 120v
handset platform on which we are the sole source for power amplifier modules,
to new handset platforms, for which we will not be a supplier of power
amplifier modules. As a result of this decrease in revenue and operations, we
closed our office in Lincoln, UK and restructured various operations in the
United States. The $2.8 million of special charges is made up of both operating
lease and fixed asset impairments and employee termination charges.
Approximately $1.3 million of the $2.8 million total charge is due to an
operating lease impairment, which was the result of the equipment covered by
operating leases no longer having economic value to us. Another $1.1 million of
the $2.8 million total charge is due to the write off of the Lincoln, UK fixed
assets. The Lincoln, UK building, which is owned by us, was reclassified to
prepaid and other current assets as a current asset for resale. We expect to be
able to sell the building in the next twelve months. The remaining $0.4 million
of the $2.8 million charge is related to employee termination charges in the
United States and in the Lincoln, UK office. The total number of employees to
be terminated according to the restructuring plan is 44. Pursuant to the plan,
40 employees were terminated prior to December 31, 2002 and 4 employees were
terminated subsequent to December 31, 2002.

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

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

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

Subsequent to our earnings release on January 16, 2003, we adjusted the
total Tavanza purchase price based on a correction to the number of options
assumed at the time of the acquisition. The net effect of this change resulted
in a net loss of $12.5 million in the first nine months of fiscal 2003 compared
to a net loss of $12.6 million previously reported. The $0.2 million reduction
in the purchase price effected intangible assets and in-process research and
development.

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In-process research and development expenses were $4.4 million in the
first nine months of fiscal 2003. In-process research and development expenses
were incurred as a result of our purchase of Tavanzas assets. The $4.4
million of the purchase price represented purchased in-process research and
development, which, at the date of purchase had not yet reached technical
feasibility, had no alternative future use and was therefore charged to
operations. The valuation of in-process research and development included
estimating the stage of development of each in-process research and development
project at the date of acquisition, estimating cash flows resulting from the
expected revenue generated from such projects, and discounting the net cash
flows back to their present value using an appropriate discount rate. The
discount rate used represents a premium to our cost of capital. All of the
projections used are based on managements estimates of market size and growth,
expected trends in technology and the expected timing of new product
introductions.

During the second quarter of fiscal 2003, we received an unsolicited offer
from Anaren Microwave Inc. for all of the outstanding shares of our common
stock. Our Board of Directors voted unanimously to reject the offer as not in
the best interests of our shareholders. We have incurred expenses for legal and
investment advisors of $0.7 million for the nine months ended
December 31, 2002
relating to the Anaren proposal, which have been reported in operating
income under the caption Costs related to Anaren proposal. We
anticipate that we will incur additional expenses of at least $0.4 million over
the next two quarters related to the Anaren proposal for legal and investment
advisors. However, expenses related to the Anaren proposal could be
significantly greater than expected, which could negatively impact our
business.

Amortization of intangibles was $0.09 million during the first nine months
of fiscal 2003. The intangible assets were acquired as part of the purchase of
Tavanzas assets during the third quarter of fiscal 2003.

The $0.3 million impairment of strategic investment included in the first
nine months of fiscal 2003 was the result of a further impairment of our
investment in a Taiwanese GaAs foundry. During the fourth quarter of fiscal
2002, we recorded an impairment charge of approximately $1.7 million related to
our cost basis strategic investment in the Taiwanese foundry. During the fourth
quarter of fiscal 2002, we reviewed updated financial statements and
projections from the foundry. Significant decreases in actual and expected
revenues, net income and cash balances were observed as compared with the
original projections. In addition, the foundry had no current customers. With
this backdrop, combined with the downturn in the semiconductor industry and our
excess semiconductor capacity, we determined there was a decline in the value
of the foundry that was other than temporary. The additional impairment charge
of $0.3 million included in the first nine months of fiscal 2003 results was
determined after analysis of changes in the market values of public companies
in the GaAs market from March 2002 to June 2002. We reviewed this strategic
investment as of December 31, 2002, and determined no indicators of impairment
were present that would indicate the current carrying value of this strategic
investment was impaired.

Interest income and other, net was $1.2 million in the first nine months
of fiscal 2003 compared to $3.0 million in the first nine months of fiscal
2002. The decrease in interest income and other, net, was primarily due to
lower interest rates.

Liquidity and Capital Resources

We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of December 31, 2002, we had
$20.4 million in cash and cash equivalents, $79.4 million in short-term
investments and $96.3 million in working capital.

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Net cash provided by operating activities was $7.0 million in the first
nine months of fiscal 2003 and was due mainly to a decrease in accounts
receivable and inventory and an increase in accounts payable and other current
liabilities. Net cash used by operating activities was $0.7 million in the
first nine months of fiscal 2002 and was due mainly to decreases in accounts
payable and other current liabilities. Although we have generated cash from
operations in the first nine months of fiscal 2003, we do not expect this trend
to continue.

Net cash provided by investing activities was $7.0 million in the first
nine months of fiscal 2003 and was due to proceeds from the sale and maturities
of short-term investments of approximately $119.6 million offset by the
purchase of short term investments of $108.3 million, the purchase of property,
plant and equipment of $2.3 million and the purchase of strategic investments
of $2.0 million. Net cash provided by investing activities was $7.4 million in
the first nine months of fiscal 2002 and was due to the proceeds from the sale
and maturities of short-term investments of approximately $145.4 million offset
by the purchase of short term investments of $131.5 million, the purchase of
property and equipment of approximately $6.0 million and the strategic
investment of $0.5 million.

Net cash used by financing activities was $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 $0.6
million offset by proceeds from the exercise of employee stock options and
employee stock purchase plan of approximately $0.5 million. Net cash provided
by financing activities was approximately $3.0 million in the first nine months
of fiscal 2002 and was the result of borrowings on long-term debt of
approximately $3.7 million and proceeds from the exercise of employee stock
options and employee stock purchase plan of approximately $1.0 million offset
by principal payments on long-term debt of approximately $1.2 million and
payments on capital leases of approximately $0.5 million.

As of December 31, 2002, 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. As of
December 31, 2002, we had no borrowings outstanding against our former term
loans. We have various equipment notes outstanding with other lenders, which
are secured by the equipment. Several of these notes have covenants attached
pertaining to liquidity levels and minimum tangible net worth. As of December
31, 2002 we were in compliance with all covenants.

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

Commitments

We do not have any special purpose entities. We have no commercial
commitments with related parties, except for employee loans. We have
outstanding loans to certain officers and employees totaling approximately $1.5
million at December 31, 2002. The notes are relocation loans collateralized by
certain real property assets, bear no interest and have maturities through
2019. The principal will be repaid at various dates. If an employee ceases
being employed by us, the principal outstanding will be due and payable within
90 days.

We have contractual obligations in the form of operating and capital
leases, debt and purchase order commitments. The following table sets forth our
future contractual obligations as of December 31, 2002 (in
thousands):

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|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|------------------------------- |  | ----------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | -- | 
|                                |  | Fiscal Year
|                                |  |            
|                                |  | Total       |        | 2003 |  | 2004 |       | 2005 |  | 2006 |       | 2007
|                                |  |             |        |      |  |      |       |      |  |      |       |     
|Contractual Obligations         |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Long-term debt
obligations      |  | $           | 5,829  |      |  | $    | 721   |      |  | $    | 2,884 |      |  | $ | 1,922 |  |  | $ | 302   |  |  |   |   | 
|Capital lease obligations       |  |             | 1,865  |      |  |      | 240   |      |  |      | 787   |      |  |   | 559   |  |  |   | 279   |  |  |   |   | 
|Operating lease
obligations     |  |             | 8,900  |      |  |      | 1,816 |      |  |      | 3,815 |      |  |   | 2,516 |  |  |   | 719   |  |  |   | 34 | 
|Open purchase order
commitments |  |             | 2,381  |      |  |      | 2,381 |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |   | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Total                           |  | $           | 18,975 |      |  | $    | 5,158 |      |  | $    | 7,486 |      |  | $ | 4,997 |  |  | $ | 1,300 |  |  | $ | 34 | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 

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

RISKS, TRENDS AND UNCERTAINTIES

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

We expect that sales to a limited number of customers will account for a
large percentage of our net sales in the future. If we lose a major customer or
if anticipated sales to a major customer do not materialize, our operating
results and business would be harmed. For the first nine months of fiscal
2003, sales to our top ten customers accounted for approximately 78% of our net
sales, with Motorola making up approximately 47% of those net sales. In fiscal
year 2002, sales to our top ten customers accounted for approximately 76% of
our net sales, with Motorola making up approximately 43% of those net sales.
Motorola accounted for approximately 25% of our backlog at December 31, 2002.

We have been a sole source supplier of power amplifier modules to Motorola
for its model 120v handset platform. However, Motorola is currently
transitioning to new platforms, and it recently selected a sole source supplier
other than us for its new platforms. Although we continue to be the sole
source for power amplifier modules for Motorolas model 120v platform, third
quarter fiscal 2003 sales have declined as a result of this transition. We
expect that the effect on our revenues will be more significant in the fourth
quarter of fiscal 2003. Although we intend to compete for Motorolas business
in the future, there can be no assurance that we will be successful. If we are
unable to sell our products to Motorola, our revenues may decline and our
business will be harmed.

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:

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

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

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

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

In October 2002, we acquired the assets of Tavanza, 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. 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.

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

Our business requires us to invest heavily in manufacturing equipment and
related support infrastructure that we must pay for regardless of our level of
sales. To support our manufacturing capacity we also incur costs for
maintenance and repairs and employ personnel for manufacturing and process
engineering functions. These expenses, along with depreciation costs, do not
vary greatly, if at all, when our net sales decrease. In addition, the lead
time for developing and manufacturing our products often requires us to invest
in

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manufacturing capacity in anticipation of future demand. We committed to
significant expenditures in capital equipment and facilities in fiscal 2001
based on customer demand. The recent decline in market demand has resulted in
infrastructure costs in excess of current needs and has resulted in lower
earnings. In the third quarter of fiscal 2003, we wrote down fixed assets and
operating leases in response to a change in our business plan. If future demand
does not increase or if our net sales decline further, our results will
continue to suffer. If our net sales projections are inaccurate or we
experience declines in demand for our products, we may not be able to reduce
many of our costs rapidly, if at all, and our business, operating results and
financial condition may be harmed.

We are exposed to general economic and market conditions.

Our business is subject to the effects of general economic conditions in
the United States and globally, and, in particular, market conditions in the
wireless communications industry. In recent quarters, our operating results
have been adversely affected as a result of unfavorable economic conditions and
reduced capital spending in the United States, Europe and Asia. In particular,
sales to customers who supply equipment to service providers of voice and data
services have been adversely affected due to significant decline in demand in
the wireless infrastructure markets. Additionally, industry forecast of sales
of handsets for calendar 2003 continue to show low to moderate growth
expectations. If the economic conditions in the United States and globally do
not improve, if we experience a worsening in the global economic slowdown or if
the wireless infrastructure markets do not recover, we may continue to
experience material adverse impacts on our business, operating results and
financial condition.

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

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

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

During the first nine months of fiscal 2003, sales to international
customers accounted for 69% of our net sales. During fiscal 2002, sales to
international customers accounted for 31% of our net sales. We expect that
international sales will continue to account for a significant portion of our
net sales in the future. In addition, many of our domestic customers sell their
products outside of the United States. These sales expose us to a number of
inherent risks, including:



| |  |  | the need for export licenses;                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | unexpected changes in regulatory requirements;                                                     
|
| |  |  | tariffs and other potential trade barriers and restrictions;                                       
|
| |  |  | reduced protection for intellectual property rights in some countries;                             
|
| |  |  | fluctuations in foreign currency exchange rates;                                                   
|
| |  |  | the burdens of complying with a variety of foreign laws;                                           
|
| |  |  | the impact of recessionary or inflationary environments in economies outside the United States; and

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| |  |  | generally longer accounts receivable collection periods.
| | - |  | --------------------------------------------------------

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

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

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

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

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, 2002, our backlog was
approximately $17.0 million. Backlog is not necessarily indicative of future
sales as our customers may cancel or defer orders without penalty.
Nevertheless, we make a number of management decisions based on our backlog,
including purchasing materials, hiring personnel and other matters that may
increase our production capabilities and costs. Cancellation of pending
purchase orders or termination or reduction of purchase orders in progress
could significantly harm our business. We do not believe that our backlog as of
any particular date is representative of actual sales for any succeeding
period, and we do not know whether our current order backlog will necessarily
lead to sales in any future period.

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Of our current backlog, approximately 25% is attributable to orders
received from Motorola. If we lose this customer or any other major customer,
or if orders by a major customer were to otherwise decrease or be delayed,
including reductions due to market or competitive conditions in the wireless
communications markets or further decreases in government defense spending, our
business, operating results and financial condition would be harmed.

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

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



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

Our manufacturing yields also vary significantly among our products due to
product complexity and the depth of our experience in manufacturing a
particular product. For example, in the fourth quarter of fiscal 2001, we began
volume production of a new product, HBT modules. We experienced lower than
expected yields and start-up quality issues with the subcontractor who is
assembling the modules. These issues resulted in lower gross margins than
expected. We cannot assure you that we will not experience problems with our
production yields in the future. Decreases in our yields can result in
substantially higher costs for our products. If we cannot maintain acceptable
yields in the future, our business, operating results and financial condition
will suffer.

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

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

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

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

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

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



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

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

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:

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

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

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

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

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

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

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

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

In addition, our inventory can rapidly become out of date due to the short
life cycle of the end products that incorporate our products. For example, the
life cycle of mobile handsets has been and is expected to

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Antitakeover provisions could affect the price of our common stock.

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

A disaster could severely damage our operations.

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

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|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, 2002, our investment portfolio comprised
approximately $19.9 million in money market funds and certificate of deposits
and $78.9 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, 2002 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 the majority of
liabilities are receivable and payable in U.S. dollars. A 10% change in
exchange rates would not be material to our financial condition and results
from operations. Accordingly, we do not use derivative financial instruments to
hedge against foreign exchange exposure.






|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



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

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



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

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

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|PART II | OTHER INFORMATION
|------- | -----------------






|Item 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------

|                                                                                                |  |                                                                     
|----------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------
|(a)                                                                                             |  | Exhibits.                                                           
|                                                                                                |  |                                                                     
|99.1                                                                                            |  | Certification of Chief Executive Officer and Chief Financial Officer
|                                                                                                |  |                                                                     
|(b)                                                                                             |  | Reports on Form 8-K.                                                
|                                                                                                |  |                                                                     
|Two Forms 8-K were filed with the U.S. Securities and Exchange Commission on November 12, 2002.

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SIGNATURES

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

|                         |                                                                                    |                      
|------------------------ | ---------------------------------------------------------------------------------- | ---------------------
|                         | CELERITEK, INC.                                                                   
|                         |                                                                                    |                      
|Date:  February 10, 2003 |                                                                                    | /s/ MARGARET E. SMITH
|                         |                                                                                   
|                         | Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary

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CERTIFICATIONS

I, Tamer Husseini, certify that:



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



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



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



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



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

Date:  February 10, 2003



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





| |  | Name:  |  | Tamer Husseini         
| |  | ------ |  | -----------------------
| |  |        | 
| |  | Title: |  | Chief Executive Officer



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I, Margaret E. Smith, certify that:



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



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



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



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



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

Date:  February 10, 2003



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





| |  | Name:  |  | Margaret E. Smith      
| |  | ------ |  | -----------------------
| |  |        | 
| |  | Title: |  | Chief Financial Officer



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Exhibit Index

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

35 --