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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One)
|           |  |                                                                                         
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|           |  |                                                                                         
|           |  | For the quarterly period ended June 30, 2003                                            
|           |  |                                                                                         
|           |  | or                                                                                      
|           |  |                                                                                         
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|           |  |                                                                                         
|           |  | For the transition period from           to                                             

Commission file number: 0-23576

CELERITEK, INC.

(Exact name of registrant as
specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

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

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

Common Stock, No Par Value: 12,345,445 shares as of July 25, 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                  
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                



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CELERITEK, INC.

Table of Contents

|                              |                                                                                               |                                                                                            |    |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -- | -------- | - | 
|                              |                                                                                               |                                                                                            |    | Page No.
|                              |                                                                                               |                                                                                            |    |         
|PART I: FINANCIAL INFORMATION |                                                                                               |                                                                                            | 1  |         
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                            |    | 1        |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets: June 30, 2003 and March 31, 2003                    |    |          | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations: Three months
ended June 30, 2003 and 2002 |    |          | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows: Three months
ended June 30, 2003 and 2002 |    |          | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                       |    |          | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                            |    | 11       |  
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                            |    | 27       |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                            |    | 27       |  
|PART II: OTHER INFORMATION    |                                                                                               |                                                                                            | 28 |         
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                            |    | 28       |  
|SIGNATURES                    |                                                                                               |                                                                                            | 30 |         

-i-



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|        |  |                      
|------- |  | ---------------------
|PART I  |  | FINANCIAL INFORMATION
|        |  |                      
|Item 1. |  | FINANCIAL STATEMENTS 




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

|                                                                                              |                                           |                           |         |             |        |           |         |        |         | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------- | ------- | ----------- | ------ | --------- | ------- | ------ | ------- | 
|                                                                                              |                                           |                           |         | June 30,    |        | March 31,
|                                                                                              |                                           |                           |         | 2003        |        | 2003     
|                                                                                              |                                           |                           |         |             |        |          
|                                                                                              |                                           |                           |         | (Unaudited) |        | (Note)   
|ASSETS                                                                                        |                                           |                           |         |             |        |           |         |       
|Current assets:                                                                               |                                           |                           |         |             |        |           |         |       
|                                                                                              | Cash and cash equivalents                 |                           | $       | 5,870       |        |           | $       | 28,909 |        
|                                                                                              | Short-term investments                    |                           |         | 84,848      |        |           |         | 66,727 |        
|                                                                                              | Accounts receivable, net                  |                           |         | 3,530       |        |           |         | 4,483  |        
|                                                                                              | Inventories                               |                           |         | 3,469       |        |           |         | 3,599  |        
|                                                                                              | Prepaid expenses and other current assets |                           |         | 1,929       |        |           |         | 1,925  |        
|                                                                                              |                                           |                           |         |             |        |           |         |       
|                                                                                              |                                           | Total current assets      |         |             | 99,646 |           |         |        | 105,643 | 
|Property and equipment, net                                                                   |                                           |                           | 10,289  |             |        |           | 11,029  |       
|Intangible assets                                                                             |                                           |                           | 803     |             |        |           | 931     |       
|Other assets                                                                                  |                                           |                           | 4,844   |             |        |           | 4,857   |       
|                                                                                              |                                           |                           |         |             |        |           |         |       
|Total assets                                                                                  |                                           | $                         | 115,582 |             |        | $         | 122,460 |       
|                                                                                              |                                           |                           |         |             |        |           |         |       
|LIABILITIES & SHAREHOLDERS EQUITY                                                            |                                           |                           |         |             |        |           |         |       
|Current liabilities:                                                                          |                                           |                           |         |             |        |           |         |       
|                                                                                              | Accounts payable                          |                           | $       | 5,035       |        |           | $       | 4,355  |        
|                                                                                              | Accrued payroll                           |                           |         | 1,448       |        |           |         | 1,601  |        
|                                                                                              | Accrued liabilities                       |                           |         | 4,331       |        |           |         | 4,201  |        
|                                                                                              | Current portion of long-term debt         |                           |         | 2,611       |        |           |         | 2,543  |        
|                                                                                              | Current obligations under capital leases  |                           |         | 651         |        |           |         | 597    |        
|                                                                                              |                                           |                           |         |             |        |           |         |       
|                                                                                              |                                           | Total current liabilities |         |             | 14,076 |           |         |        | 13,297  | 
|Long-term debt, less current portion                                                          |                                           |                           | 1,443   |             |        |           | 2,126   |       
|Non-current obligations under capital leases                                                  |                                           |                           | 725     |             |        |           | 793     |       
|Shareholders equity (12,344,819 common and
no preferred shares outstanding at June 30,
2003) |                                           |                           | 99,338  |             |        |           | 106,244 |       
|                                                                                              |                                           |                           |         |             |        |           |         |       
|Total liabilities and shareholders equity                                                    |                                           | $                         | 115,582 |             |        | $         | 122,460 |       
|                                                                                              |                                           |                           |         |             |        |           |         |       

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

See accompanying notes.

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

|                                                               |                                     |   |                    |       |      |   |        |       | 
|-------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ----- | ---- | - | ------ | ----- | 
|                                                               |                                     |   | Three Months Ended
|                                                               |                                     |   | June 30,          
|                                                               |                                     |   |                   
|                                                               |                                     |   | 2003               |       | 2002
|                                                               |                                     |   |                    |       |     
|Net sales                                                      |                                     | $ | 6,572              |       |      | $ | 15,341 |      
|Cost of goods sold                                             |                                     |   | 6,017              |       |      |   | 11,386 |      
|                                                               |                                     |   |                    |       |      |   |        |      
|Gross profit                                                   |                                     |   | 555                |       |      |   | 3,955  |      
|Operating expenses:                                            |                                     |   |                    |       |      |   |        |      
|                                                               | Research and development            |   |                    | 2,915 |      |   |        | 2,606 | 
|                                                               | Selling, general and administrative |   |                    | 2,151 |      |   |        | 2,654 | 
|                                                               | Cost related to shareholder actions |   |                    | 2,500 |      |   |        |      | 
|                                                               | Intangible asset amortization       |   |                    | 128   |      |   |        |      | 
|                                                               |                                     |   |                    |       |      |   |        |      
|Total operating expenses                                       |                                     |   | 7,694              |       |      |   | 5,260  |      
|Loss from operations                                           |                                     |   | (7,139             | )     |      |   | (1,305 | )    
|Impairment of strategic investment                             |                                     |   |                   |       |      |   | (330   | )    
|Interest income and other, net                                 |                                     |   | 241                |       |      |   | 368    |      
|                                                               |                                     |   |                    |       |      |   |        |      
|Net loss                                                       |                                     | $ | (6,898             | )     |      | $ | (1,267 | )    
|                                                               |                                     |   |                    |       |      |   |        |      
|Basic and diluted loss per share                               |                                     | $ | (0.56              | )     |      | $ | (0.10  | )    
|                                                               |                                     |   |                    |       |      |   |        |      
|Weighted average common shares
outstanding  basic and diluted |                                     |   | 12,343             |       |      |   | 12,231 |      

See accompanying notes.

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

|                                                                           |                                             |                                                         |              |       |                    |     |          |       |   |     | 
|-------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------- | ------------ | ----- | ------------------ | --- | -------- | ----- | - | --- | 
|                                                                           |                                             |                                                         |              |       | Three Months Ended
|                                                                           |                                             |                                                         |              |       |                   
|                                                                           |                                             |                                                         |              |       | June 30,           |     | June 30,
|                                                                           |                                             |                                                         |              |       | 2003               |     | 2002    
|                                                                           |                                             |                                                         |              |       |                    |     |         
|Operating activities                                                       |                                             |                                                         |              |       |                    |     |          |      
|Net loss                                                                   |                                             | $                                                       | (6,898       | )     |                    | $   | (1,267   | )    
|Adjustment to reconcile net loss to net cash used in operating activities: |                                             |                                                         |              |       |                    |     |          |      
|                                                                           | Depreciation, amortization and other        |                                                         |              | 1,211 |                    |     |          | 1,561 |  
|                                                                           | Changes in operating assets and liabilities |                                                         |              | 1,732 |                    |     |          | 4,888 |  
|                                                                           |                                             |                                                         |              |       |                    |     |          |      
|Net cash used in operating activities                                      |                                             |                                                         | (3,955       | )     |                    |     | (5,182   | )    
|Investing activities                                                       |                                             |                                                         |              |       |                    |     |          |      
|Purchase of property and equipment                                         |                                             |                                                         | (260         | )     |                    |     | (665     | )    
|Purchases of short-term investments                                        |                                             |                                                         | (52,875      | )     |                    |     | (16,325  | )    
|Purchases of strategic investments                                         |                                             |                                                         |             |       |                    |     | (1,992   | )    
|Maturities and sale of short-term investments                              |                                             |                                                         | 34,755       |       |                    |     | 19,124   |      
|                                                                           |                                             |                                                         |              |       |                    |     |          |      
|Net cash provided (used) in investing activities                           |                                             |                                                         | (18,380      | )     |                    |     | 142      |      
|Financing activities                                                       |                                             |                                                         |              |       |                    |     |          |      
|Payments on long-term debt                                                 |                                             |                                                         | (615         | )     |                    |     | (558     | )    
|Payments on obligations under capital leases                               |                                             |                                                         | (103         | )     |                    |     | (172     | )    
|Proceeds from issuance of common stock                                     |                                             |                                                         | 14           |       |                    |     | 36       |      
|                                                                           |                                             |                                                         |              |       |                    |     |          |      
|Net cash used by financing activities                                      |                                             |                                                         | (704         | )     |                    |     | (694     | )    
|(Decrease) increase in cash and cash equivalents                           |                                             |                                                         | (23,039      | )     |                    |     | 4,630    |      
|Cash and cash equivalents at beginning of period                           |                                             |                                                         | 28,909       |       |                    |     | 8,096    |      
|                                                                           |                                             |                                                         |              |       |                    |     |          |      
|Cash and cash equivalents at end of period                                 |                                             | $                                                       | 5,870        |       |                    | $   | 12,726   |      
|                                                                           |                                             |                                                         |              |       |                    |     |          |      
|Supplemental disclosures of cash flow information:                         |                                             |                                                         |              |       |                    |     |          |      
|                                                                           | Cash paid during the period for:            |                                                         |              |       |                    |     |          |       |  
|                                                                           |                                             |                                                         | Income taxes |       | $                  | 1   |          |       | $ | 1   | 
|                                                                           |                                             |                                                         | Interest     |       |                    | 125 |          |       |   | 205 | 
|                                                                           |                                             | Capital lease obligations incurred to acquire equipment |              |       | 89                 |     |          |       |  |    

See accompanying notes.

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Celeritek, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

June 30, 2003



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included.
|  
|   |  | The Companys reporting period consisted of a thirteen-week period ending
on the Sunday closest to the calendar month end. The first quarters of
fiscal 2004 and fiscal 2003 ended June 29, 2003 and June 30, 2002,
respectively. For convenience, the accompanying financial statements have
been shown as ending on the last day of the calendar month.                                                                                                                                                                                                                                 
|  
|   |  | Operating results for the three months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2004. This financial information should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Companys annual report on Form 10-K for the year ended
March 31, 2003 as filed with the Securities and Exchange Commission.                                                                                                                                               
|  
|   |  | Certain amounts reported in previous years have been reclassified to
conform to the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|2. |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair value of the
shares on the date of grant. The Company records compensation related to
employees stock awards under the intrinsic value method and accordingly,
no compensation expense is recognized in the Companys financial
statements in connection with stock options granted to employees with
exercise prices not less than fair value.                                                                                                         
|  
|   |  | Proforma information regarding net loss and net loss per share under the
fair value method is presented below (in thousands, except per share
amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|                                      |                                                                                                                                    |  |                             |        |      |  |   |        |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- |  | - | ------ | -
|                                      |                                                                                                                                    |  | Three months ended June 30,
|                                      |                                                                                                                                    |  | 2003                        |        | 2002
|Net loss                              |                                                                                                                                    |  |                             |        |      |  |   |       
|                                      | As reported                                                                                                                        |  | $                           | (6,898 | )    |  | $ | (1,267 | )
|                                      | Add: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects |  |                             | (1,156 | )    |  |   | (1,215 | )
|                                      |                                                                                                                                    |  |                             |        |      |  |   |       
|                                      | Pro forma net loss                                                                                                                 |  | $                           | (8,054 | )    |  | $ | (2,482 | )
|Basic and diluted net loss per share: |                                                                                                                                    |  |                             |        |      |  |   |       
|                                      | As reported                                                                                                                        |  | $                           | (0.56  | )    |  | $ | (0.10  | )
|                                      |                                                                                                                                    |  |                             |        |      |  |   |       
|                                      | Pro forma                                                                                                                          |  | $                           | (0.65  | )    |  | $ | (0.20  | )
|                                      |                                                                                                                                    |  |                             |        |      |  |   |       



| |  | Pro forma information regarding net loss and net loss per share is
required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation (SFAS 123), as amended by SFAS
148, and has been determined as if the Company had accounted for its stock
options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair market value for options granted prior to
December 1995, the date of the initial public offering of the Companys
common stock, was estimated at the date of grant using the Minimum Value
Method. The fair market value for options granted subsequent to December
1995 was estimated at the date of grant using the Black-Scholes
option-pricing model. The Company valued its employee stock options using
the following weighted-average assumptions:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |                             |         |      |  |  |         |  
|------------------------ |  | --------------------------- | ------- | ---- |  |  | ------- | -
|                         |  | Three months ended June 30,
|                         |  | 2003                        |         | 2002
|Risk-free interest rate  |  |                             | 2.5     | %    |  |  | 4.1     | %
|Dividend yield           |  |                             | 0.0     | %    |  |  | 0.0     | %
|Volatility               |  |                             | 87.9    | %    |  |  | 88.7    | %
|Expected life of options |  |                             | 5 years |      |  |  | 5 years |  



| |  | The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair market value estimate, in managements opinion, the existing
models do not necessarily provide a reliable measure of the fair market
value of its options.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The weighted average grant date fair value of options granted during the
three months ended June 30, 2003 and 2002 was $5.25 and $6.20,
respectively. There were no Employee Stock Purchases during the three
months ended June 30, 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                        

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|3. |  | Inventories                                                                                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Inventories, stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out method) or market, consists of the
following components:

|                |  |                |       |           |  |   |       | 
|--------------- |  | -------------- | ----- | --------- |  | - | ----- | 
|                |  | June 30,       |       | March 31,
|                |  | 2003           |       | 2003     
|                |  |                |       |          
|                |  | (In thousands)
|Raw materials   |  | $              | 528   |           |  | $ | 666   | 
|Work-in-process |  |                | 2,941 |           |  |   | 2,933 | 
|                |  |                |       |           |  |   |       | 
|                |  | $              | 3,469 |           |  | $ | 3,599 | 
|                |  |                |       |           |  |   |       | 



|4. |  | Loss per share                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basic loss per common share is computed using the weighted average common
shares outstanding during the period. The effect of outstanding stock
options is excluded from the calculation of diluted net loss per share, as
their inclusion would be antidilutive.
|  
|   |  | The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):                                                                                                                                        

|                                        |  |                    |        |      |  |   |        |  
|--------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                        |  | Three months ended
|                                        |  | June 30,          
|                                        |  |                   
|                                        |  | 2003               |        | 2002
|                                        |  |                    |        |     
|Basic and Diluted                       |  |                    |        |      |  |   |        |  
|Net loss                                |  | $                  | (6,898 | )    |  | $ | (1,267 | )
|                                        |  |                    |        |      |  |   |        |  
|Weighted common shares
outstanding      |  |                    | 12,343 |      |  |   | 12,231 |  
|                                        |  |                    |        |      |  |   |        |  
|Basic and diluted loss per
common share |  | $                  | (0.56  | )    |  | $ | (0.10  | )
|                                        |  |                    |        |      |  |   |        |  

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|5. |  | Comprehensive loss                                                                                                         
|-- |  | ---------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of comprehensive loss for the three-month period ended June
30, 2003 and 2002 are as follows (in thousands):

|                                   |                                                    |   |                    |     |      |   |        |    | 
|---------------------------------- | -------------------------------------------------- | - | ------------------ | --- | ---- | - | ------ | -- | 
|                                   |                                                    |   | Three months ended
|                                   |                                                    |   | June 30,          
|                                   |                                                    |   |                   
|                                   |                                                    |   | 2003               |     | 2002
|                                   |                                                    |   |                    |     |     
|Net loss                           |                                                    | $ | (6,898             | )   |      | $ | (1,267 | ) 
|Other comprehensive income (loss): |                                                    |   |                    |     |      |   |        |   
|                                   | Unrealized gains (losses) on
marketable securities |   |                    | (17 | )    |   |        | 96 | 
|                                   |                                                    |   |                    |     |      |   |        |   
|Other comprehensive income (loss)  |                                                    |   | (17                | )   |      |   | 96     |   
|                                   |                                                    |   |                    |     |      |   |        |   
|Comprehensive loss                 |                                                    | $ | (6,915             | )   |      | $ | (1,171 | ) 
|                                   |                                                    |   |                    |     |      |   |        |   



|6. |  | 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 dependent
on the performance of the companies invested in, as well as the
marketability of these investments. In assessing potential impairment of
these investments, management considers these factors as well as
forecasted financial performance of the investees. If these forecasts are
not met or if market conditions change, the Company may have to record
additional impairment charges.
|  
|   |  | Handset Design Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In December 2001, the Company invested $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 June 30, 2003
and determined no indicators of impairment were present that would
indicate the current carrying value of the investment was impaired.                                                                                                                                                                              
|  
|   |  | GaAs Foundry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In December 2000, the Company invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan in exchange for a strategic
interest in the foundry. The Company has accounted for this investment
using the cost basis in all reported periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | During the fourth quarter of fiscal 2002 and the first and fourth quarter
of fiscal 2003, the Company recorded impairment charges of approximately
$1.7 million, $0.3 million and $0.1 million, respectively, against its
strategic investment in the Taiwanese foundry, which was deemed, in those
respective periods, to have an other than temporary decline in value. The
Company reviewed the investment as of June 30, 2003 and determined no
indicators of further impairment were present that would indicate the
current carrying value of the investment was impaired.                                                                                                                                                                                 

7



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|7. |  | Intangible Assets                                         
|-- |  | ----------------------------------------------------------
|  
|   |  | Intangible assets consist of the following (in thousands):

|                    |  |              |  |          |       |              |  |                |      |               |  |          |     |  |  |     |      |   |  |   |     | 
|------------------- |  | ------------ |  | -------- | ----- | ------------ |  | -------------- | ---- | ------------- |  | -------- | --- |  |  | --- | ---- | - |  | - | --- | 
|                    |  |              |  |          |       |              |  | March 31, 2003 |      | June 30, 2003
|                    |  |              |  |          |       |              |  |                |      |              
|                    |  |              |  | Gross    |       |              |  |                |      | Net           |  |          |     |  |  | Net
|                    |  | Amortization |  | Carrying |       | Accumulated  |  | Carrying       |      | Accumulated   |  | Carrying
|                    |  | Period       |  | Amount   |       | Amortization |  | Amount         |      | Amortization  |  | Amount  
|                    |  |              |  |          |       |              |  |                |      |               |  |         
|Patent application  |  | 4 years      |  | $        | 233   |              |  | $              | (25  | )             |  | $        | 208 |  |  | $   | (39  | ) |  | $ | 194 | 
|Assembled workforce |  | 2 years      |  |          | 913   |              |  |                | (190 | )             |  |          | 723 |  |  |     | (304 | ) |  |   | 609 | 
|                    |  |              |  |          |       |              |  |                |      |               |  |          |     |  |  |     |      |   |  |   |     | 
|                    |  |              |  | $        | 1,146 |              |  | $              | (215 | )             |  | $        | 931 |  |  | $   | (343 | ) |  | $ | 803 | 
|                    |  |              |  |          |       |              |  |                |      |               |  |          |     |  |  |     |      |   |  |   |     | 



|   |  | The Company has reviewed the carrying values of its intangible assets and
has determined no indicators of impairment were present that would
indicate the current carrying value of these intangible assets was
impaired.                                                                                                                                                                                                                                                                                                                                                
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Special Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The special charges of $2.8 million recorded during the third quarter of
fiscal 2003 were due to Motorolas transition from a handset platform on which
the Company was the sole source for power amplifier modules, to the next
generation of handset platforms, for which the Company is not a supplier of
power amplifier modules. The special charges of $2.8 million are comprised of
operating lease and fixed asset impairments and employee termination charges.
The following table summarizes the Companys special charges activity as
follows (in thousands):

|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|------------------------------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                                        |  | Employee    |      |           |  |             |        |       |  |   |       |   |  |  
|                                                        |  | Termination |      | Excess    |  | Lease       |        |       |  |  
|                                                        |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                                        |  |             |      |           |  |             |        |      
|Fiscal 2003 Special Charges                             |  | $           | 350  |           |  | $           | 1,160  |       |  | $ | 1,326 |   |  | $ | 2,836  |  
|Cash paid in fiscal 2003                                |  |             | (227 | )         |  |             |       |       |  |   | (276  | ) |  |   | (503   | )
|Non-cash adjustments and
reconciliations in fiscal 2003 |  |             |     |           |  |             | (1,160 | )     |  |   |      |   |  |   | (1,160 | )
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2003                        |  |             | 123  |           |  |             |       |       |  |   | 1,050 |   |  |   | 1,173  |  
|Cash paid through the first
three months of fiscal 2004 |  |             | (123 | )         |  |             |       |       |  |   | (272  | ) |  |   | (395   | )
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, June 30, 2003                         |  | $           |     |           |  | $           |       |       |  | $ | 778   |   |  | $ | 778    |  
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  



|9. |  | Product Warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company warrants its products against defects in design, materials,
and workmanship, generally for one year from the date of shipment for all
of its products. The actual term could vary depending on the specific
customers. An accrual for estimated future costs relating to warranty
expense is recorded, as a percentage of revenue based on prior experience,
when revenue is recorded and is included in cost of goods sold. Factors
that affect the Companys warranty liability include historical

8



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| |  | and anticipated rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Changes in the Companys product liability during the three months ended
June 30, 2003 and 2002 were as follows (in thousands):                                                       

|                          |  |                    |     |      |  |   |     |  
|------------------------- |  | ------------------ | --- | ---- |  | - | --- | -
|                          |  | Three months ended
|                          |  | June 30,          
|                          |  |                   
|                          |  | 2003               |     | 2002
|                          |  |                    |     |     
|Beginning accrual balance |  | $                  | 400 |      |  | $ | 500 |  
|Warranties issued         |  |                    | 69  |      |  |   | 60  |  
|Charges incurred          |  |                    | (68 | )    |  |   | (60 | )
|                          |  |                    |     |      |  |   |     |  
|Ending accrual balance    |  | $                  | 401 |      |  | $ | 500 |  
|                          |  |                    |     |      |  |   |     |  



|10. |  | Cost Related to Shareholder Actions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In the fourth quarter of fiscal 2003, a group of shareholders (the
Celeritek Shareholder Protective Committee) called a special meeting to
remove the Companys Board of Directors from office and replace them with
a different slate of candidates. In May 2003 the Companys Board of
Directors entered into an agreement with the Committee. Under the terms
of the agreement, the Company has expanded its Board of Directors from six
directors to seven. The new Board is now composed of three of the
Companys directors who were directors prior to the agreement, three
directors nominated by the Committee and one member who is not affiliated
with either the Company or the Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The four new directors were each automatically granted options to purchase
6,000 shares of common stock. Consequently, the Company currently has
3,000 shares reserved for future issuance under the Directors Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | In the first quarter of fiscal 2004, expenses of $1.4 million related to
the special meeting of shareholders and $1.1 million in investment banking
fees, including fees related to the special meeting, have been incurred
and have been reported in loss from operations under the caption Cost
related to shareholder actions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|11. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company

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|    |  | does not believe the adoption of FIN 46 will have a material impact on its
financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In December 2002, the FASB issued Statement Number 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148). SFAS
148 amends Statement Number 123, Accounting for Stock-Based
Compensation, (SFAS 123) to provide alternative methods of transition to
the SFAS 123 fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 requires disclosure of the effects of
an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The transition provisions of SFAS No. 148
are effective for fiscal years ended after December 15, 2002. The
transition provisions do not currently have an impact on our consolidated
financial position and results of operations as we have not elected to
adopt the fair value based method of accounting for stock-based employee
compensation under SFAS No. 123. We adopted the disclosure provisions of
SFAS No. 148 and, accordingly, have included such disclosures in the
financial statements for the three months ended June 30, 2003.
|   
|    |  | In May 2003, the FASB issued Statement Number 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). This Statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity. SFAS 150 generally requires liability classification for two
broad classes of financial instruments: (1) instruments that represent, or
are indexed to, an obligation to buy back the issuers shares, and (2)
obligations that can be settled in shares, but are subject to certain
conditions. SFAS 150 applies to all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of
the first interim period beginning after July 1, 2003. As we have not
created or modified any financial instruments since the effective date of
SFAS 150, we do not believe this Statement will have a material impact on
our financial statements                                                                                           
|   
|    |  | In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21 Accounting for Revenue Arrangements with
Multiple Deliverables. The EITF concluded that revenue arrangements with
multiple elements should be divided into separate units of accounting if
the deliverables in the arrangement have value to the customer on a
standalone basis, if there is objective and reliable evidence of the fair
value of the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by the Company. The provisions
of EITF Issue No. 00-21 are applicable to agreements entered into after
June 15, 2003. Management does not believe adoption of the consensus will
have a material effect on the Companys results of operations or financial
condition.                                                                                                                                                                                                                                                                                                                             
|   
|12. |  | Rights Plan Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | On June 6, 2003 the Company amended the Rights Plan to accelerate the
final expiration date of the Preferred Share Purchase Rights issued
thereunder from April 8, 2009 to June 13, 2003. The Company terminated
the Rights Plan upon expiration of the purchase rights on June 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|13. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | In July 2003, the Company reduced its engineering headcount by four
persons, in the United Kingdom. The Company expects this reduction to
result in approximately $0.5 million to $0.8 million of termination
expense and fixed asset impairment charges to research and development in
the second quarter of fiscal 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

10



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| |  | On July 25, 2003, the Company sold its building in Lincoln, United Kingdom
for approximately $0.3 million, which resulted in a gain of approximately
$0.05 million.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------




|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|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: exploration of
strategic alternatives; semiconductor revenue; the handset market during this
fiscal year; sales of our infrastructure products; our gross margins; research
and development expenses; investment banking fees and selling, general and
administrative expenses; 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 have a material adverse
impact on our operations and financial position.

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

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

Allowance for Doubtful Accounts.We establish an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We evaluate our customers

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

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

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

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

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

Intangible Assets.We 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  First Quarter of Fiscal 2004 Compared to First Quarter
of Fiscal 2003:

This continues to be a difficult time for our business as evidenced by the
reduced revenue this quarter. Celeritek is facing considerable business
challenges resulting from excess capacity and increasing competition in the
wireless communications market. The success of our new products, primarily our
3mm x 3mm power amplifier modules, is critical to our ability to achieve
revenue levels significant enough for us to return to profitability.

As previously announced, we reached an agreement with the Celeritek
Shareholder Protective Committee in May. As part of this agreement, the Board
has established a strategy committee to explore all strategic alternatives
available to the company and to make recommendations to the board regarding the
companys strategic alternatives. Our investment bankers continue to assist
with this process.

Total net sales were $6.6 million for the first quarter of fiscal 2004,
compared to $15.3 million for the first quarter of fiscal 2003, a decrease of
57%.

Semiconductor sales were $1.6 million in the first quarter of fiscal 2004,
compared to $9.3 million in the first quarter of fiscal 2003, a decrease of
83%. Sales in the first quarter of fiscal 2004 did not include any sales of
power amplifier modules for handsets while sales in the first quarter of fiscal
2003 included $8.5

12



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million of sales of power amplifier modules for handsets. Motorola, which
was our largest customer for this product, transitioned from the handset
platform on which we were the sole source for power amplifier modules, to new
handset platforms for which we are not supplying modules. While sales of
infrastructure products almost doubled in the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003, they were not significant enough
to offset the loss of the handset related sales. We have designed several new
products for the handset market and are currently providing samples of these
products to customers. Until we secure design wins and significant production
orders on new handset platforms, however, we do not expect to see any material
increase in semiconductor sales.

In addition to the foregoing, visibility of customer demand for power
amplifier modules continues to be limited. The wireless communications market
continues to suffer from excess capacity and increasing competition. 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 first quarter of fiscal 2004 were $5.0 million
compared to $6.0 million in the first quarter of fiscal 2003, a decrease of
17%. Sales of subsystems products to defense customers decreased 7% to $5.0
million in the first quarter of fiscal 2004 from $5.4 million in the first
quarter of fiscal 2003, and sales of subsystem products to commercial customers
declined to zero in the first quarter of fiscal 2004 compared to $0.6 million
in the first quarter of fiscal 2003. 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 8% of net sales in the first quarter of fiscal 2004
compared to 26% of net sales in the first quarter of fiscal 2003. 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 further reductions.

Research and development expenses were $2.9 million, or 44% of net sales,
in the first quarter of fiscal 2004 compared to $2.6 million, or 17% of net
sales, in the first quarter of fiscal 2003, an increase of 12%. Research and
development expenses increased due to our acquisition of Tavanza, which
included an assembled workforce, and, to a lesser extent, our increased focus
on defense product development. We expect research and development expenses to
remain fairly consistent because of cost reduction strategies undertaken that
have partially offset the addition of research and development expenses from
the acquisition of 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.

Selling, general and administrative expenses were $2.2 million, or 33% of
net sales, in the first quarter of fiscal 2004 compared to $2.7 million, or 17%
of net sales, in the first quarter of fiscal 2003, a decrease of 19%. The
decrease was primarily due to lower selling costs driven by the decrease in
revenues and lower personnel costs. In addition, we incurred management
information systems consulting costs in the first quarter of fiscal 2003. We
expect selling, general and administrative expenses to be fairly consistent
with this quarter, absent any expenses related to the strategy committees
activities.

The $2.5 million of costs related to shareholder actions in the first
quarter of fiscal 2004 consisted of approximately $1.4 million in expense
related to the special meeting of shareholders and $1.1 million in investment
banking fees, including fees related to the special meeting. We expect to
incur additional investment banking fees of at least $0.9 million through March
2004.

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

The $2.8 million of special charges recorded in the third quarter of
fiscal 2003 were due to Motorolas decision to transition from a handset
platform on which we were the sole source for power amplifier modules, to new
handset platforms, for which we will not be supplying power amplifier modules.
The $2.8 million of special charges is made up of both operating lease and
fixed asset impairments and employee termination charges.

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

|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|------------------------------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                                        |  | Employee    |      |           |  |             |        |       |  |   |       |   |  |  
|                                                        |  | Termination |      | Excess    |  | Lease       |        |       |  |  
|                                                        |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                                        |  |             |      |           |  |             |        |      
|Fiscal 2003 Special Charges                             |  | $           | 350  |           |  | $           | 1,160  |       |  | $ | 1,326 |   |  | $ | 2,836  |  
|Cash paid in fiscal 2003                                |  |             | (227 | )         |  |             |       |       |  |   | (276  | ) |  |   | (503   | )
|Non-cash adjustments and
reconciliations in fiscal 2003 |  |             |     |           |  |             | (1,160 | )     |  |   |      |   |  |   | (1,160 | )
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2003                        |  |             | 123  |           |  |             |       |       |  |   | 1,050 |   |  |   | 1,173  |  
|Cash paid through the first
three months of fiscal 2004 |  |             | (123 | )         |  |             |       |       |  |   | (272  | ) |  |   | (395   | )
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, June 30, 2003                         |  | $           |     |           |  | $           |       |       |  | $ | 778   |   |  | $ | 778    |  
|                                                        |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  

Amortization of intangibles was $0.1 million during the first quarter of
fiscal 2004. 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 $0.2 million in the first quarter of
fiscal 2004 compared to $0.3 million in the first quarter of fiscal 2003. The
decrease in interest income and other, net, was primarily due to lower interest
rates.

Subsequent to the end of the first quarter, in July 2003, we reduced the
engineering headcount by four persons in the United Kingdom. We expect this
reduction to result in approximately $0.5 million to $0.8 million of
termination expense and fixed asset impairment charges in research and
development in the second quarter of fiscal 2004.

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On July 25, 2003, we sold the building in Lincoln, United Kingdom for
approximately $0.3 million, which resulted in a gain of approximately $0.05
million.

Liquidity and Capital Resources

We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of June 30, 2003, we had $5.9
million in cash and cash equivalents, $84.8 million in short-term investments
and $85.6 million in working capital.

Net cash used by operating activities was $3.9 million in the first three
months of fiscal 2004 and was due mainly to the quarterly net loss partially
offset by decreases in accounts receivable and inventory and increases in
accounts payable and accrued liabilities. Net cash used by operating activities
was $5.2 million in the first three months of fiscal 2003 and was due mainly to
decreases in accounts payable and other current liabilities. Net cash used by
investing activities was $18.4 million in the first three months of fiscal 2004
and was due to the purchase of short-term investments of $52.9 million and the
purchase of property and equipment of approximately $0.3 million offset by the
proceeds from the sale and maturities of short-term investments of
approximately $34.8 million. Net cash provided by investing activities was $0.1
million in the first three months of fiscal 2003 and was due to the proceeds
from the sale and maturities of short-term investments of approximately $19.1
million offset by the purchase of short term investments of $16.3 million, the
purchase of property and equipment of approximately $0.7 million and the
strategic investment of $2.0 million.

Net cash used by financing activities was $0.7 million in the first three
months of fiscal 2004 and was due to principal payments on long-term debt of
approximately $0.6 million and payments on capital leases of approximately $0.1
million. Net cash used by financing activities was approximately $0.7 million
in the first three months of fiscal 2003 and was due to principal payments on
long-term debt of approximately $0.6 million and payments on capital leases of
approximately $0.2 million. As of June 30, 2003, we had $0.5 million in
outstanding letters of credit, which are secured by certificates of deposits.
Given our cash position, we currently do not have a line of credit.

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 June 30, 2003. The notes are relocation loans collateralized by
certain real property assets, bear no interest and have maturities through
2019. The principal will be repaid at various dates. If an employee ceases
being employed by us, the principal outstanding will be due and payable within
90 days.

We have various equipment notes outstanding with lenders, which are
secured by the equipment. Several of these notes have covenants pertaining to
liquidity levels and minimum tangible net worth. As of June 30, 2003 we were
in compliance with all covenants.

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 June 30, 2003 (in thousands):

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|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |    |  |  |   |    | 
|------------------------------- |  | ----------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | -- |  |  | - | -- | 
|                                |  | Fiscal Year
|                                |  |            
|                                |  | Total       |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2008
|                                |  |             |        |      |  |      |       |      |  |      |       |     
|Contractual Obligations         |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |    |  |  |   |    | 
|Long-term debt obligations      |  | $           | 4,387  |      |  | $    | 2,163 |      |  | $    | 1,922 |      |  | $ | 302   |  |  | $ |   |  |  | $ |   | 
|Capital lease obligations       |  |             | 1,467  |      |  |      | 554   |      |  |      | 634   |      |  |   | 279   |  |  |   |   |  |  |   |   | 
|Operating lease obligations     |  |             | 7,148  |      |  |      | 3,212 |      |  |      | 2,928 |      |  |   | 905   |  |  |   | 73 |  |  |   | 30 | 
|Open purchase order
commitments |  |             | 1,521  |      |  |      | 1,521 |      |  |      |      |      |  |   |      |  |  |   |   |  |  |   |   | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |    |  |  |   |    | 
|Total                           |  | $           | 14,523 |      |  | $    | 7,450 |      |  | $    | 5,484 |      |  | $ | 1,486 |  |  | $ | 73 |  |  | $ | 30 | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |    |  |  |   |    | 

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

In addition, we have contractual commitments as of June 30, 2003, relating
to our engagement of financial advisory firms pursuant to which we will be
required to incur aggregate minimum future costs of approximately $0.9 million
through March 2004. However, as is customary for contracts of this type, these
commitments may increase above the minimum depending on the value of any
strategic transaction we may complete, or the value of our common stock in the
event that there is no strategic transaction.

We have outstanding letters of credit of approximately $0.5 million as
security for capital leases for equipment.

RISK FACTORS

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

We depend on a small number of original equipment manufacturers as customers.
If we fail to secure design wins from new OEMs who have not made recent
purchases from us or who have never purchased from us, or if we lose one or
more of our significant customers, or if purchases by any one of our key
customers decrease, our business will be harmed.

We expect that sales to a limited number of customers will account for a
large percentage of our net sales in the future and will be a very important
component in our plans for returning to profitability. In particular, we are
currently marketing our products to large OEMs in the wireless handset market
to whom we have not in the past sold our power amplifier products. If we fail
to secure design wins from one or more of these large OEMs, if the design wins
we do secure do not result in significant production volumes for our customers
and

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consequently, we are unable to secure significant sales to major new OEM
customers, our revenues will be less than anticipated and we will not be
profitable.

In addition, if we lose any of our existing major customers, our operating
results and business would be harmed. In the first three months of fiscal year
2004, sales to our top ten customers accounted for approximately 64% of our net
sales, with one customer making up approximately 16% and another customer
making up approximately 11% of those net sales. In fiscal year 2003, sales to
our top ten customers accounted for approximately 75% of our net sales, with
Motorola making up approximately 41% of those net sales. In fiscal year 2002,
sales to our top ten customers accounted for approximately 76% of our net
sales, with Motorola making up approximately 43% of those net sales. We had
been a sole source supplier of power amplifier modules to Motorola for its
model 120v handset platform. However, Motorola transitioned to new platforms,
and it selected a sole source supplier other than us for its new platforms. We
did not receive any revenue from products for the handset market in the first
quarter of fiscal 2004 nor do we expect revenue sufficient to replace the
Motorola revenue in the next several quarters. Although we intend to compete
for Motorolas business in the future, there can be no assurance that we will
be successful. If we were to lose another major customer, or if orders by any
of our remaining major customers were to otherwise decrease or be delayed, our
business, operating results and financial condition would be seriously harmed.

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

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, are fixed
and do not vary greatly, if at all, when our net sales decrease. In addition,
the lead time for developing and manufacturing our products often requires us
to invest in manufacturing capacity in anticipation of future demand. 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. We are relying on increased sales to large OEMs in the wireless
handset market in order to realize a significant increase in revenues. If
these sales do not materialize, and if our revenues do not significantly
increase to a level commensurate with our installed capacity, we will be unable
to achieve profitability.

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

We compete in markets with rapidly changing technologies, evolving
industry standards and continuous improvements in products. To be competitive
we will need to continually improve our products and keep abreast of new
technology and our ability to grow will depend substantially on our ability to
continue to apply our GaAs semiconductor components expertise to existing and
emerging wireless communications markets. For example, we recently introduced
3mm x 3mm indium gallium phosphide heterojunction bipolar transistor (InGaP
HBT) power amplifier modules, and hope to secure design wins and production
orders for this product from mobile handset manufacturers. However, our
competitors may introduce products using similar technologies, and new process
technologies could be developed that have characteristics that are superior to
our InGaP HBT process or our other current processes. If we are unable to
develop and maintain competitive processes or design products using new
technologies, and if we are unable to secure production orders for these
products, we will not achieve the significant increase in revenues necessary to
achieve profitability, and our business and operating results will suffer. We
cannot assure you that we will be able to respond to technological advances,
changes in customer requirements or changes in regulatory requirements or
industry

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standards. Any significant delays in our development, introduction or
shipment of products could seriously harm our business, operating results and
financial condition.

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

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



| |  |  | the timing, cancellation or delay of customer orders or
shipments, particularly from our largest customers;
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuating demand from our defense customers;                                                             
|
| |  |  | the timing of our introduction of new products and the introduction of new products by our competitors;    
|
| |  |  | variations in average selling prices of our products;                                                      
|
| |  |  | 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. Due to fluctuations in our net
sales and operating expenses, we believe that period to period comparisons of
our results of operations are not good indications of our future performance.
It is possible that in some future quarter or quarters, our operating results
will be below the expectations of securities analysts or investors. In that
case, our stock price could decline.

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

In October 2002, we acquired Tavanza, Inc., and we may make 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. For example, with the acquisition of Tavanza,
we acquired the technology necessary to introduce 3mm x 3mm power amplifier
modules with lower cost packaging. Previous to this product introduction, most
power amplifier modules were 6mm x 6mm. Although we have completed development
of the 3mm x 3mm power amplifier modules and have begun to deliver samples of
these parts to our potential customers, there can be no assurance that our
customers will adopt these products for use in

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handsets. In addition, several of our competitors have recently
introduced similar products. If our customers do not purchase our new power
amplifier modules, our development and integration efforts will have been
unsuccessful, and our business may suffer.

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

Our business is subject to the effects of general economic conditions in
the United States and globally, and, in particular, market conditions in the
wireless communications 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 expectations of zero to low
growth with rising concerns regarding excess inventory levels. 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 three months of fiscal 2004, sales to international
customers accounted for 35% of our net sales. During fiscal 2003, sales to
international customers accounted for 67% of our net sales. During fiscal 2002,
sales to international customers accounted for 31% of our net sales. We expect
that international sales will continue to account for a significant portion of
our net sales in the future. In addition, many of our domestic customers sell
their products outside of the United States. These sales expose us to a number
of inherent risks, including:



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

We are also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with our international operations. Potential markets for our
products exist in developing countries that may deploy wireless communications
networks. These countries

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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, and in particular,
Samsung. Among other things, we recently opened a new sales and technical
support office in Seoul, South Korea, and we have invested approximately $2.5
million in a South Korean handset design company. During the third quarter of
fiscal 2003, we loaned the South Korean handset design company $0.5 million,
which was repaid during the fourth quarter of fiscal 2003. 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.

Uncertainties resulting from the recent proxy contest and the exploration of
strategic alternatives may adversely affect our business and may hamper our
ability to retain key personnel.

In the fourth quarter of fiscal 2003, a group of shareholders (the
Celeritek Shareholder Protective Committee) called a special meeting to
remove our Board of Directors from office and replace them with a different
slate of candidates. Although we have reached an agreement with the Celeritek
Shareholder Protective Committee as described in our Form 10-K and other public
filings, uncertainties resulting from the proxy contest and our exploration of
strategic alternatives may adversely affect our business and hamper our ability
to retain our executives or key personnel in our engineering and other
departments. If we fail to retain executives or key engineering personnel, our
ability to develop products, especially new products such as the recently
introduced 3mm x 3mm power amplifier modules, will be harmed and our revenues
will likely decline. In addition, we anticipate that we will incur additional
expenses of at least $0.9 million through March 2004 for advisory services
related to the activities of our strategy committee with respect to the
considerations of strategic alternatives available to us. However, expenses
could be greater than anticipated, which would negatively affect our earnings.

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Given our presence in China and other parts of Asia, the outbreak of SARS may
negatively impact our operating results.

The recent outbreak of severe acute respiratory syndrome (SARS), a disease
of unknown etiology that has caused numerous deaths in Asia, North America and
Europe, could have a negative impact on our operations. In particular, we have
both customers, sales personnel and third party suppliers located in the
affected areas of Asia, and therefore, our normal operating processes could be
hindered by a number of SARS-related factors, including, but not limited to:



| |  |  | disruptions to our sales personnel and process in affected locations;  
| | - |  | -----------------------------------------------------------------------
|
| |  |  | disruptions at our third-party suppliers located in affected locations;
|
| |  |  | disruptions in our customers operations in affected locations; and    
|
| |  |  | reduced travel between ourselves, customers, and suppliers.            

If the number of SARS cases rises or spreads to other areas, our sales and
operating results could be 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 June 30, 2003, our backlog was
approximately $13.1 million, of which 78% was from defense customers and 22%
was from commercial customers. Backlog is not necessarily indicative of future
sales as our customers may cancel or defer orders without penalty.
Nevertheless, we make a number of management decisions based on our backlog,
including purchasing materials, hiring personnel and other matters that may
increase our production capabilities and costs. Cancellation of pending
purchase orders or termination or reduction of purchase orders in progress
could significantly harm our business. We do not believe that our backlog as of
any particular date is representative of actual sales for any succeeding
period, and we do not know whether our current order backlog will necessarily
lead to sales in any future period.

Generally, purchase orders in our backlog are subject to cancellation
without penalty at the option of the customer, and from time to time we have
experienced cancellation of orders in backlog. In fact, in the fourth quarter
of fiscal 2001 and in fiscal 2002, a significant portion of our backlog was
cancelled due to changing market conditions. Certain of our customers in the
wireless infrastructure market delayed and cancelled long-standing contracts in
response to declining market demand.

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

The success of our business depends largely on our ability to make our
products efficiently through a manufacturing process that results in a large
number of usable products, or yields, from any particular production run. In
the past we have experienced significant delays in our product shipments due to
lower than expected production yields. Due to the rigid technical requirements
for our products and manufacturing 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.                                                     

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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. In addition, with the acquisition of Tavanza, we acquired the
technology necessary to introduce 3mm x 3mm power amplifier modules with lower
cost packaging. Although we have completed development of the 3mm x 3mm power
amplifier modules and have begun to deliver samples of these parts to our
potential customers, we have limited experience with these modules.
Consequently, our production yields may be lower than expected, and we cannot
assure you that we will not experience problems with our production yields in
the future. Decreases in our yields can result in substantially higher costs
for our products. If we cannot maintain acceptable yields in the future, our
business, operating results and financial condition will suffer.

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

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

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.

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

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



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

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

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

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

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

In addition, our inventory can rapidly become out dated due to the short
life cycle of the end products that incorporate our products. For example, the
life cycle of mobile handsets has been and is expected to continue to be
relatively short with models, features and functionality evolving rapidly. In
fiscal 1999, 2002 and 2003, we wrote off out dated 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 dated 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.

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

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

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

Our ability to satisfy our current backlog and any additional orders we
may receive in the future will depend on our ability to successfully retain
qualified design engineers, assembly and test personnel. Our design engineers
reside at our headquarters in Santa Clara, California and at our 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 and fourth

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quarter of fiscal 2003, we recorded additional impairments of $0.3 and
$0.1 million respectively. We regularly review our investments for
circumstances of impairment and assess the carrying value of the assets against
market value. When impairment exists, we record an expense to the extent that
the carrying value exceeds fair market value in the period the assessment was
made. The fair value of strategic investments, such as the foundry, is
dependent on the performance of the companies invested in, as well as the
marketability for these investments. In assessing potential impairment of these
investments, management considers these factors as well as forecasted financial
performance of the investees. If these forecasts are not met or if market
conditions change, we may have to record additional impairment charges.

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

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

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

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

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

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 June 30, 2003, our investment portfolio comprised
approximately $6.2 million in money market funds and certificate of deposits
and $84.3 million of money market auction rate preferred stocks, corporate debt
securities and municipal bonds. The securities in our investment portfolio are
not leveraged, are classified as available for sale and are therefore subject
to interest rate risk. We currently do not hedge interest rate exposure. If
market interest rates were to increase by 100 basis points, or 1%, from June
30, 2003 levels, the fair value of our portfolio would decline by approximately
$0.2 million. The modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest rates.

Foreign Currency Exchange Risk

The current foreign exchange exposure in all international operations is
deemed to be immaterial since all of our net sales and 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

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

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

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|        |  |                                 
|------- |  | --------------------------------
|PART II |  | OTHER INFORMATION               
|        |  |                                 
|Item 6. |  | EXHIBITS AND REPORTS ON FORM 8-K



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

|        |  |                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                
|31.1    |  | Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                              
|        |  |                                                                                                                                                                                                                
|31.2    |  | Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                              
|        |  |                                                                                                                                                                                                                
|32.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                 
|        |  |                                                                                                                                                                                                                
|99.1    |  | Charter for the Audit Committee of the Board of Directors. (1)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                
|99.2    |  | Charter for the Compensation Committee of the Board of
Directors. (1)                                                                                                                                          
|        |  |                                                                                                                                                                                                                
|99.3    |  | Charter for the Corporate Governance and Nominating Committee
of the Board of Directors. (1)                                                                                                                   
|        |  |                                                                                                                                                                                                                
|99.4    |  | Corporate Governance Guidelines. (1)                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                
|99.5    |  | Letter Agreement, dated May 18, 2003, between Celeritek, Inc.
and the Celeritek Shareholder Protective Committee (2)                                                                                           
|        |  |                                                                                                                                                                                                                
|99.6    |  | Settlement Agreement, dated May 28, 2003, between Celeritek,
Inc., the Celeritek Shareholder Protective Committee and the members
and certain affiliates of the Celeritek Shareholder Protective
Committee. (3)



---

| | (1) |  | Incorporated by reference to our Form 8-K filed on April 16, 2003.
| | --- |  | ------------------------------------------------------------------
| | (2) |  | Incorporated by reference to our Form 8-K filed on May 19, 2003.  
| | (3) |  | Incorporated by reference to our Form 8-K filed on May 28, 2003.  

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| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------



| |  | We filed five reports of Form 8-K with the Securities and Exchange
Commission during the period covered by this report, as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------



| | 1. |  | Report on Form 8-K filed on April 16, 2003 under Item 5 (Other
Events), regarding our adoption of new board committee charters,
corporate governance guidelines and change of control agreements.        
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Report on Form 8-K filed on April 30, 2003 under Item 12
(Results of Operations and Financial Condition), regarding our fourth
quarter 2003 financial results.                                           
|
| | 3. |  | Report on Form 8-K filed on May 19, 2003 under Item 5 (Other
Events), regarding the preliminary settlement with respect to the
proxy contest and the cancellation of the special meeting of
shareholders.
|
| | 4. |  | Report on Form 8-K filed on May 28, 2003 under Item 5 (Other
Events), regarding the definitive settlement with respect to the
proxy contest and the cancellation of the special meeting of
shareholders. 
|
| | 5. |  | Report on Form 8-K filed on June 9, 2003 under Item 5 (Other
Events), regarding the amendment and termination of our Rights
Agreement.                                                                   

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SIGNATURES

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

|                      |  |                                                                                    | 
|--------------------- |  | ---------------------------------------------------------------------------------- | 
|                      |  | CELERITEK, INC.                                                                   
|                      |  |                                                                                   
|Date: August 13, 2003 |  | /s/ MARGARET E. SMITH                                                             
|                      |  |                                                                                   
|                      |  | Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                
|31.1    |  | Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                              
|        |  |                                                                                                                                                                                                                
|31.2    |  | Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                              
|        |  |                                                                                                                                                                                                                
|32.1    |  | Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                 
|        |  |                                                                                                                                                                                                                
|99.1    |  | Charter for the Audit Committee of the Board of Directors. (1)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                
|99.2    |  | Charter for the Compensation Committee of the Board of
Directors. (1)                                                                                                                                          
|        |  |                                                                                                                                                                                                                
|99.3    |  | Charter for the Corporate Governance and Nominating Committee
of the Board of Directors. (1)                                                                                                                   
|        |  |                                                                                                                                                                                                                
|99.4    |  | Corporate Governance Guidelines. (1)                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                
|99.5    |  | Letter Agreement, dated May 18, 2003, between Celeritek, Inc.
and the Celeritek Shareholder Protective Committee (2)                                                                                           
|        |  |                                                                                                                                                                                                                
|99.6    |  | Settlement Agreement, dated May 28, 2003, between Celeritek,
Inc., the Celeritek Shareholder Protective Committee and the members
and certain affiliates of the Celeritek Shareholder Protective
Committee. (3)



---

| | (1) |  | Incorporated by reference to our Form 8-K filed on April 16, 2003.
| | --- |  | ------------------------------------------------------------------
| | (2) |  | Incorporated by reference to our Form 8-K filed on May 19, 2003.  
| | (3) |  | Incorporated by reference to our Form 8-K filed on May 28,
2003.  

31