A theoretical model is developed for the two‐beam klystron, where two concentric annular electron beams propagate through a grounded conducting tube. The beams premodulated at the first cavity enter the second cavity, exciting it. The induced voltage at the second cavity returns a part of the inner beam toward the first cavity, establishing a mutual communication between two cavities. The in‐phase condition of the return current is obtained in terms of the intercavity distance. The maximum current‐modulation condition at the second cavity is also obtained. These two conditions determine an optimum intercavity distance. The oscillation behavior of the first cavity is investigated, including influence of the intercavity distance on the induced gap voltage appearing on the cavity opening. The relationship between the induced voltage and the modulated return current in the opening is found from an equivalent circuit representation of the cavity impedance. The boundary between the oscillator and amplifier regions is described in the parameter space defined by the normalized return‐current strengthhand intercavity distance represented by the phase angle &agr;. In the amplifier region (h sin &agr;<1), the amplification occurs only for a narrow range of the phase angle &agr;. The induced voltage grows exponentially in the oscillator region satisfyingh sin &agr;≳1. Introducing a nonlinear saturation term into the return current, the induced voltage is bounded in the oscillator operation.