The forward-looking statements included in this report including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "intends" and words of similar import, which reflect management's best judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those listed in Giga-tronics' Annual Report on Form 10-K for the fiscal year ended March 29, 2008 Part I, under the heading "Certain Factors Which May Adversely Affect Future Operations or an Investment in Giga-tronics", and Part II, under the heading "Management's Discussion and Analysis of Financial Conditions and Results of Operations".

Overview

The Company produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. In 2009, our business consisted of two operating and reporting segments: Giga-tronics and Microsource.

Our business is highly dependent on government spending in the defense electronics sector and on the wireless telecommunications market. The Company has seen a reduction in defense orders for the first half of fiscal 2009 versus the first half of fiscal 2008. Conversely, the Company has seen some improvement in commercial orders for the six month period ended September 27, 2008 as compared to the same period last year.

The Company continues to monitor costs, including reductions in personnel, facilities and other expenses, to more appropriately align costs with revenues. In March 2007, the Company moved ASCOR's engineering, sales and marketing, and administrative activities to the San Ramon, California facility, effectively abandoning its Fremont, California facility. Subsequently, in fiscal 2009, the ASCOR subsidiary was combined into the Giga-tronics Instrument Division. As a result, the Company has accrued its future lease obligations, net of estimated sub-lease income, through June 2009. The Company is pursuing subleasing of this facility. Microsource sales and marketing and engineering activities were also consolidated into the San Ramon facility to better integrate our component development activities with the Company's overall new product plans. The Microsource facility in Santa Rosa, California, however, remains open as a manufacturing operation.

Results of Operations

New orders received from continuing operations in the second quarter of fiscal 2009 decreased 18% to $3,089,000 from the $3,751,000 received in the second quarter of fiscal 2008. New orders received from continuing operations in the second half of fiscal 2009 decreased 16% to 7,313,000 from the $8,731000 received in the second half of fiscal 2008.

New orders by segment were as follows for the fiscal periods shown:

                                     New Orders
                                              Three Months Ended
   (Dollars in thousands)    September 27, 2008       % change    September 29, 2007
Giga-tronics                  $           2,347         (34 %)     $           3,536
Microsource                                 742         245 %                    215
 Total                        $           3,089         (18 %)     $           3,751



                                               Six Months Ended
   (Dollars in thousands)    September 27, 2008       % change    September 29, 2007
Giga-tronics                  $           6,405         (20 %)     $           7,980
Microsource                                 908          21 %                    751
 Total                        $           7,313         (16 %)     $           8,731

Orders at Giga-tronics decreased for the three and six month periods ended September 27, 2008 primarily due to an decrease in new military orders whereas orders at Microsource increased for the three and six month periods ended September 27, 2008 primarily due to an increase in military demand for its products.

The following table shows order backlog and related information at the end of the respective periods:

                                           Backlog
                                                     September                      September
(Dollars in thousands)                                27, 2008        % Change       29, 2007
Backlog of unfilled orders                        $      7,664           (3 %)   $      7,891
Backlog of unfilled orders shippable within one
year                                                     6,248           16 %           5,389
Previous fiscal year (FY) quarter end backlog
reclassified during year as shippable later
than one year                                              ---          ---               ---
Net cancellations during year of previous FY
quarter end one-year backlog                               ---          ---               ---

Backlog at the end of the first half of fiscal 2009 decreased 3% as compared to the end of the same period last year. However, our shippable backlog has increased due to a partial liquidation of our multiyear contract with Boeing.

The allocation of net sales was as follows for the fiscal periods shown:

                             Allocation of Net Sales
                                           Three Months Ended
(Dollars in thousands)    September 27, 2008       % change    September 29, 2007
Giga-tronics               $           2,438         (32 %)     $           3,584
Microsource                            1,251          17 %                  1,067
  Total                    $           3,689         (21 %)     $           4,651



                                               Six Months Ended
   (Dollars in thousands)    September 27, 2008       % change    September 29, 2007
Giga-tronics                  $           5,098         (27 %)     $           7,010
Microsource                               2,079          (8 %)                 2,269
  Total                       $           7,177         (23 %)     $           9,279

Fiscal 2009 second quarter net sales were $3,689,000, a 21% decrease from the $4,651,000 in the second quarter of fiscal 2008. Sales at Giga-tronics decreased 32% or $1,146,000 primarily due to a decrease in military demand for its products. Sales at Microsource increased 17% or $184,000 during the second quarter of fiscal 2009 versus the second quarter of fiscal 2008 primarily due to an increase in military shipments.

Net sales for the six month period ended September 27, 2008 were $7,177,000, a 23% decrease from the $9,279,000 in the six month period ended September 29, 2007. Sales at Giga-tronics decreased 27% or $1,912,000 primarily due to a decrease in military demand for its products. Sales at Microsource decreased 8% or $190,000 during the first half of fiscal 2009 versus the first half of fiscal 2008 primarily due to a decrease in commercial shipments.

Cost of sales was as follows for the fiscal periods shown:

                                     Cost of Sales
                                                Three Months Ended
   (Dollars in thousands)    September 27, 2008       % change       September 29, 2007
Cost of sales               $             2,351             (9 %)   $             2,570

Six Months Ended (Dollars in thousands) September 27, 2008 % change September 29, 2007 Cost of sales $ 4,442 (16 %) $ 5,254

In the second quarter of fiscal 2009, cost of sales decreased 9% to $2,351,000 from $2,570,000 for the same period last year. For the six months ended September 27, 2008, cost of sales decreased 16% to $4,442,000 from $5,254,000 for the similar period ended September 29, 2007. For both the three months and six month periods the primary reason is lower sales, however, due to a poor product mix the rate of decrease in cost of sales did not keep up with the sales reduction.

Operating expenses were as follows for the fiscal periods shown:

                                      Operating Expenses
                                                              Three Months Ended
                                                  September 27,                  September 29,
(Dollars in thousands)                                     2008       % change            2007
Engineering                                          $      522            2 %     $       514
Selling, general and administrative                       1,437            5 %           1,365
Restructuring                                               ---          ---               ---
  Total                                              $    1,959            4 %     $     1,879




                                                                Six Months Ended
                                                      September                      September
(Dollars in thousands)                                 27, 2008        % change       29, 2007
Engineering                                        $      1,078           (2 %)   $      1,100
Selling, general and administrative                       2,801            6 %           2,640
Restructuring                                               ---          ---                80
  Total                                            $      3,879            2 %    $      3,820

Operating expenses increased 4% or $80,000 in the second quarter of fiscal 2009 over fiscal 2008. Product development costs increased 2% or $8,000 for the quarter ended September 27, 2008 as compared to the same period in the prior year. Selling, general and administrative expenses increased 5% or $72,000 for the second quarter of fiscal year 2009 compared to the same period in the prior year. The increase is a result of higher marketing expenses of $173,000 and higher administrative expenses of $6,000 offset by lower commission expenses of $107,000 on lower commissionable sales for the quarter.

Operating expenses increased 2% or $59,000 for the six months ended September 27, 2008 over the same period for the prior year. Engineering costs from continuing operations decreased 2% or $22,000 for the six month period ended September 27, 2008. Selling, general and administrative expenses from continuing operations increased 6% or $161,000 for the six month period ended September 27, 2008. The increase is a result of higher marketing expenses of $205,000 and higher administrative expenses of $200,000 offset by lower commission expenses of

$244,000 on lower commissionable sales for the quarter. A one-time restructuring charge of $80,000 in severance costs was made in the first quarter of fiscal 2008.

The Company recorded a net loss of $540,000 or $0.11 per fully diluted share for the second quarter of fiscal 2009 versus a net income of $188,000 or $0.04 per fully diluted share in the same period last year. The Company recorded a net loss of $1,062,000 or $0.22 per fully diluted share for the first half of fiscal 2009 versus a net income of $280,000 or $0.06 per fully diluted share in the same period last year.

Financial Condition and Liquidity

As of September 27, 2008, the Company had $1,577,000 in cash and cash equivalents, compared to $1,845,000 as of March 29, 2008.

Working capital at September 27, 2008 was $6,200,000 compared to $7,131,000 at March 29, 2008. The decrease in working capital was primarily due to lower accounts receivable and accrued expenses in fiscal 2009.

The Company's current ratio (current assets divided by current liabilities) at September 27, 2008 was 3.38 compared to 3.55 on March 29, 2008.

Cash used in operations amounted to $251,000 in the first half of fiscal 2009. Cash used in operations amounted to $103,000 in the same period of fiscal 2008. Cash used in operations in the first half of fiscal 2009 is primarily attributed to the operating loss offset by the net change in operating assets and liabilities in the year. Cash used by operations in the first half of fiscal 2008 was primarily attributed to the net change in operating assets and liabilities offset by the operating income in the year.

Additions to property and equipment were $64,000 in the first half of fiscal 2009 compared to $94,000 for the same period last year. The capital equipment spending in fiscal 2008 was due to an upgrade of capital equipment enabling the manufacture of new products being released.

On June 17, 2008, the Company renewed its secured revolving line of credit for $2,500,000, with interest payable at prime rate plus 1%. The borrowing under this line of credit is based on the Company's accounts receivable and inventory and is secured by all of the assets of the Company. The Company had no borrowings under this line of credit in the three and six month periods ended September 27, 2008.

From time to time, the Company considers a variety of acquisition opportunities to also broaden its product lines and expand its market. Such acquisition activity could also increase the Company's operating expenses and require the additional use of capital resources. The Company also intends to maintain research and development expenditures for the purpose of broadening its product line.

Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more likely than not be realized from the results of operations. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on historical taxable income and projections for future taxable income over the periods in which the deferred tax assets become deductible, management has taken a conservative approach that the Company will not realize benefits of these deductible differences as of September 27, 2008. Management has, therefore, established a valuation allowance against its net deferred tax assets as of September 27, 2008.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are likely to have a current or future material effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 11 to the Condensed Consolidated Financial Statements included in this report.