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 fiscal year 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 an increase in defense orders for the first nine months of fiscal 2009 versus the first nine months of fiscal 2008. And likewise, the Company has seen improvement in commercial orders for the nine month period ended December 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 vacating 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 third quarter of fiscal 2009 increased 93% to $9,461,000 from the $4,905,000 received in the third quarter of fiscal 2008. New orders received from continuing operations for the nine months ended December 27, 2008 increased 23% to $16,774,000 from the $13,636,000 for the same period a year ago.

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

                                       New Orders
                                               Three Months Ended
   (Dollars in thousands)     December 27, 2008      % change        December 29, 2007
   Giga-tronics               $           3,052           (19 %)     $           3,785
   Microsource                            6,409           472 %                  1,120
    Total                     $           9,461            93 %      $           4,905



                                               Nine Months Ended
   (Dollars in thousands)     December 27, 2008      % change        December 29, 2007
   Giga-tronics               $           9,457           (20 %)     $          11,765
   Microsource                            7,317           291 %                  1,871
    Total                     $          16,774            23 %      $          13,636

Orders at Giga-tronics decreased for the three and nine month periods ended December 27, 2008 primarily due to a decrease in new military orders partially offset by a slight increase in commercial orders whereas orders at Microsource increased for the three and nine month periods ended December 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
                                                 December 27,                     December 29,
(Dollars in thousands)                                   2008        % Change             2007
Backlog of unfilled orders                       $     12,026              53 %   $      7,843
Backlog of unfilled orders shippable within
one year                                                8,853              96 %          4,510
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 third quarter of fiscal 2009 increased 53% as compared to the end of the same period last year.

Net sales were as follows for the fiscal periods shown:

                                        Net Sales
                                               Three Months Ended
   (Dollars in thousands)     December 27, 2008       % change        December 29, 2007
   Giga-tronics               $           3,771             (6 %)     $           3,999
   Microsource                            1,328             39 %                    954
     Total                    $           5,099              3 %      $           4,953



                                               Nine Months Ended
   (Dollars in thousands)     December 27, 2008      % change        December 29, 2007
   Giga-tronics               $           8,869           (19 %)     $          11,009
   Microsource                            3,407             6 %                  3,223
     Total                    $          12,276           (14 %)     $          14,232

Fiscal 2009 third quarter net sales were $5,099,000, a 3% increase from the $4,953,000 in the third quarter of fiscal 2008. Sales at Giga-tronics decreased 6% or $228,000 primarily due to a decrease in commercial shipments for its products. Sales at Microsource increased 39% or $374,000 during the third quarter of fiscal 2009 versus the third quarter of fiscal 2008 primarily due to an increase in military shipments.

Net sales for the nine month period ended December 27, 2008 were $12,276,000, a 14% decrease from the $14,232,000 in the nine month period ended December 29, 2007. Sales at Giga-tronics decreased 19% or $2,140,000 primarily due to a decrease in military demand for its products. Sales at Microsource increased 6% or $184,000 during the nine month period ended December 27, 2008 versus the same period in the prior fiscal year primarily due to an increase in military shipments.

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

                                      Cost of Sales
                                                Three Months Ended
   (Dollars in thousands)     December 27, 2008       % change        December 29, 2007
   Cost of sales            $             2,679             (8 %)   $             2,904

Nine Months Ended (Dollars in thousands) December 27, 2008 % change December 29, 2007 Cost of sales $ 7,121 (13 %) $ 8,158

In the third quarter of fiscal 2009, cost of sales decreased 8% to $2,679,000 from $2,904,000 for the same period last year. For the nine months ended December 27, 2008, cost of sales decreased 13% to $7,121,000 from $8,158,000 for the similar period ended December 29, 2007. For the three month period the decrease is primarily due to a better product mix sold with higher profit margins, whereas the decrease for the nine month period is primarily due to lower sales.

Operating expenses were as follows for the fiscal periods shown:

                                             Operating Expenses
                                                                   Three Months Ended
(Dollars in thousands)                           December 27, 2008         % change        December 29, 2007
Engineering                                      $             479               (8 %)     $             520
Selling, general and administrative                          1,590                9 %                  1,454
  Total                                          $           2,069                5 %      $           1,974



                                                              Nine Months Ended
                                                December 27,                       December 29,
(Dollars in thousands)                                  2008        % change               2007
Engineering                                    $       1,557              (4 %)   $       1,620
Selling, general and administrative                    4,391               7 %            4,094
Restructuring                                              -            (100 %)              80
  Total                                        $       5,948               3 %    $       5,794

Operating expenses increased 5% or $95,000 in the third quarter of fiscal 2009 over fiscal 2008. Product development costs decreased 8% or $41,000 for the quarter ended December 27, 2008 as compared to the same period in the prior year. This is primarily due to engineering expense associated with an NRE (non-recurring engineering) contract inventoried on the balance sheet until the revenue from the milestone is recognized. Selling, general and administrative expenses increased 9% or $136,000 for the third quarter of fiscal year 2009 compared to the same period in the prior year. The increase is a result of higher marketing expenses of $131,000 and higher commission expenses of $17,000 offset by lower administrative expenses of $12,000.

Operating expenses increased 3% or $154,000 for the nine months ended December 27, 2008 over the same period for the prior year. Engineering costs from continuing operations decreased 4% or $63,000 for the nine month period ended December 27, 2008. This is primarily due to engineering expense associated with an NRE contract inventoried on the balance sheet until the revenue from the milestone is recognized. Selling, general and administrative expenses from continuing operations increased 7% or $297,000 for the nine month period ended

December 27, 2008. The increase is a result of higher marketing expenses of $336,000 and higher administrative expenses of $188,000 offset by lower commission expenses of $227,000 on lower commissionable sales for the nine month period. A one-time restructuring charge of $80,000 in severance costs was made in the nine month period ended December 29, 2007.

The Company recorded a net profit of $349,000 or $0.07 per fully diluted share for the third quarter of fiscal 2009 versus a net profit of $31,000 or $0.01 per fully diluted share in the same period last year. The Company recorded a net loss of $713,000 or $0.15 per fully diluted share for the nine months ended December 27, 2008 versus a net profit of $311,000 or $0.06 per fully diluted share in the same period last year.

Financial Condition and Liquidity

As of December 27, 2008, the Company had $2,113,000 in cash and cash equivalents, compared to $1,845,000 as of March 29, 2008.

Working capital at December 27, 2008 was $6,628,000 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 December 27, 2008 was 3.30 compared to 3.55 on March 29, 2008.

Cash provided by operations amounted to $290,000 for the nine month period ended December 27, 2008. Cash provided by operations amounted to $147,000 in the same period of fiscal 2008. Cash used in operations in the nine months ended December 27, 2008 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 nine month period ended December 29, 2007 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 $66,000 for the nine months ended December 27, 2008 compared to $121,000 for the same period last year. The capital equipment spending in fiscal 2009 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 borrowed $500,000 in the third quarter of fiscal 2009, but repaid it prior to December 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 December 27, 2008. Management has, therefore, established a valuation allowance against its net deferred tax assets as of December 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 (unaudited) included in this report.