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 28, 2009 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

Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense electronics and wireless telecommunications. In fiscal 2010, the Company consisted of two operating and reporting segments: Giga-tronics Division and Microsource.

The Company's business is highly dependent on government spending in the defense electronics sector and on the wireless telecommunications market. The Company has seen an improvement in defense and commercial orders during the second quarter of fiscal 2010 versus the second quarter of fiscal 2009. The Company has seen a reduction in defense orders for the six month period ended September 26, 2009 as compared to the same period last year. However, commercial orders have improved for the six month period ended September 26, 2009 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. As of June 30, 2009, the Fremont lease obligation has terminated. 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 by segment are as follows for the periods shown:

  New Orders
                                                      Three Months Ended
  (Dollars in thousands)      September 26, 2009         September 27, 2008       % change
  Giga-tronics Division        $           4,421          $           2,347          88 %
  Microsource                                429                        742         (42 %)
  Total                        $           4,850          $           3,089          57 %




                                                     Six Months Ended
   (Dollars in thousands)     September 26, 2009        September 27, 2008       % change
   Giga-tronics Division        $          6,623         $           6,405           3 %
   Microsource                               760                       908         (16 %)
   Total                        $          7,383         $           7,313           1 %

New orders received in the second quarter of fiscal 2010 increased by 57% to $4,850,000 from the $3,089,000 received in the second quarter of fiscal 2009. New orders received in the first half of fiscal 2010 increased 1% to $7,383,000 from the $7,313,000 received in the first half of fiscal 2009. Orders at Giga-tronics increased for the three and six month periods ended September 26, 2009 primarily due to an increase in new military orders whereas orders at Microsource decreased for the three and six month periods ended September 26, 2009 primarily due to a decrease in military demand for its products.

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

Backlog
                                                                  Three Months Ended
                                              September 26,       September 27,
(Dollars in thousands)                                 2009                2008        % change
Backlog of unfilled orders                       $    7,396          $    7,664           (3 %)
Backlog of unfilled orders
shippable within one year                             6,980               6,248           12 %
Previous fiscal year end backlog
reclassified during quarter as
shippable later than one year                           ---                 ---          ---
Net cancellations during the quarter                    ---                 ---          ---

Backlog at the end of the first half of fiscal 2010 decreased 3% as compared to the end of the same period last year.

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

  Allocation of Net Sales
                                                       Three Months Ended
  (Dollars in thousands)      September 26, 2009         September 27, 2008       % change
  Giga-tronics Division        $           3,205          $           2,438          31 %
  Microsource                              1,418                      1,251          13 %
  Total                        $           4,623          $           3,689          25 %




                                                     Six Months Ended
   (Dollars in thousands)    September 26, 2009        September 27, 2008       % change
   Giga-tronics Division       $          5,741          $          5,098          13 %
   Microsource                            3,351                     2,079          61 %
   Total                       $          9,092          $          7,177          27 %

Fiscal 2010 second quarter net sales were $4,623,000, a 25% increase from the $3,689,000 in the second quarter of fiscal 2009. Sales at Giga-tronics Division increased 31% or $767,000 primarily due to an increase in military shipments. Sales at Microsource increased 13% or $167,000 during the second quarter of fiscal 2009 versus the second quarter of fiscal 2009 primarily due to an increase in military shipments.

Net sales for the six month period ended September 26, 2009 were $9,092,000, a 27% increase from the $7,177,000 in the six month period ended September 27, 2008. Sales at Giga-tronics increased 13% or $643,000 primarily due to an increase in military shipments. Sales at Microsource increased 61% or $1,272,000 during the first half of fiscal 2010 versus the first half of fiscal 2009 primarily due to an increase in military shipments.

Cost of sales was as follows for the periods shown:

 Cost of Sales
                                                     Three Months Ended
 (Dollars in thousands)      September 26, 2009         September 27, 2008        % change
 Cost of sales                $           2,510          $           2,351            7 %


                                                     Six Months Ended
 (Dollars in thousands)      September 26, 2009         September 27, 2008        % change
 Cost of sales                $           4,865          $           4,442           10 %

In the second quarter of fiscal 2010, cost of sales increased 7% to $2,510,000 from $2,351,000 for the same period last year due to increased volume. Cost of sales as a percentage of sales improved by 9.4% for the second quarter of fiscal 2010 to 54.3% compared to 63.7% for the second quarter of fiscal 2009. The improvement was driven by a change in product mix.

For the six months ended September 26, 2009, cost of sales increased 10% to $4,865,000 from $4,442,000 for the similar period ended September 27, 2008 due to increased volume. Cost of sales as a percentage of sales improved by 8.4% for the first half of fiscal 2010 to 53.5% compared to 61.9% from the first half of fiscal 2009. The improvement was driven by a change in product mix.

Operating expenses were as follows for the fiscal periods shown:

Operating Expenses
                                                          Three Months Ended
                                               September 26,     September 27,
(Dollars in thousands)                                  2009              2008       % change
Engineering                                       $      363        $      522         (30 %)
Selling, general and administrative                    1,371             1,437          (5 %)
Total                                             $    1,734        $    1,959         (11 %)


                                                           Six Months Ended
                                               September 26,     September 27,
(Dollars in thousands)                                  2009              2008       % change
Engineering                                       $      744        $    1,078         (31 %)
Selling, general and administrative                    2,765             2,801          (1 %)
Total                                             $    3,509        $    3,879         (10 %)

Operating expenses decreased 11% or $225,000 in the second quarter of fiscal 2010 over fiscal 2009 due to greater manpower efficiencies gained as a result of implementing a new Enterprise Resource Plan (ERP) computer software system, as well as a decrease of $159,000 in product development expenses excluding customer order development (COD) engineering costs and a decrease of $66,000 in selling, general and administrative expenses. The non-recurring engineering (NRE) expenses, which are engineering efforts directed by the customer and are not internally directed projects or sustaining engineering, charged to cost of sales in the second quarter of fiscal 2010 was $106,000. In the second quarter of fiscal 2009 the engineering labor charged to cost of sales was not material. The decrease in selling, general and administrative expense is a result of lower marketing of $97,000 offset by higher administrative expenses of $19,000 and higher commission expenses of $12,000.

Operating expenses decreased 10% or $370,000 in the first half of fiscal 2010 over fiscal 2009 due to greater manpower efficiencies gained as a result of implementing a new ERP computer software system, as well as a decrease of $334,000 in product development expenses excluding COD engineering costs and a decrease of $36,000 in selling, general and administrative expenses. The NRE expenses charged to cost of sales in the first half of fiscal 2010 was $254,000. In the first half of fiscal 2009 the engineering labor charged to cost of sales was not material. The decrease in selling, general and administrative expense is a result of lower marketing of $36,000 and lower administrative expenses of $18,000 offset by higher commission expenses of $18,000.

Giga-tronics recorded a net profit of $373,000 or $0.08 per fully diluted share for the second quarter of fiscal 2010 compared to a net loss of $540,000 or $0.11 per fully diluted share in the same period last year. Giga-tronics recorded a net profit of $706,000 or $0.15 per fully diluted share for the first half of fiscal 2010 compared to a net loss of $1,062,000 or $0.22 per fully diluted share in the same period last year. A $2,000 provision for income taxes was incurred in both the first half of fiscal 2010 and fiscal 2009.

The following provides a reconciliation of GAAP to non-GAAP net income (loss).

                                             Three Months Ended                      Six Months Ended
                                        September 26,     September 27,       September 26,     September 27,
(In thousands except per-share data)             2009              2008                2009              2008
Net income (loss) as reported               $     373         $    (540 )         $     706         $  (1,062 )
Share based Compensation                           44                54                  80               118
Net income (loss) non-GAAP                  $     417         $    (486 )         $     786         $    (944 )


Basic and diluted earnings (loss)
per share as reported                       $    0.08         $  (0.11   )        $    0.15         $  (0.22   )
Impact of share based compensation
on earnings (loss) per share                     0.01              0.01                0.02              0.02
Basic and diluted earnings (loss)
per share non-GAAP                          $    0.09         $   (0.10 )         $    0.17         $   (0.20 )

Shares used in per share
  calculation:
  Basic                                         4,828             4,824               4,826             4,824
  Diluted                                       4,844             4,824               4,829             4,824

Non-GAAP net income, which excludes share based compensation, for the three month period ended September 26, 2009 would have been $44,000 higher or $417,000. Non-GAAP basic and diluted earnings per share would have been $0.09 compared to $0.08 as reported. For the same period last year, the Company's non-GAAP net loss would have been $54,000 lower or $486,000 and the basic and diluted share loss would have been $0.10 compared to $0.11 as reported.

Non-GAAP net income, which excludes share based compensation, for the six month period ended September 26, 2009 would have been $80,000 higher or $786,000. Non-GAAP basic and diluted earnings per share would have been $0.17 compared to $0.15 as reported. For the same period last year, the Company's non-GAAP net loss would have been $118,000 lower or $944,000 and the basic and diluted share loss would have been $0.20 compared to $0.22 as reported.

Management has included this information as this expense is a non-cash item with no net equity impact.

Financial Condition and Liquidity

As of September 26, 2009, the Company had $1,345,000 in cash and cash equivalents, compared to $1,518,000 as of March 28, 2009.

Working capital at September 26, 2009 was $7,971,000 compared to $7,131,000 at March 28, 2009. The increase in working capital was primarily due to an increase in accounts receivable and an increase in inventory partially offset by a decrease in accounts payable in fiscal 2010.

The Company's current ratio (current assets divided by current liabilities) at September 26, 2009 was 3.29 compared to 3.14 on March 28, 2009.

Cash used in operations amounted to $673,000 for the six months ended September 26, 2009. Cash used in operations amounted to $251,000 in the same period of fiscal 2009. Cash used in operations in the first half of fiscal 2010 is primarily attributed to increases in accounts receivable and inventory and a decrease in accounts payable partially offset by the operating profit. 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.

Additions to property and equipment were $4,000 in the first half of fiscal 2010 compared to $64,000 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 16, 2009, the Company renewed its secured revolving line of credit for $1,500,000, with interest payable at prime rate plus 1.5%. 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 under this line of credit during the six month period ended September 26, 2009 and was in compliance with all required covenants at September 26, 2009.

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, the Company may not realize benefits of these deductible differences as of September 26, 2009. Management has, therefore, established a full valuation allowance against its net deferred tax assets as of September 26, 2009.

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.