<PAGE>   1

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS FOR FISCAL 2001 AS COMPARED TO 2000

        During the fourth quarter of fiscal 2001, the Company adopted SAB 101,
Revenue Recognition in Financial Statements. The Company recorded a net
cumulative effect adjustment related to this change in accounting of $520,000,
effective March 26, 2000. The adoption of SAB 101 resulted in the deferral of
$2,165,000 in sales as of the beginning of the 2001 fiscal year, and subsequent
recognition of the deferred sales during the year.

        New orders received in 2001 were $57,830,000, a decrease of 10% from
$64,013,000 in 2000. This decrease was attributable primarily to the non
recurrence of a three year contract for about $14,100,000 recorded at the end of
fiscal 2000. At year end 2001, the Company's backlog of unfilled orders was
$39,964,000, compared to $34,128,000 at the end of 2000. As of year end 2001,
there were approximately $7,245,000 unfilled orders that were scheduled for
shipment beyond a year and as of year end 2000 there were $10,201,000 unfilled
orders scheduled for shipment beyond a year. Primarily, the increase in backlog
is attributable to strong order levels at Microsource and at the Giga-tronics
Instruments division.

        Net sales for 2001 were $54,159,000, a 14% increase from $47,577,000 in
2000. Sales for the fiscal year 2001, without the SAB 101 adjustment, would have
been $51,994,000, or over a 9% increase in revenue as compared to the
$47,577,000 of the prior year. In fiscal 2001, Microsource decreased revenues
12% or $1,861,000, while Giga-tronics Instruments increased 35% or $6,485,000,
in sales and ASCOR improved 12% or $798,000, in sales. DYMATIX (formerly the
Semiconductor Equipment Group) improved 16% or $1,160,000. DYMATIX sales for the
fiscal year 2001, without the SAB 101 adjustment, would have declined over 14%
or $1,005,000.

        Cost of sales increased 11% in 2001 to $35,103,000 from $31,767,000 in
2000. Cost of sales for the fiscal year 2001, without the SAB 101 adjustment,
would have been $33,681,000, or over a 6% increase in cost of sales as compared
to the prior year. The increase in fiscal 2001 is attributable to increased
shipments of products during the fiscal year coupled with higher costs for labor
and material for the products shipped.

        Operating expenses increased 12% in 2001 over 2000. Product development
costs increased $907,000 in fiscal 2001 to $5,087,000. This was principally due
to increased development of new products at the Instruments division and at
Microsource. Selling, general and administrative expenses increased $1,058,000
to $10,713,000 in 2001 due to higher commissions on higher revenues coupled with
higher personnel and promotional expenses at the Instruments division.
Amortization of intangibles decreased $248,000 to $232,000 principally, as a
result of reduced amortization of patents and licenses.

        Other income increased in fiscal 2001 primarily due to increased
sublease rent from the facilities leased in Santa Rosa. Net interest income in
2001 increased from 2000 due to higher average cash available for investment.
The average cash improvement resulted principally from higher cash levels in the
middle of the year. The provision for income taxes in 2001 was $1,040,000, or
30%, of the pre-tax earnings.

        Giga-tronics recorded net earnings before cumulative effect of
accounting change of $2,421,000, or $0.51 per diluted share, in 2001 versus
$1,139,000, or $0.24 per diluted share, in 2000. The improvement in 2001
earnings was due to the Company's higher sales levels in 2001 as compared to
2000. The Company recorded $520,000 for the cumulative effect of accounting
change as a result of the implementation of SAB 101. As a result, Giga-tronics
recorded net earnings of $1,901,000, or $0.40 per diluted share, in 2001 versus
$1,139,000, or $0.24 per diluted share, in 2000.

RESULTS OF OPERATIONS FOR FISCAL 2000 AS COMPARED TO 1999

        New orders received in 2000 were $64,013,000, an increase of 74% from
$36,786,000 in 1999. At year end 2000, the Company's backlog of unfilled orders
was $34,128,000, compared to $17,692,000 at the end of 1999. As of year end
2000, there were approximately $10,201,000 unfilled orders that were scheduled
for shipment beyond a year and as of year end 1999 there were no unfilled orders
scheduled for shipment beyond a year. Primarily, the increase in backlog is
attributable to strong order levels at Microsource and at the Giga-tronics
Instruments division.

        Net sales for 2000 were $47,577,000, a 26% increase from $37,636,000 in
1999. Every segment of the business improved revenue during the fiscal year. In
fiscal 2000, Microsource increased revenues 68% or $6,085,000, DYMATIX (formerly
the Semiconductor Equipment Group) improved 43% or $2,180,000, in revenue, while
Giga-tronics Instruments increased 8% or $1,455,000, in sales and ASCOR improved
3% or $221,000, in sales.

        Cost of sales increased 22% in 2000 to $31,767,000 from $26,102,000 in
1999. The increase in fiscal 2000 is attributable to increased shipments of
products during the fiscal year coupled with higher costs for labor and material
for the products shipped.

        Operating expenses declined 6% in 2000 over 1999. Product development
costs declined $1,133,000 in fiscal 2000 to $4,180,000 as the development of new
products returned to previous levels. Selling, general and administrative
expenses increased $237,000 to $9,655,000 in 2000 due to higher commissions on
higher revenues. Amortization of intangibles decreased $82,000 to $480,000 as a
result of reduced amortization of patents and licenses.

<PAGE>   2

        Other income decreased in fiscal 2000 primarily due to the fiscal 1999
gain from the sale of a surplus building following facilities consolidation at
DYMATIX for which there was no corresponding sale in fiscal 2000. Net interest
income in 2000 decreased 51% from 1999 due to lower average cash available for
investment. The average cash decline resulted principally from low cash level at
the beginning of the year. The provision for income taxes in 2000 was $494,000,
or 30%, of the pre-tax earnings.

        Giga-tronics recorded net earnings of $1,139,000, or $0.24 per diluted
share, in 2000 versus a loss of $1,858,000, or $0.43 per diluted share, in 1999.
The improvement in 2000 earnings was due to the Company's higher sales levels in
2000 as compared to 1999.

FINANCIAL CONDITION AND LIQUIDITY

        As of March 31, 2001, Giga-tronics had $3,469,000 in cash and cash
equivalents, compared to $3,455,000 as of March 25, 2000 and $2,286,000 as of
March 27, 1999. Cash provided by operations amounted to $1,951,000 in 2001 and
$2,644,000 in 2000, compared to cash used by operations of $2,365,000 in 1999.
Cash provided by operations in 2001 is attributed to operating income in the
year primarily offset by cash paid for income taxes of $988,000 and the net
change in operating assets and liabilities. Cash provided by operations in 2000
is attributed to operating income in the year. In 1999, losses by operations
were the significant reason for the increase in use of cash by operations.

        Giga-tronics continues to maintain a strong financial position, with
working capital at year end of $22,924,000 compared to $21,066,000 in 2000 and
$18,021,000 in 1999. The Company's current ratio of 4.1 increased from the 2000
and 1999 current ratio of 3.2 and 3.3, respectively. The increase in working
capital is primarily a result of the increased operations of the Company.

        Additions to property and equipment were $1,800,000 in 2001, compared to
$1,361,000 in 2000 and $953,000 in 1999. Fiscal 2001 spending reflects
continuing investments to support new product development, increased
productivity, and improved product quality. Other cash inflows in 2001 consists
of $367,000 of common stock in connection with the exercise of stock options.
Other cash inflows in 2000 were $174,000 of common stock in connection with the
exercise of stock options.

        Management believes that the Company has adequate resources to meet its
operating and capital expenditure needs for the foreseeable future. The Company
has a seven million dollar unsecured line of credit, none of which has been
used. The Company may continue to increase product development expenditures in
the near term for the purpose of broadening its product base. It is the
Company's intention to broaden its product lines and expand its market, both by
internal development of new products and through the acquisition of other
business entities.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

BUSINESS CLIMATE MAY BECOME VOLATILE

        Giga-tronics' has a significant number of defense-related orders. If the
defense market should decline, shipments in the current year could be less than
anticipated and cause a decrease in earnings. The Company's commercial product
backlog has a number of risks and uncertainties such as the cancellation or
deferral of orders dispute over performance and our ability to collect amounts
due under the contract. If this occurs, then shipments in the current year could
fall short of plan resulting in a decline in earnings.

GIGA-TRONICS ACQUISITIONS MAY NOT BE EFFECTIVELY INTEGRATED AND THEIR
INTEGRATION MAY BE COSTLY

        As part of its business strategy, Giga-tronics intends to broaden its
product lines and expand its markets, in part through the acquisition of other
business entities. Giga-tonics is subject to various risks in connection with
any future acquisitions. Such risks include, among other things, the difficulty
of assimilating the operations and personnel of the acquired companies, the
potential disruption of the Company's business, the inability of management to
maximize the financial and strategic position of the Company by the successful
incorporation of acquired technology and rights into its product offerings, the
maintenance of uniform standards, controls, procedures and policies, and the
potential loss of key employees of acquired companies. No assurance can be given
that any acquisition by Giga-tronics will or will not occur, that if an
acquisition does occur, that it will not materially harm the Company or that any
such acquisition will be successful in enhancing the Company's business. The
Company currently contemplates that future acquisitions may involve the issuance
of additional shares of common stock. Any such issuance may result in dilution
to all Giga-tronics shareholders, and sales of such shares in significant volume
by the shareholders of acquired companies may depress the price of its common
stock.

<PAGE>   3

FORWARD LOOKING STATEMENTS

        Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Annual Report to Shareholders contain
forward-looking statements that involve risks and uncertainties. The actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed herein and in the Company's 2001 Report
10-K under "Item 1. Business" and "Certain Factors Which May Affect Future
Operation Or An Investment In Giga-tronics" as filed with the Securities and
Exchange Commission.
<PAGE>   4


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(In thousands except share data)                              March 31, 2001   March 25, 2000
                                                              --------------   --------------
<S>                                                           <C>              <C>
ASSETS
Current assets
    Cash and cash equivalents                                    $ 3,469          $ 3,455
    Trade accounts receivable, net of allowance
          of $262 and $254 respectively                            7,767            9,194
    Inventories, net                                              15,185           14,113
    Prepaid expenses                                                 424              444
    Deferred income taxes                                          3,560            3,570
                                                                 -------          -------
TOTAL CURRENT ASSETS                                              30,405           30,776

Property and equipment
    Leasehold improvements                                           398              382
    Machinery and equipment                                       16,123           14,673
    Office furniture and fixtures                                  1,142            1,023
                                                                 -------          -------
Property and equipment, gross cost                                17,663           16,078
Less accumulated depreciation and amortization                    12,357           10,678
                                                                 -------          -------
PROPERTY AND EQUIPMENT, NET                                        5,306            5,400
PATENTS AND LICENSES                                                  36              112
GOODWILL, NET                                                        339              564
OTHER ASSETS                                                       1,232              674
                                                                 -------          -------
TOTAL ASSETS                                                     $37,318          $37,526
                                                                 =======          =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable                                             $ 3,347          $ 4,065
    Accrued commissions                                              435              625
    Accrued payroll and benefits                                   1,687            1,638
    Accrued warranty                                                 732              553
    Customer advances                                                690            1,536
    Obligation under capital lease                                   167              118
    Other current liabilities                                        423            1,175
                                                                 -------          -------
TOTAL CURRENT LIABILITIES                                          7,481            9,710
OBLIGATIONS UNDER CAPITAL LEASE, NET OF CURRENT PORTION              115              127
DEFERRED INCOME TAXES                                                796            1,011
DEFERRED RENT                                                        451              529
                                                                 -------          -------
TOTAL LIABILITIES                                                  8,843           11,377
                                                                 -------          -------
SHAREHOLDERS' EQUITY
Preferred stock of no par value
    Authorized 1,000,000 shares; no shares outstanding
    at March 31, 2001 and March 25, 2000                              --               --
Common stock of no par value;
    Authorized 40,000,000 shares; 4,542,694 shares at
    March 31, 2001 and 4,431,008 shares at
    March 25, 2000 issued and outstanding                         12,346           11,921
Retained earnings                                                 16,129           14,228
                                                                 -------          -------
TOTAL SHAREHOLDERS' EQUITY                                        28,475           26,149
                                                                 -------          -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                       $37,318          $37,526
                                                                 =======          =======
</TABLE>

See Accompanying Notes to Consolidated Financial Statements


                                       17
<PAGE>   5

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except share data)                             March 31, 2001     March 25, 2000   March 27, 1999
                                                             --------------     --------------   --------------
<S>                                                          <C>                <C>              <C>
NET SALES                                                       $ 54,159           $47,577          $ 37,636
Cost of sales                                                     35,103            31,767            26,102
                                                                --------           -------          --------
GROSS PROFIT                                                      19,056            15,810            11,534
Product development                                                5,087             4,180             5,313
Selling, general and administrative                               10,713             9,655             9,418
Amortization of intangibles                                          232               480               562
                                                                --------           -------          --------

Operating expenses                                                16,032            14,315            15,293
                                                                --------           -------          --------

OPERATING INCOME (LOSS)                                            3,024             1,495            (3,759)

Other income (expense)                                               232                79               632
Interest income, net                                                 205                59               121
                                                                --------           -------          --------
EARNINGS (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE                   3,461             1,633            (3,006)
Provision (benefit) for income taxes                               1,040               494            (1,148)
                                                                --------           -------          --------
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE                                                             2,421             1,139            (1,858)
Cumulative effect of accounting change                               520                --                --
                                                                --------           -------          --------
NET EARNINGS (LOSS)                                             $  1,901           $ 1,139          $ (1,858)
                                                                ========           =======          ========

Basic earnings (loss) per share:
Before cumulative effect of accounting change                   $   0.54           $  0.26          $  (0.43)
                                                                --------           -------          --------
Cumulative effect of accounting change                             (0.12)               --                --
                                                                --------           -------          --------
Basic earnings (loss) per share                                 $   0.42           $  0.26          $  (0.43)
                                                                ========           =======          ========
Diluted earnings (loss) per share:
Before cumulative effect of accounting change                   $   0.51           $  0.24          $  (0.43)
                                                                --------           -------          --------
Cumulative effect of accounting change                             (0.11)               --                --
                                                                --------           -------          --------
Diluted earnings (loss) per share                               $   0.40           $  0.24          $  (0.43)
                                                                ========           =======          ========

Weighted average basic common shares outstanding                   4,474             4,379             4,338
Weighted average diluted common shares outstanding                 4,803             4,693             4,338

PRO FORMA AMOUNTS ASSUMING ACCOUNTING CHANGE IS
APPLIED RETROACTIVELY:
(Unaudited)

NET INCOME (LOSS)                                               $  2,421           $   623          $ (1,404)
                                                                ========           =======          ========
Net income (loss) per share - Basic                             $   0.54           $  0.14          $  (0.32)
                                                                ========           =======          ========
Net income (loss) per share - Diluted                           $   0.51           $  0.13          $  (0.32)
                                                                ========           =======          ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements


                                       18
<PAGE>   6

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands except share data)

<TABLE>
<CAPTION>
                                                     Common Stock                       Other
                                                     ------------     Comprehensive  Comprehensive   Retained
                                                Shares      Amount    Income (Loss)  Income (Loss)   Earnings     Total
--------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>       <C>            <C>             <C>         <C>
BALANCE AT MARCH 28, 1998                      4,326,299    $11,532      $    --         $(18)       $ 14,947    $ 26,461
Comprehensive Income
    Net loss                                          --         --       (1,858)          --          (1,858)     (1,858)
    Unrealized gain on investments, net
        of income tax benefit of $10                  --         --           18           18              --          18
                                                                         -------
Comprehensive Loss                                    --         --       (1,840)          --              --          --
                                                                         =======
Stock issuance under stock
    Option plans                                  35,603         89           --           --              --          89

--------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 27, 1999                      4,361,902    $11,621      $    --         $ --        $ 13,089    $ 24,710
Comprehensive Income - net
   Net earnings                                       --         --        1,139           --           1,139       1,139
                                                                         =======
Stock issuance under stock
    Option plans                                  69,106        174           --           --              --         174
Tax benefit associated with exercise
    of stock options                                  --        126           --           --              --         126

--------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 25, 2000                      4,431,008    $11,921      $    --         $ --        $ 14,228    $ 26,149
Comprehensive Income - net
   Net earnings                                       --         --        1,901           --           1,901       1,901
                                                                         =======
Stock issuance under stock
    Option plans                                 111,686        367           --           --              --         367
Tax benefit associated with exercise
    of stock options                                  --         58           --           --              --          58

--------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001                      4,542,694    $12,346      $    --         $ --        $ 16,129    $ 28,475
==========================================================================================================================
</TABLE>

See Accompanying Notes to Consolidated Financial Statements



                                       19
<PAGE>   7

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands)                                                    March 31, 2001    March 25, 2000    March 27, 1999
                                                                  --------------    --------------    --------------
<S>                                                               <C>               <C>               <C>
CASH FLOWS PROVIDED FROM OPERATIONS:
Net earnings (loss)                                                  $ 1,901           $ 1,139           $(1,858)
Adjustments to reconcile net earnings (loss) to
    net cash provided by (used in) operations:
Provision for bad debt                                                     8              (182)              142
Depreciation and amortization                                          2,120             2,111             2,208
Tax benefit from employee stock options                                   58               126                --
Tax benefit of pre acquisition NOL utilization                            --               394                --
Gain on sales of fixed assets                                            (20)              (20)             (521)
Deferred income taxes                                                   (205)              (81)             (443)
Changes in operating assets and liabilities:
    Trade accounts receivable                                          1,419            (2,578)            1,738
    Inventories                                                       (1,072)             (864)           (1,710)
    Prepaid expenses                                                      20               (61)               74
    Accounts payable                                                    (718)            1,043              (622)
    Accrued commissions                                                 (190)              256              (180)
    Accrued payroll and benefits                                          49               292                67
    Accrued warranty                                                     179                86              (269)
    Accrued other expenses                                              (613)              535              (209)
    Customer advances                                                   (846)             (112)             (968)
    Income taxes receivable/payable                                     (139)              560               186
                                                                     -------           -------           -------
NET CASH PROVIDED BY (USED IN) OPERATIONS                              1,951             2,644            (2,365)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments                                                  --                --            (2,268)
Maturities of investments                                                 --                --             8,010
Proceeds from sale of property and equipment                              26                 7             1,291
Additions to property and equipment                                   (1,645)           (1,311)             (953)
Payment for purchase of Microsource, including
  transaction costs                                                       --                (8)             (605)
Advances to Microsource                                                   --                --              (940)
Other assets                                                            (489)             (565)              (17)
                                                                     -------           -------           -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                   (2,108)           (1,877)            4,518

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock                                                 367               174                89
Payment on line of credit                                                 --                --            (1,500)
Payment on notes payable and other long term liabilities                 (78)              (45)           (2,497)
Payments on capital lease and other long term obligations               (118)             (127)             (170)
                                                                     -------           -------           -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                      171                 2            (4,078)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          14               769            (1,925)
                                                                     -------           -------           -------
BEGINNING CASH AND CASH EQUIVALENTS                                    3,455             2,686             4,611
ENDING CASH AND CASH EQUIVALENTS                                       3,469             3,455             2,686
                                                                     =======           =======           =======
Supplementary disclosure of cash flow information:
    Cash paid for income taxes                                       $   988           $    86           $     7
    Cash paid for interest                                                --                --                --
Non-cash investing and financing activities:
    Purchases under capital lease obligations                            155                50                --
--------------------------------------------------------------------------------------------------------------------
</TABLE>


See Accompanying Notes to Consolidated Financial Statements


                                       20
<PAGE>   8

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

        1    BUSINESS COMBINATIONS

        On May 18, 1998, Giga-tronics Incorporated acquired Microsource, Inc.
        (Microsource) of Santa Rosa, California. Microsource develops and
        manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned
        oscillators, filters, and microwave synthesizers. The acquisition was
        accounted for using the purchase method of accounting, and accordingly,
        the results of operations of Microsource have been included in the
        Company's consolidated financial statements from May 18, 1998. The
        purchase price consisted of $1,500,000 plus contingent payments based
        upon future net income of Microsource during the two fiscal years after
        the effective time of the merger.

        The purchase price was subsequently adjusted to give effect to the
        contingent payment of $8,000, net paid to Microsource shareholders based
        on the subsidiary's fiscal year 2000 operating results. In addition, the
        purchase price allocation was adjusted to give effect in fiscal year
        2000 to the recognition of deferred tax assets of $394,000 for which no
        value was assigned at the date of the acquisition.

        2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The Company  The accompanying consolidated financial statements include
        the accounts of Giga-tronics and its wholly owned subsidiaries.
        Giga-tronics and its subsidiary companies design, manufacture and market
        a broad line of test and measurement equipment used in the development,
        test, and maintenance of wireless communications products and systems,
        flight navigational equipment, electronic defense systems, and automatic
        testing systems. The Company also manufactures and markets a line of
        test, measurement, and handling equipment used in the manufacturing of
        semiconductor devices. The Company's products are sold worldwide to
        customers in the test and measurement and semiconductor industries. The
        Company has a United Kingdom (UK) research & development facility for
        the Instruments division. Otherwise the Company has no other
        foreign-based operations or material amounts of identifiable assets in
        foreign countries. Its gross margins on foreign and domestic sales are
        similar, and all non-U.S. sales are made in U.S. dollars.

        Principles of Consolidation  The consolidated financial statements
        include the accounts of Giga-tronics and its wholly-owned subsidiaries.
        All significant intercompany balances and transactions have been
        eliminated in consolidation.

        Use of Estimates  The preparation of financial statements in conformity
        with accounting principles generally accepted in the United States of
        America requires management to make estimates and assumptions that
        effect the reported amounts of assets and liabilities and the disclosure
        of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.

        Fiscal Year  The Company's financial reporting year consists of either a
        52 week or 53 week period ending on the last Saturday of the month of
        March. Fiscal year 2001 contained 53 weeks while fiscal years 2000 and
        1999 each contained 52 weeks.

        Reclassifications  Certain reclassifications, none of which affected net
        income (loss), have been made to prior year balances in order to conform
        to the current year presentation.

        Revenue Recognition  Revenues are recognized when there is evidence of
        an arrangement, delivery has occurred, the price is fixed and
        determinable, and collectibility is reasonably assured. Revenue to
        customers is recorded when products are shipped and the risk of loss has
        passed. Upon shipment, the Company also provides for the estimated cost
        that may be incurred for product warranties. Revenue related to products
        shipped subject to customers' evaluation is recognized upon final
        acceptance.

        During the fourth quarter of fiscal 2001, the Company adopted Staff
        Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
        Statements, effective March 26, 2000. Prior to the adoption of SAB 101,
        the Company recognized revenue on sales with final customer acceptance
        upon delivery and provided for the estimated costs of installation
        obligations at the time the revenue was recognized. The Company recorded
        a cumulative effect adjustment related to this change in accounting of
        $520,000, net of income taxes. The adoption of SAB 101 resulted in the
        deferral of $2,165,000 in sales as of the beginning of the 2001 fiscal
        year, and subsequent recognition of the deferred sales during the year.


<PAGE>   9

        Pro forma effect of SAB 101 assuming accounting change is applied
        retroactively is as follows:

<TABLE>
<CAPTION>
        Years ended                                 March 31, 2001   March 25, 2000   March 27, 1999
                                                    --------------   --------------   --------------
        (In thousands except per share data)
        (Unaudited)
<S>                                                 <C>              <C>              <C>
        NET SALES                                      $54,159          $45,412          $ 39,120
        Cost of Sales                                   35,103           30,345            26,938
                                                       -------          -------          --------
        GROSS PROFIT                                    19,056           15,067            12,182
        Operating Expense                               16,032           14,315            15,293
                                                       -------          -------          --------
        OPERATING INCOME (LOSS)                          3,024              752            (3,111)
        Interest and other income                          437              138               753
                                                       -------          -------          --------
        EARNINGS (LOSS) BEFORE TAXES                     3,461              890            (2,358)
        Provision (benefit) for income taxes             1,040              267              (954)
                                                       -------          -------          --------
        NET INCOME (LOSS)                              $ 2,421          $   623          $ (1,404)
                                                       =======          =======          ========
        Net income (loss) per share - Basic            $  0.54          $  0.14          $  (0.32)
                                                       -------          -------          --------
        Net income (loss) per share - Diluted          $  0.51          $  0.13          $  (0.32)
                                                       -------          -------          --------
</TABLE>

        Cash Equivalents  The Company considers all highly liquid debt
        instruments with remaining maturity dates of 90 days or less from date
        of purchase to be cash equivalents.

        Inventories  Inventories are stated at the lower of cost or market. Cost
        is determined on a first-in, first-out basis.

        Property and Equipment  Property and equipment are stated at cost.
        Depreciation is calculated using the straight-line method over the
        estimated useful lives of the respective assets, which range from three
        to ten years for machinery and equipment and office fixtures. Leasehold
        improvements and assets acquired under capital leases are amortized
        using the straight-line method over the shorter of the estimated useful
        lives of the respective assets or the lease term. Recoverability of
        property and equipment is measured by comparison of its carrying amount,
        including the unamortized portion of goodwill allocated to property and
        equipment, to future cash flows the property and equipment are expected
        to generate. The Company assesses the recoverability of enterprise level
        goodwill by determining whether the unamortized goodwill balance can be
        recovered through undiscounted future cash flows of the acquired
        operation. To date, the Company has made no adjustments to the carrying
        value of its property and equipment or goodwill due to asset impairment.

        Deferred Rent  Rent expense is recognized in an amount equal to the
        minimum guaranteed base rent plus future rental increases amortized on
        the straight-line basis over the terms of the leases, including free
        rent periods. Included in other long-term liabilities is the excess of
        rent expense over required rental payments.

        Income Taxes  Income taxes are accounted for using the asset and
        liability method. Deferred tax assets and liabilities are recognized for
        the future tax consequences attributable to differences between the
        financial statement carrying amounts of existing assets and liabilities
        and their respective tax bases and operating loss and tax credit
        carryforwards. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in
        which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change
        in tax rates is recognized in income in the period that includes the
        enactment date.

        Patents and Licenses  Patents and licenses are being amortized using the
        straight-line method over periods of five to seven years. As of March
        31, 2001 and March 25, 2000 accumulated amortization on patents and
        licenses was $2,160,000 and $2,084,000, respectively.

        Goodwill  Goodwill is being amortized using the straight-line method
        over a period of five years. As of March 31, 2001 and March 25, 2000
        accumulated amortization on goodwill was $1,881,000 and $1,725,000
        respectively.

        Pre-production costs  The Company incurs pre-production costs on certain
        long-term supply arrangements. The costs, which represent non-recurring
        engineering and tooling costs owned by the Company, are capitalized as
        part of other assets and amortized over their useful life when
        reimbursable by

<PAGE>   10

        the customer. Otherwise, they are expensed as incurred. Included in
        other assets as of March 31, 2001 and March 25, 2000 are capitalized
        design and development costs of $1,133,000 and $579,000, respectively.

        Product Development Costs  Product development costs are charged to
        operations in the year incurred.

        Software Development Costs  Development costs included in the research
        and development of new products and enhancements to existing products
        are expensed as incurred until technological feasibility in the form of
        a working model has been established. To date, completion of software
        development has been concurrent with the establishment of technological
        feasibility, and accordingly, no costs have been capitalized.

        Stock-based Compensation  The Company uses the intrinsic value method to
        account for employee stock-based compensation.

        Earnings (Loss) Per Share  Basic earnings (loss) per share are computed
        using the weighted average number of common shares outstanding during
        the period. Diluted earnings per share incorporate the incremental
        shares issuable upon the assumed exercise of stock options using the
        treasury method. Antidilutive options are not included in the
        computation of diluted earnings per share.

        Financial Instruments and Concentration of Credit Risk  Financial
        instruments, which potentially subject the Company to credit risk as of
        March 31, 2001, consist principally of cash, cash equivalents and trade
        accounts receivable. The Company's cash equivalents consist principally
        of money market funds and certificates of deposits. Cash and cash
        equivalents are held in recognized depository institutions.
        Concentration of credit risk in trade accounts receivable results
        primarily from sales to major customers. The Company individually
        evaluates the creditworthiness of its customers and generally does not
        require collateral or other security.

        Fair Market Value of Financial Instruments  The carrying amount for the
        Company's cash equivalents, trade accounts receivable and accounts
        payable approximates fair market value because of the short maturity of
        these financial instruments.

        Recent Accounting Pronouncements  The Financial Accounting Standards
        Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments
        and Hedging Activities." SFAS No. 133 establishes accounting and
        reporting standards for derivative instruments, including certain
        derivative instruments embedded in other contracts (collectively
        referred to as derivatives) and for hedging activities. It requires that
        an entity recognize all derivatives as either assets or liabilities in
        the Balance Sheet and measure those instruments at fair value. For a
        derivative not designated as a hedging instrument, changes in the fair
        value of the derivative are recognized in earnings in the period of
        change. The Company must adopt SFAS No. 133 in the first quarter of
        fiscal 2002. Management does not believe the adoption of SFAS No. 133
        will have a material effect on the financial position or operations of
        the Company.

        3    CASH AND CASH EQUIVALENTS

        Cash and cash equivalents consisted of the following at March 31, 2001
        and March 25, 2000:

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------
        March 31, 2001                    Cash and Cash Equivalents
                                          --------------------------
        (In thousands)                   Amortized                Fair
                                            Cost                  Value
<S>                                      <C>                      <C>
        Cash                                $3,469                 $3,469
                                            ------                 ------
          Total                             $3,469                 $3,469
                                            ======                 ======
</TABLE>

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------
        March 25, 2000                     Cash and Cash Equivalents
                                           -------------------------
        (In thousands)                   Amortized                 Fair
                                            Cost                   Value
<S>                                       <C>                     <C>
        Cash                                $1,067                $1,067
        Money market funds                   1,933                 1,933
        Other marketable securities            455                   455
                                            ------                ------
          Total                             $3,455                $3,455
                                            ======                ======
</TABLE>


<PAGE>   11

        4    INVENTORIES

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------
        Years ended
        (In thousands)                         March 31, 2001     March 25, 2000
        ------------------------------------------------------------------------
<S>                                               <C>                <C>
        Raw materials                             $ 8,432            $ 8,095
        Work-in-progress                            4,833              5,167
        Finished goods                              1,020                294
        Loaned Inventory                              900                557
                                                  -------            -------
                                                  $15,185            $14,113
                                                  =======            =======
</TABLE>

        5    SELLING EXPENSES

        Selling expenses consist primarily of commissions paid to various
        marketing agencies. Commission expense totaled $2,579,000, $2,360,000,
        and $2,051,000 in fiscal 2001, 2000, and 1999, respectively. Advertising
        costs which are expensed as incurred totaled $579,000, $511,000, and
        $558,000 for fiscal 2001, 2000, and 1999, respectively.

        6    SIGNIFICANT CUSTOMERS AND INDUSTRY SEGMENT INFORMATION

        The Company has five reportable segments: Giga-tronics Instruments
        division, ASCOR, Microsource, DYMATIX, and Corporate. Giga-tronics
        Instrument division produces a broad line of test and measurement
        equipment used in the development, test and maintenance of wireless
        communications products and systems, flight navigational equipment,
        electronic defense systems and automatic testing systems. ASCOR designs,
        manufactures, and markets a line of switching devices that link together
        many specific purpose instruments that comprise automatic test systems.
        Microsource develops and manufactures a broad line of YIG (Yttrium,
        Iron, Garnet) tuned oscillators, filters and microwave synthesizers,
        which are used in a wide variety of microwave instruments or devices.
        DYMATIX, which includes Viking Semiconductor Equipment, Inc. and
        Ultracision, Inc., manufactures and markets optical inspection equipment
        used to test semiconductor devices and automation equipment for the test
        and inspection of silicon wafers. Corporate handles the financing needs
        of each segment and lends funds to each segment as required.

        The accounting policies for the segments are the same as those described
        in the "Summary of Significant Accounting Policies." The Company
        evaluates the performance of its segments and allocates resources to
        them based on earnings before income taxes (pre-tax income (loss)).
        Segment net sales includes sales to external customers. Segment pre-tax
        loss includes an allocation for corporate expenses, amortization of
        goodwill, and interest expense from borrowings from Corporate. Corporate
        expenses are allocated to the reportable segments based principally on
        full time equivalent headcount. Interest expense is charged at prime
        which is currently 9 % for cash required by each segment. Goodwill
        associated with acquisitions are recorded as assets of the individual
        segments. Assets include accounts receivable, inventories, equipment,
        cash, deferred income taxes, prepaid expenses, goodwill and other
        long-term assets. The Company accounts for inter-segment sales and
        transfers at terms that allow a reasonable profit to the seller. During
        the periods reported there were no significant inter-segment sales or
        transfers.

        The Company's reportable operating segments are strategic business units
        that offer different products and services. They are managed separately
        because each business utilizes different technology and requires
        different marketing strategies. All of the businesses except for
        Giga-tronics Instruments were acquired. The Company's chief operating
        decision maker is considered to be the Company's Chief Executive Officer
        ("CEO"). The CEO reviews financial information presented on a
        consolidated basis accompanied by disaggregated information about
        revenues and pre-tax income by operating segment. The tables below
        present information for the fiscal years ended in 2001, 2000 and 1999:

        March 31, 2001 (In thousands):

<TABLE>
<CAPTION>
                              Giga-tronics
                               Instruments        ASCOR         Microsource       DYMATIX        Corporate       Total
                              ------------       -------        -----------       -------        ---------      --------
<S>                             <C>              <C>             <C>              <C>             <C>           <C>
        Revenue                 $ 25,001         $ 7,503         $ 13,208         $ 8,447         $   --        $ 54,159
        Interest income               25              93                6               3            109             236
        Interest expense            (196)             (4)            (744)           (354)         1,267             (31)
        Depreciation and
          amortization               604             148            1,270              98             --           2,120
        Pre-tax income             1,193           1,436             (985)            434          1,383           3,461
        Assets                    15,518           4,172           11,937           5,236            455          37,318
</TABLE>

        March 25, 2000 (In thousands):

<TABLE>
<CAPTION>
                              Giga-tronics
                               Instruments        ASCOR         Microsource       DYMATIX        Corporate       Total
                              ------------       -------        -----------       -------        ---------      --------
<S>                             <C>              <C>             <C>              <C>             <C>           <C>
        Revenue                 $ 18,516         $ 6,705         $ 15,069         $ 7,287         $   --        $ 47,577
        Interest income               --              34                1              --             70             105
        Interest expense             (25)            (15)            (634)           (329)           957             (46)
        Depreciation and
          amortization               699             153            1,164              95             --           2,111
        Pre-tax income               361              53              132             168            919           1,633
        Assets                    13,546           5,299           11,874           5,396          1,411          37,526
</TABLE>



<PAGE>   12

        March 27, 1999 (In thousands):

<TABLE>
<CAPTION>
                                   Giga-tronics
                                    Instruments       ASCOR        Microsource       DYMATIX        Corporate         Total
                                   ------------       ------       -----------       -------        ---------        --------
<S>                                  <C>              <C>           <C>              <C>             <C>             <C>
        Revenue                      $ 17,061         $6,484        $  8,984         $ 5,107         $    --         $ 37,636
        Interest income                    35             10              --               2             120              167
        Interest expense                   --             31             455             287            (727)              46
        Depreciation and
          amortization                    924            152           1,004             128              --            2,208
        Pre-tax income (loss)            (805)           546            (777)         (2,791)            821           (3,006)
        Assets                         10,130          4,426          11,495           5,763           1,445           33,259
</TABLE>

        The Company's Giga-tronics Instruments, ASCOR, and Microsource segments
        sell to agencies of the U.S. Government and U.S. defense-related
        customers. In fiscal 2001, 2000, and 1999 U.S. Government and U.S.
        defense-related customers accounted for 11%, 16%, and 24%, of sales,
        respectively. In addition during 2001, a Japanese distibutor of the
        Company, Midoriya, accounted for 10% of the Company's consolidated sales
        and 11% of accounts receivable as of year end.

        Export sales accounted for 41%, 30%, and 20% of the Company's sales in
        fiscal 2001, 2000, and 1999, respectively. Export sales by geographical
        area are shown below:

<TABLE>
<CAPTION>
        Years ended
        (In thousands)       March 31, 2001   March 25, 2000   March 27, 1999
        ------------------------------------------------------------------------
<S>                             <C>              <C>              <C>
        Americas                $ 4,256          $ 1,989          $  445
        Europe                    6,831            6,448           3,446
        Asia                      9,512            4,981           3,371
        Rest of world             1,473            1,050             403
                                -------          -------          ------
                                $22,072          $14,468          $7,665
                                =======          =======          ======
</TABLE>

        7    EARNINGS (LOSS) PER SHARE

        Shares used in per share computations for the years ended March 31,
        2001, March 25, 2000, and March 27, 1999 are as follows:

<TABLE>
<CAPTION>
        Years ended
        (In thousands except per share data)           March 31, 2001  March 25, 2000  March 27, 1999
        -------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>             <C>
        Net earnings (loss)                                $1,901          $1,139          $(1,858)
                                                           ======          ======          =======
        Weighted average:
        Common shares outstanding                           4,474           4,379            4,338
        Common share equivalents                              329             314               --
                                                           ------          ------          -------
        Common shares assuming dilution                     4,803           4,693            4,338
                                                           ======          ======          =======

        Net earnings per share of common stock             $ 0.42          $ 0.26          $ (0.43)
                                                           ======          ======          =======
        Net earnings per share of common
        stock assuming dilution                            $ 0.40          $ 0.24          $ (0.43)
                                                           ======          ======          =======

        Stock options not included in computation              57              24              537
                                                           ======          ======          =======
</TABLE>

        The number of stock options not included in the computation of diluted
        earnings per share (EPS) for the period ended March 27, 1999 is a result
        of the Company's loss from continuing operations and therefore the
        options are antidilutive. The number of stock options not included in
        the computation of diluted EPS for the periods ending March 31, 2001 and
        March 25, 2000 reflects stock options where the exercise prices were
        greater than the average market price of the common shares and are
        therefore antidilutive.

<PAGE>   13

        8    INCOME TAXES

Following are the components of the provision (benefit) for income taxes:

<TABLE>
<CAPTION>
        ---------------------------------------------------------------------------------------------------
        Years ended
        (In thousands)                                    March 31, 2001   March 25, 2000    March 27, 1999
        ---------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>             <C>
        Current:
            Federal                                           $ 1,063           $  46           $  (720)
            State                                                  66               7                 4
                                                              -------           -----           -------
                                                                1,129              53              (716)

        Deferred:
            Federal                                                58            (180)             (205)
            State                                                (263)            100              (227)
                                                              -------           -----           -------
                                                                 (205)            (80)             (432)

        Charge in lieu of taxes attributable to
        employer stock option plans                                58             127                --
        Goodwill, for initial recognition of
        acquired tax benefits that previously
        were included in the valuation reserve                     58             394                --
                                                              -------           -----           -------

        Provision (benefit) for income taxes                  $ 1,040           $ 494           $(1,148)
                                                              =======           =====           =======
</TABLE>

        The tax effects of temporary differences that give rise to significant
        portions of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
        -----------------------------------------------------------------------------------------
        Years ended
        (In thousands)                                            March 31, 2001   March 25, 2000
        -----------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>
        Current tax assets, net                                      $ 3,560           $ 3,570
        Noncurrent tax asset (liabilities), net                         (796)           (1,011)
                                                                     -------           -------
        Net deferred taxes                                           $ 2,764           $ 2,559
                                                                     =======           =======

        Future state tax effect                                         (182)             (188)
        Allowance for doubtful accounts                                  112               196
        Fixed asset depreciation                                        (855)           (1,116)
        Inventory reserves and additional costs capitalized            2,529             2,747
        Deferred revenue                                                  --                19
        Accrued vacation                                                 284               268
        Accrued warranty                                                 314               237
        Other accrued liabilities                                        212               330
        Net operating loss carryforward                                6,056             6,452
        Income tax credits                                               786               501
        Valuation allowances                                          (6,492)           (6,887)
                                                                     -------           -------
                                                                     $ 2,764           $ 2,559
                                                                     =======           =======
</TABLE>

<PAGE>   14

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------------------------------------------------------
        Years ended
        (In thousands except percentages)                   March 31, 2001           March 25, 2000           March 27, 1999
        ------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>       <C>           <C>       <C>             <C>
        Statutory federal income tax (benefit)           $ 1,176         34.0%     $ 555         34.0%     $(1,022)        34.0%
        Beginning of year change in deferred
            Tax asset valuation allowance                     --           --        (55)        (3.4)          --           --
        State income tax, net of federal benefit             200          5.8         57          3.5         (146)         4.9
        Nontax deductible expenses                             6          0.2          6          0.4           14         (0.4)
        Tax credits                                         (297)        (8.6)       (98)        (6.0)         (58)         1.9
        Goodwill and patent amortization                      60          1.7         88          5.4           84         (2.8)
        Interest income exempt from federal tax              (58)        (1.7)       (51)        (3.1)         (19)          .6
        Other                                                (47)        (1.4)        (8)         (.5)          (1)          --
                                                         --------------------      ------------------      --------------------
        Effective income tax (benefit)                   $ 1,040         30.0%     $ 494         30.3%     $(1,148)        38.2%
                                                         ====================      ==================      ====================
</TABLE>

        The change in valuation allowance from March 25, 2000 to March 31, 2001
        was $395,000. The change in valuation allowance from March 27, 1999 to
        March 25, 2000 was $860,000. The change in valuation allowance from
        March 28, 1998 to March 27, 1999 was $7,648,000.

        The Company has recorded a valuation allowance to reflect the estimated
        amount of deferred tax assets, which 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 the historical taxable income and projections for future
        taxable income over the periods in which the deferred tax assets become
        deductible, management believes it more likely than not that the Company
        will realize benefits of these deductible differences, net of valuation
        allowances as of March 31, 2001.

        During the year ended March 27, 1999, the Company acquired approximately
        $7,600,000 of deferred tax assets in the acquisition of Microsource,
        which was fully offset by a valuation allowance. Subsequent recognition
        of tax benefits relating to the valuation allowance for deferred tax
        assets of Microsource will be allocated to goodwill and the remainder to
        income tax benefit. As of March 31, 2001, goodwill has been reduced by
        $452,000 for the tax benefits realized from the Microsource deferred tax
        assets.

        During the years ended March 31, 2001 and March 25, 2000, disqualifying
        employee stock option dispositions resulted in an income tax deduction
        to the Company of approximately $145,000 and $269,000, respectively, and
        a tax benefit of approximately $58,000 and $127,000, respectively. The
        tax benefit has been reflected as an increase to the Company's paid-in
        capital in the accompanying Statement of Shareholders' Equity.

        9    STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

        Stock Option Plan The Company established a 1990 Stock Option Plan which
        provided for the granting of options for up to 700,000 shares of common
        stock. The 1990 Plan expired during the 2001 fiscal year. The Company
        subsequently established the 2000 Stock Option Plan which provides for
        the granting of options for up to 700,000 shares of common stock at 100%
        of fair market value at the date of grant, with each grant requiring
        approval by the Board of Directors of the Company. Options granted vest
        in one or more installments as set forth in the relevant option
        agreement and must be exercised while the grantee is employed by the
        Company or within a certain period after termination of employment.
        Options granted to employees shall not have terms in excess of 10 years
        from the grant date. During December 1998, the Company offered options
        holders the opportunity to have outstanding options repriced to current
        fair value, with the related vesting period starting over. The Company
        cancelled and reissued (repriced) 405,250 options pursuant to the
        repricing. Holders of options may be granted stock appreciation rights
        (SAR's), which entitle them to surrender outstanding options for a cash
        distribution under certain changes in ownership of the Company, as
        defined in the stock option plan. As of March 31, 2001, no SAR's have
        been granted under the option plan. As of March 31, 2001, the total
        number of shares of common stock available for issuance is 540,800 under
        the 2000 stock option plan. All outstanding options have a term of five
        years.

<PAGE>   15
        Following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                              Per Share Weighted
                                              Average Fair Value        Options                      Weighted Average
                                              of Options Granted      Exercisable       Shares        Exercise Price
         ------------------------------------------------------------------------------------------------------------
<S>                                           <C>                       <C>             <C>               <C>
         Outstanding as of March 28, 1998                               106,682         390,670          $7.268
         ------------------------------------------------------------------------------------------------------------
             Exercised                                                                   (1,400)          2.660
             Forfeited                                                                 (561,456)          6.399
             Granted                                $2.914                              807,750           2.818
         ------------------------------------------------------------------------------------------------------------
         Outstanding as of March 27, 1999                                48,814         635,564           2.391
         ------------------------------------------------------------------------------------------------------------
             Exercised                                                                  (28,204)          2.515
             Forfeited                                                                 (168,875)          2.118
             Granted                                $2.613                              115,500           2.613
         ------------------------------------------------------------------------------------------------------------
         Outstanding as of March 25, 2000                               131,424         553,985           2.514
         ------------------------------------------------------------------------------------------------------------
             Exercised                                                                  (84,212)          2.247
             Forfeited                                                                  (89,737)          4.786
             Granted                                $6.407                              214,700           6.407
         ------------------------------------------------------------------------------------------------------------
         Outstanding as of March 31, 2001                               143,988         594,736          $3.610
         ------------------------------------------------------------------------------------------------------------
</TABLE>

        In accordance with SFAS No. 123, "Accounting for Stock-Based
        Compensation", the Company is required to disclose the effects on net
        earnings and earnings per share as if it had elected to use the fair
        value method to account for employee stock-based compensation plans. Had
        the Company recorded a charge for the fair value of options granted
        consistent with SFAS No. 123, net earnings (loss) and net earnings
        (loss) per share would have been changed to the pro-forma (unaudited)
        amounts shown below:


<TABLE>
<CAPTION>
        Years ended
        (In thousands except per share data)            March 31, 2001     March 25, 2000     March 27, 1999
        ----------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>               <C>
        Net earnings (loss)
            As reported                                     $1,901             $1,139            $(1,858)
            Pro-forma                                        1,537                872             (2,234)
        Net earnings (loss) per share - basic
            As reported                                       0.42               0.26              (0.43)
            Pro-forma                                         0.34               0.20              (0.52)
        Net earnings (loss) per share - diluted
            As reported                                       0.40               0.24              (0.43)
            Pro-forma                                       $ 0.32             $ 0.19            $ (0.52)
</TABLE>

        For purposes of computing pro-forma (unaudited) consolidated net
        earnings (loss), the fair value of each option grant and Employee Stock
        Purchase Plan purchase right is estimated on the date of grant using the
        Black Scholes option pricing model. The assumptions used to value the
        option grants and purchase rights are stated below:

<TABLE>
<CAPTION>
        Years ended                      March 31, 2001     March 25, 2000      March 27, 1999
        --------------------------------------------------------------------------------------
<S>                                          <C>                <C>                <C>
        Expected life of options             4 years            4 years            4 years
        Expected life of purchase rights     6 mos              6 mos              6 mos
        Volatility                           60%                60%                60%
        Risk-free interest rate              4.64 to 6.30       5.08 to 5.97       4.53 to 5.66
        Dividend yield                       Zero               Zero               Zero
</TABLE>

        Options Outstanding and Exercisable as of March 25, 2001, by Price Range

<TABLE>
<CAPTION>
        --------------------------------------------------------------------------------------------------
                                     Number  Weighted Average        Weighted       Number        Weighted
        Range of                 of Options         Remaining         Average   of Options         Average
        Exercise Prices         Outstanding  Contractual Life  Exercise Price  Exercisable  Exercise Price
        --------------------------------------------------------------------------------------------------
<S>                                 <C>                  <C>           <C>         <C>              <C>
        $2.09                       286,536              2.69          $2.094      113,238          $2.094
        From $2.12 to $5.09         182,200              3.77           3.658       30,750           2.895
        From $6.13 to $8.88         126,000              4.54           6.990           --              --
                                    -------              ----          ------      -------           -----
        From $2.09 to $8.88         594,736              3.41          $3.610      143,988           $2.26
                                    =======              ====          ======      =======           =====
</TABLE>

        Employee Stock Purchase Plan Under the Company's Employee Stock Purchase
        Plan (the Purchase Plan), employees meeting specific employment
        qualifications are eligible to participate and can purchase shares
        semi-annually through payroll deductions at the lower of 85% of the fair
        market value of the stock at the commencement or end of the offering
        period. The Purchase Plan permits eligible employees to purchase common
        stock through payroll deductions for up to 10% of qualified
        compensation. As of March 31, 2001, 18,260 shares remain available for
        issuance under the Purchase Plan. The weighted average fair value of the
        purchase rights granted in fiscal 2001 was $6.471.
<PAGE>   16

        401(k) Plan The Company has established 401(k) plans which cover
        substantially all employees. Participants may make voluntary
        contributions to the plan up to 20% of their defined compensation. The
        Company is required to match a percentage of the participants'
        contributions in accordance with the plan. Participants vest ratably in
        Company contributions over a four-year period. Company contributions to
        the plans for fiscal 2001, 2000, and 1999 were approximately $208,000,
        $151,000, and $153,000, respectively.

        10   COMMITMENTS

        The Company leases a 47,300 square foot facility located in San Ramon,
        California, under a twelve-year lease (as amended) that commenced in
        April 1994. The Company leases a 18,756 square foot facility located in
        Fremont, California, under a seven-year lease that commenced in July
        1999. The Company leases a 20,400 square foot facility located in Santa
        Clara, California, under a seven-year lease that commenced in July 1995.
        The Company leases a 49,090 square foot facility located in Santa Rosa,
        California, under a twenty-year lease that commenced in July 1993. These
        facilities accommodate all of the Company's present operations. The
        Company also has acquired equipment under capital and operating leases.
        The future minimum lease payments for operating equipment and facility
        leases are shown below:

<TABLE>
<CAPTION>
        ------------------------------------------------------------------------
        Fiscal years
        (In thousands)
        ------------------------------------------------------------------------
<S>                                                                     <C>
        2002                                                            $ 1,717
        2003                                                              1,581
        2004                                                              1,535
        2005                                                                875
        2006                                                                886
        Thereafter                                                        6,241
                                                                        -------
                                                                        $12,835
                                                                        =======
</TABLE>

        The aggregate rental expense was $1,816,000, $1,812,000, and $1,462,000
        in fiscal 2001, 2000, and 1999, respectively.

        As of March 31, 2001, Property and Equipment includes equipment under
        capital lease of $283,000 and related accumulated amortization of
        $162,000. As of March 25, 2000, Property and Equipment includes
        equipment under capital lease of $313,000 and related accumulated
        amortization of $99,000. As of March 27, 1999, Property and Equipment
        includes equipment under capital lease of $502,000 and related
        accumulated amortization of $111,000. The future minimum lease payments
        for capital equipment leases are shown below.

<TABLE>
<CAPTION>
        ----------------------------------------------------------------------
        Fiscal years
        (In thousands)
        ----------------------------------------------------------------------
<S>                                                                     <C>
        2002                                                            $ 182
        2003                                                               70
        2004                                                               57
                                                                        -----
        Total                                                             309
        Less interest costs                                                27
                                                                        -----
        Present value of minimum lease payments                           282
        Less current portion                                              167
                                                                        -----
        Long term portion of capital lease obligations                  $ 115
                                                                        =====
</TABLE>

        11   LINE OF CREDIT

        The Company has an agreement with a bank for an unsecured revolving line
        of credit loan for $7,000,000 with interest payable at prime rate or at
        LIBOR plus 1 1/2 percent. As of March 31, 2001, this credit line has not
        been utilized by the Company and expires July 31, 2001.

<PAGE>   17



I N D E P E N D E N T  A U D I T O R S'  R E P O R T


The Board of Directors and Shareholders
Giga-tronics Incorporated:


        We have audited the accompanying consolidated balance sheets of
Giga-tronics Incorporated and subsidiaries as of March 31, 2001 and March 25,
2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for years ended March 31, 2001, March 25, 2000, and March
27, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Giga-tronics
Incorporated and subsidiaries as of March 31, 2001 and March 25, 2000, and the
results of their operations and their cash flows for the years ended March 31,
2001, March 25, 2000, and March 27, 1999, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective March
26, 2000, the Company changed its method of accounting for certain equipment
sales.



/s/
KPMG LLP

Mountain View, California
May 4, 2001

                                       29
<PAGE>   18

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS:                                                   YEAR ENDED
------------------------------------------------------------------------------------------------------------------
 (In thousands except per share data)         March 31,     March 25,      March 27,      March 28,     March 29,
                                                2001          2000           1999           1998          1997
<S>                                            <C>           <C>           <C>             <C>           <C>
Net sales                                      $54,159       $47,577       $ 37,636        $36,813       $38,031
Gross profit                                    19,056        15,810         11,534         15,789        14,627
Operating expenses                              16,032        14,315         15,293         15,172        13,096
Interest income, net                               205            59            121            457           533
Earnings (loss) before cumulative effect
of accounting change and income taxes            3,461         1,633         (3,006)         1,096         2,048

Earnings (loss) before cumulative effect
of accounting change                             2,421         1,139         (1,858)           767         1,509
Net earnings (loss)                              1,901         1,139         (1,858)           767         1,509
Net earnings (loss) per share - basic          $  0.42       $  0.26       $  (0.43)       $  0.18       $  0.35

Net earnings (loss) per share - diluted        $  0.40       $  0.24       $  (0.43)       $  0.18       $  0.34
</TABLE>

FINANCIAL POSITION:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
 (In thousands except ratio)          March 31,     March 25,     March 27,     March 28,     March 29,
                                        2001          2000          1999          1998          1997
<S>                                    <C>           <C>           <C>           <C>           <C>
Current ratio                             4.06          3.17          3.32          5.06          4.32
Working capital                        $22,924       $21,066       $18,021       $23,484       $22,692
Total assets                            37,318        37,526        33,259        32,672        33,618
Shareholders' equity                   $28,475       $26,149       $24,710       $26,461       $25,654
Shares of common stock - basic           4,474         4,379         4,338         4,319         4,300
Shares of common stock - diluted         4,803         4,693         4,338         4,377         4,376
</TABLE>

PERCENTAGE DATA:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                        March 31,  March 25,  March 27,   March 28,  March 29,
                                                          2001       2000       1999        1998       1997
<S>                                                       <C>        <C>        <C>         <C>        <C>
 Percent of net sales

      Gross profit                                        35.2       33.2       30.6        42.9       38.5
      Operating expenses                                  29.6       30.1       40.6        41.2       34.4
      Interest income, net                                 0.4        0.1        0.3         1.2        1.4
      Earnings (loss) before cumulative effect of
      accounting change and income taxes                   6.4        3.4       (8.0)        3.0        5.4
      Net earnings (loss)                                  3.5        2.4       (4.9)        2.1        4.0
</TABLE>

COMMON STOCK MARKET PRICES

Giga-tronics' common stock is traded over the counter on NASDAQ/NMS National
Market System using the symbol "GIGA". The number of record holders of the
Company's common stock as of March 31, 2001 was close to 1,400. The table below
shows the high and low closing bid quotations for the common stock during the
indicated fiscal periods. These quotations reflect inter-dealer prices without
retail mark-ups, mark-downs, or commission and may not reflect actual
transactions.

<TABLE>
<CAPTION>
                       ---------------------------------------------------------------------------------
                              2001        High           Low         2000         High          Low
                       ---------------------------------------------------------------------------------
<S>                    <C>                 <C>          <C>      <C>               <C>          <C>
 First quarter          (3/26-6/24)        12 7/8       6 3/8     (3/28-6/26)        3           1 3/4
 Second quarter         (6/25-9/30)        10           6 25/32   (6/27-9/25)        3 5/16      1 13/16
 Third quarter         (10/1-12/30)        7 5/16       4 13/16   (9/26-12/25)       7 1/2       2 1/2
 Fourth quarter        (12/31-3/31)        8 3/16       4 7/8     (12/26-3/25)      22           6 1/2
--------------------------------------------------------------------------------------------------------
</TABLE>



                                       30
<PAGE>   19

SELECTED FINANCIAL DATA

Effective March 26, 2000, the Company changed its method of accounting for
revenue recognition to conform with the guidance provided by SAB 101 (see Note
2). The Company's unaudited financial results for the quarters ended June 24,
September 30 and December 30, 2000 have been restated to apply SAB 101
retroactively to the beginning of fiscal 2001. The impact in 2001 of adopting
SAB 101 was to increase net income before the cumulative effect of the
accounting change by $520,000, net of income taxes.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
(In thousands except per share data)                                      2001
                                                 ----------------------------------------------------------
                                                   First      Second        Third       Fourth         Year
                                                 -------     -------      -------      -------      -------
<S>                                              <C>         <C>          <C>          <C>          <C>
Net sales                                        $13,637     $13,642      $11,368      $15,512      $54,159
Gross profit                                       4,963       4,814        4,068        5,211       19,056
Operating expenses                                 3,775       4,298        3,883        4,076       16,032
Interest income, net                                  33          36           96           40          205
Earnings before cumulative effect of
accounting change and income taxes                 1,253         666          322        1,220        3,461
Earnings before cumulative effect of
accounting change                                    877         465          225          854        2,421
Net earnings                                         357         465          225          854        1,901
Net earnings per share - basic                   $  0.08     $  0.10      $  0.05      $  0.19      $  0.42
Net earnings per share - diluted                 $  0.07     $  0.10      $  0.05      $  0.18      $  0.40
Equivalent shares of common stock - basic          4,437       4,460        4,488        4,511        4,474
Equivalent shares of common stock - diluted        4,817       4,796        4,777        4,801        4,803
</TABLE>

The results of operations and statements of financial position as previously
reported in the Company's interim 2001 financial statements filed on Form 10-Q
have been revised to retroactively reflect on a pro-forma basis the application
of SAB 101 effective March 26, 2000.

<TABLE>
<CAPTION>
                                                                      For the three months ended
                                        ---------------------------------------------------------------------------------
                                                June 24, 2000             September 30, 2000        December 30, 2000
                                                -------------             ------------------        -----------------
                                        As Reported       Revised   As Reported       Revised   As Reported       Revised
                                        -----------       -------   -----------       -------   -----------       -------
<S>                                         <C>           <C>           <C>           <C>           <C>           <C>
Net sales                                   $12,161       $13,637       $14,058       $13,642       $11,810       $11,368
Gross profit                                  4,436         4,963         4,946         4,814         4,266         4,068
Operating expenses                            3,775         3,775         4,298         4,298         3,883         3,883
Interest income, net                             33            33            36            36            96            96
Earnings before cumulative effect
of accounting change and income taxes           726         1,253           798           666           520           322
Earnings before cumulative effect
of accounting change                            508           877           557           465           363           224
Net earnings                                    508           357           557           465           363           224
</TABLE>

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)                                             2000
                                                  -----------------------------------------------------------------
                                                     First         Second         Third        Fourth          Year
                                                  --------        -------       -------       -------       -------
<S>                                               <C>             <C>           <C>           <C>           <C>
Net sales                                         $ 11,505        $11,834       $11,314       $12,924       $47,577
Gross profit                                         3,451          3,948         3,990         4,421        15,810
Operating expenses                                   3,315          3,638         3,568         3,794        14,315
Interest income, net                                    (1)             3            22            35            59
Earnings before income taxes                           162            324           460           687         1,633
Net earnings                                           112            227           322           478         1,139
Net earnings per share - basic                    $   0.03        $  0.05       $  0.07       $  0.11       $  0.26
Net earnings per share - diluted                  $   0.03        $  0.05       $  0.07       $  0.10       $  0.24
Equivalent shares of common stock -  basic           4,362          4,368         4,383         4,402         4,379
Equivalent shares of common stock - diluted          4,372          4,483         4,611         4,846         4,693
</TABLE>



                                       31