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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 26, 2005, or  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from  to . Commission File No. 0-12719 GIGA-TRONICS INCORPORATED 
  California
    
    94-2656341(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 4650 Norris Canyon Road, San Ramon, CA
    
    94583(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number: (925) 328-4650 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par value
(Title of class) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ   No o Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K not
contained herein, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. þ State issuers revenues for its most recent fiscal year: $21,477,000. The aggregate market value of voting stock held by non-affiliates of the Registrant calculated on
the closing average bid and asked prices as of May 25, 2005 was $16,997,405. There were a total of
4,734,646 shares of the Registrants Common Stock outstanding as of May 25, 2005.




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents have been incorporated by reference into the parts indicated: PART OF FORM 10-KSB
    
    DOCUMENTPART III
    
    Registrants PROXY STATEMENT for
its 2005 Annual Meeting of Shareholders to
be filed no later than 120 days after the close
of the fiscal year ended March 26, 2005.
 Transitional Small Business
Disclosure Format (check one): Yes
o   No þ 2




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. DESCRIPTION OF PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONITEM 7. FINANCIAL STATEMENTSITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESITEM 8A. CONTROLS AND PROCEDURESITEM 8B.OTHER INFORMATIONPART IIIITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACTITEM 10. EXECUTIVE COMPENSATIONITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESINDEX TO EXHIBITSEXHIBIT 21EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  
 PART I The forward-looking statements included in this report including, without limitation,
statements containing the words believes, anticipates, estimates, expects, intends and
words of similar import, which reflect managements best judgment based on factors currently known,
involve risks and uncertainties. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including but not limited to
those discussed under Certain Factors Which May Adversely Affect Future Operations Or An
Investment In Giga-tronics in Item 1 below and in Item 7, Managements Discussion and Analysis. 
 ITEM 1. BUSINESS General Giga-tronics Incorporated (Giga-tronics, or the Company), includes operations of Giga-tronics
Instrument Division, ASCOR, Inc. (ASCOR), and Microsource, Inc. (Microsource). In the first
quarter of fiscal 2004, Giga-tronics elected to discontinue the operations of DYMATiX, which was a
joint venture and principal activity of the Companys subsidiaries Viking Semiconductor Equipment,
Inc. (Viking) and Ultracision, Inc. (Ultracision). Giga-tronics designs, manufactures and markets through its Giga-tronics Instrument Division, 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. These products are used primarily in the design,
production, repair and maintenance of commercial telecommunications, radar, and electronic warfare
equipment. Giga-tronics was incorporated on March 5, 1980, and its principal executive offices are
located at 4650 Norris Canyon Road, San Ramon, California, and its telephone number at that
location is (925) 328-4650. Effective July 23, 1996, Giga-tronics acquired ASCOR. ASCOR, located in Fremont, California,
designs, manufactures, and markets a line of switching and connecting devices that link together
many specific purpose instruments that comprise a portion of automatic test systems. ASCOR offers
a family of switching and interface test adapters as standard VXI configured products, as well as
complete system integration services to the Automatic Test Equipment market. Effective June 27, 1997, Giga-tronics completed a merger with Viking by issuing approximately
420,000 shares of the Companys common stock in exchange for all of the common stock of Viking.
Viking manufactured and marketed a line of optical inspection equipment used to manufacture and
test semiconductor devices. Products include die attachments, automatic die sorters, tape and reel
equipment, and wafer inspection equipment. Effective December 2, 1997, Giga-tronics completed a merger with Ultracision by issuing
approximately 517,000 shares of the Companys common stock in exchange for all of the common stock
of Ultracision. Ultracision was a manufacturer of automation equipment for the test and inspection
of silicon wafers. Ultracision also produced a line of probers for the testing and inspection of
silicon devices. With the discontinuance and sale of DYMATiX, Giga-tronics has dissolved Viking and
Ultracision. Effective May 18, 1998, Giga-tronics acquired Microsource. All the outstanding shares of
Microsource were acquired for $1,500,000 plus contingent payments based on earnings from
Microsource from 1998 to 2000, which amounts were nominal. Microsource, located in Santa Rosa,
California, develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned
oscillators, filters and microwave synthesizers, which are used by its customers in manufacturing a
wide variety of microwave instruments or devices. Giga-tronics intends to broaden its product lines and expand its market, both by internal
development of new products and through the acquisition of other business entities. From time to
time, the Company considers a variety of acquisition opportunities. 3




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Industry Segments The Company manufactures products used in test, measurement and handling. The Company
operates primarily in four operating and reporting segments, Giga-tronics Instrument Division,
ASCOR Inc., Microsource Inc. and Corporate. Products and Markets Giga-tronics Instrument Division The Giga-tronics Instrument Division segment produces signal sources, generators and sweepers,
and power measurement instruments for use in the microwave and RF frequency range (10 kHz to 75
GHz). Within each product line are a number of different models and options allowing customers to
select frequency range and specialized capabilities, features and functions. The end-user markets
for these products can be divided into three broad segments: commercial telecommunications, radar
and electronic warfare. This segments instruments are used in the design, production, repair and
maintenance and calibration of other manufacturers products, from discrete components to complex
systems. ASCOR Inc. The ASCOR Inc. segment produces switch modules and interface adapters that operate with a
bandwidth from direct current (DC) to 18 GHz. This segments switch modules may be incorporated
within its customers automated test equipment. The end-user markets for these products are
primarily related to defense, aeronautics, communications, satellite and electronic warfare. Microsource Inc. The Microsource segment develops and manufactures a broad line of YIG tuned oscillators,
filters and microwave synthesizers, which are used by its customers in manufacturing a wide variety
of microwave instruments or devices. Sources and Availability of Raw Materials and Components Substantially all of the components required by Giga-tronics to make its assemblies are
available from more than one source. The Company occasionally uses sole source arrangements to
obtain leading-edge technology or favorable pricing or supply terms, but not in any material
volume. In the Companys opinion, the loss of any sole source arrangement it has would not be
material to its operations. Although extended delays in receipt of components from its suppliers could result in longer
product delivery schedules for the Company, the Company believes that its protection against this
possibility stems from its practice of dealing with well-established suppliers and maintaining good
relationships with such suppliers. Patents and Licenses The Companys competitive position is largely dependent upon its ability to provide
performance specifications for its instruments and systems that (a) easily, effectively and
reliably meet customers needs and (b) selectively surpass competitors specifications in competing
products. Patents may occasionally provide some short-term protection of proprietary designs.
However, because of the rapid progress of technological development in the Companys industry, such
protection is most often, although not always, short-lived. Therefore, although we occasionally
pursue patent coverage, we place major emphasis on the development of new products with superior
performance specifications and the upgrading of existing products toward this same end. This is
reflected in a substantial allocation of budget to project development costs. 4




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The Companys products are based on its own designs, which in turn derive from its own
engineering abilities. If the Companys new product engineering efforts fall behind, its
competitive position weakens. Conversely, effective product development greatly enhances its
competitive status. The Company presently holds 22 patents. None of these is critical to the Companys ongoing
business, and the Company does not actively maintain them. Capitalized costs relating to these
patents were both incurred and fully amortized prior to March 1, 2003. Accordingly, these patents
have no recorded value included in the Companys fiscal 2004 and 2005 consolidated financial
statements. The Company is not dependent on trademarks, licenses or franchises. We do utilize certain
software licenses in some functional aspects to some of our products. Such licenses are readily
available, non-exclusive and are obtained at either no cost or for a relatively small fee. Seasonal Nature of Business The business of the Company is not seasonal. Working Capital Practices The Company generally strives to maintain at least 60 days worth of inventory and generally
sells to customers on 30 day payment terms. Typically, the Company receives payment terms of 30
days. The Company believes that these practices are consistent with typical industry practices. Importance of Limited Number of Customers Commercial business accounted for 62% of net sales in both fiscal 2005 and in fiscal 2004.
The Company is a leading supplier of microwave and RF test instruments to various U.S. government
defense agencies, as well as to their prime contractors. Management anticipates sales to U.S.
government agencies and their prime contractors will remain significant in fiscal 2006.
Defense-related agencies accounted for 38% of net sales in both fiscal 2005 and in fiscal 2004.
Prior to the last three years, in which the defense business has improved, sales to the defense
industry in general and direct sales to the United States and foreign government agencies in
particular had declined. Any decline of defense orders could have a negative effect on the
business, operating results, financial condition and cash flows of Giga-tronics. During fiscal 2005 and 2004, the U.S. government defense agencies and their prime contractors
made up 32% and 24%, respectively, of the Giga-tronics Instrument Divisions revenues. During fiscal 2005, ASCOR derived 25% of its revenues from the U.S. government defense
agencies and their prime contractors, 15% from a communications equipment manufacturer, and another
39% from an automated test equipment manufacturer. During fiscal 2004, ASCOR derived 57% of its
revenues from U.S. government defense agencies and their prime contractors and another 23% from an
automated test equipment manufacturer. During fiscal 2005, Microsource derived 47% of its revenues from the U.S. government defense
agencies and their prime contractors, an electronic instrument manufacturer comprised 36% and an
international communications equipment company comprised 14%. During fiscal 2004, Microsource
derived 47% of its revenues from the U.S. government defense agencies and their prime contractors,
an electronic instrument manufacturer comprised 39% and an international communications equipment
company comprised 13%. Other than U.S. government agencies and their defense contractors, no customer accounted for
10% or more of consolidated revenues of the Company in fiscal 2005, and no customer who accounted
for 10% or more of revenues of any one segment accounted for 10% or more of any other segment. Other than U.S. government agencies and their defense contractors, one other customer
accounted for 10% or more of consolidated revenues of the Company in fiscal 2004, but no customer
who accounted for 10% or more 5




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of revenues of any one segment accounted for 10% or more of any other segment. The Company
generated 12% of its fiscal 2004 consolidated revenue from an electronic instrument manufacturer. Other than U.S. government agencies and their prime contractors, the Company has no customer
the loss of which would, in managements opinion, have a material adverse effect on the Company and
its subsidiaries as a whole. The Companys products are largely capital investments for its customers, and the Companys
belief is that its customers have economic cycles in which capital investment budgets for the kinds
of products that the Company produces expand and contract. The Company, therefore, expects that a
major customer in one year will often not be a major customer in the following year. Accordingly,
the Companys revenues and earnings will decline if the Company is unable to find new customers or
increase its business with other existing customers to replace declining revenues from the previous
years major customers. A substantial decline in revenues from U.S. government defense agencies
and their prime contractors would also have a material adverse effect on the Companys revenues and
results of operations unless replaced by revenues from the commercial sector. Backlog of Orders On March 26, 2005, the Companys backlog of unfilled orders was $15,792,000 compared to
$16,355,000 at March 27, 2004. As of March 26, 2005, there were approximately $7,631,000 in
unfilled orders that were scheduled for shipment beyond a year, as compared to approximately
$8,882,000 at March 27, 2004. Orders for the Companys products include program orders from both
the U.S. government and defense contractors with extended delivery dates. Accordingly, the backlog
of orders may vary substantially from quarter to quarter and the backlog entering any single
quarter may not be indicative of sales for any period. Backlog includes only those customer orders for which a delivery schedule has been agreed upon
between the Company and the customer and, in the case of U.S. government orders, for which funding
has been appropriated. Competition Giga-tronics serves the broad market for electronic instrumentation with applications ranging
from the design, test, calibration and maintenance of other electronic devices to providing
sophisticated components for complex electronic systems to sub-systems capable of sorting and
identifying high frequency communication signals. These applications cut across the commercial,
industrial and military segments of the broad market. The Company has a variety of competitors.
Several of its competitors are much larger than the Company and have greater resources and
substantially broader product lines. Others are of comparable size with more limited product
lines. Competition from numerous existing companies is intense and potential new entrants are
expected to increase. The Companys instrument, switch, oscillator and synthesizer products
compete with Agilent, Anritsu, Racal, IFR and Rohde & Schwarz. Many of these companies have
substantially greater research and development, manufacturing, marketing, financial, technological,
personnel and managerial resources than Giga-tronics. There can be no assurance that any products
developed by these competitors will not gain greater market acceptance than any developed by
Giga-tronics. To compete effectively in this circumstance, the Company (a) places strong emphasis on
maintaining a high degree of technical competence as it relates to the development of new products
and the upgrading of existing products and (b) is highly selective in establishing technological
objectives. The Company does not attempt to compete across the board, but selectively based upon
its particular strengths and the competitors perceived limitations. Specification requirements of customers in this market vary widely. The Company is able to
compete by offering products that meet a customers particular specification requirements; by being
able to offer certain product specifications at lower cost resulting from the Companys past
production of products with those of similar 6




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specifications; and by being able to offer certain product specifications at a higher quality
level. All of these advantages are attributable to the Companys continuing investment in research
and development and in a highly trained engineering staff. The customers decision is most often based on the best match of its particular requirements
and the suppliers operating specifications. In most cases, attracting and retaining customers
does not require the Company to offer the best overall product with respect to each of the
customers requirements, but rather the best product relative to the specifications that are most
important to the customer. Occasionally price is a competitive consideration. In that circumstance, the Company believes
it has more flexibility in making pricing decisions than its larger and more structured
competitors. Sales and Marketing Giga-tronics Instrument Division, ASCOR, and Microsource market their products through various
distributors and representatives to commercial and government customers, although not necessarily
through the same distributors and representatives. Product Development Products of the type manufactured by Giga-tronics historically have had relatively long
product life cycles. However, the electronics industry is subject to rapid technological changes
at the component level. The future success of the Company is dependent on its ability to steadily
incorporate advancements in component technologies into its new products. Product development
expenses totaled approximately $3,370,000 and $3,766,000 in fiscal 2005 and 2004, respectively. Activities included the development of new products and the improvement of existing products.
It is managements intention to maintain or increase expenditures for product development at levels
required to sustain its competitive position. All of the Companys product development activities
are internally funded and expensed as incurred. Giga-tronics expects to continue to make significant investments in research and development.
There can be no assurance that future technologies, processes or product developments will not
render Giga-tronics current product offerings obsolete or that Giga-tronics will be able to
develop and introduce new products or enhancements to existing products, which satisfy customer
needs, in a timely manner or achieve market acceptance. The failure to do so could adversely
affect Giga-tronics business. Manufacturing The assembly and testing of Giga-tronics Instrument Division microwave, RF and power
measurement products are done at its San Ramon facility. The assembly and testing of ASCORs
switching and connecting devices are done at its Fremont facility. The assembly and testing of
Microsources line of YIG tuned oscillators, filters and microwave synthesizers are done at its
Santa Rosa facility. Environment To the best of its knowledge, the Company is in compliance with all federal, state and local
laws and regulations involving the protection of the environment. Employees As of March 26, 2005, Giga-tronics employed 120 individuals on a full time basis. Management
believes that the future success of the Company depends on its ability to attract and retain
skilled personnel. None of the 7




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Companys employees are represented by a labor union, and the Company considers its employee
relations to be good. Information about Foreign Operations The Company sells to its international customers through a network of foreign technical sales
representative organizations. Geographic Distribution of Sales2005
    
    
    

    2004(Dollars in thousands)
    
    
    
    Amount/Percent
    
    
    
    Amount/PercentDomestic
    
    
    
    $
    15,356
    
    
    
    71.5
    %
    
    
    $
    11,981
    
    
    
    68.5
    %International
    
    
    
    $
    6,121
    
    
    
    28.5
    %
     
   
    $
    5,510
    
    
    
    31.5
    %
 See footnote 5 of the financial statements for further breakdown of international sales
for the last two years. The Company has no foreign-based operations or material amounts of identifiable assets in
foreign countries. Its gross margins on foreign and domestic sales are similar. Certain Factors Which May Adversely Affect Future Operations Or An Investment In
Giga-tronics Business climate is volatile Giga-tronics has a significant number of defense-related orders. If the defense market should
soften, shipments in the current year could decrease more than current projected shipments with a
concurrent decline 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 these orders. If any of these events occurs, then shipments
in the current year could fall below currently projected shipments and earnings could decline. Giga-tronics sales are substantially dependent on the wireless industry Giga-tronics sells directly or indirectly to customers and equipment manufacturers in the
wireless industry. Currently, this industry is undergoing dramatic and rapid change. As such, the
business that Giga-tronics records could decrease or existing recorded backlog could be stretched
or deferred resulting in less than projected shipments. Reduced shipments may have a material
adverse effect on operations. Giga-tronics markets involve rapidly changing technology and standards The market for electronics equipment is characterized by rapidly changing technology and
evolving industry standards. Giga-tronics believes that its future success will depend in part
upon its ability to develop and commercialize its existing products, develop new products and
applications, and in part to develop, manufacture and successfully introduce new products and
product lines with improved capabilities and to continue to enhance existing products. There can
be no assurance that Giga-tronics will successfully complete the development of current or future
products or that such products will achieve market acceptance. Liquidity Based on current levels of sales and expenses, management believes that cash and cash
equivalents remain adequate to meet anticipated operating needs for the next two years. However,
this estimate is based on projections that may or may not be realized, and therefore actual cash
usage could be greater than projected. To operate beyond that term would require the Company to
earn additional cash from operations, obtain a line of credit or obtain additional funds from other
sources. The Company maintains a line of credit for $2,500,000, which expires June 8




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21, 2005. The Company is in the process of negotiating a new line of credit, however, the
Company does not believe that it needs the line of credit for operating purposes. Giga-tronics acquisitions may not be effectively integrated and their integration may be costly As part of its business strategy, Giga-tronics may broaden its product lines and expand its
markets, in part through the acquisition of other business entities. Giga-tronics 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. The
Company has not made any acquisitions in the past seven years. 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. Giga-tronics common stock price is volatile The market price of the Companys common stock could be subject to significant fluctuations in
response to variations in quarterly operating results, shortfalls in revenues or earnings from
levels expected by securities analysts and other factors such as announcements of technological
innovations or new products by Giga-tronics or by competitors, government regulations or
developments in patent or other proprietary rights. In addition, the NASDAQ Small Cap and other
stock markets have experienced significant price fluctuations in recent periods. These
fluctuations often have seemingly been unrelated to the operating performance of the specific
companies whose stocks are traded. Broad market fluctuations, as well as general foreign and
domestic economic conditions, may adversely affect the market price of the common stock. Giga-tronics stock at any time has historically traded on thin volume on NASDAQ. Sales of a
significant volume of stock could result in a depression of Giga-tronics share prices. 
 ITEM 2. DESCRIPTION OF PROPERTIES As of March 26, 2005, Giga-tronics principal executive office and the Instrument Division
marketing, sales and engineering offices and manufacturing facilities for its microwave and RF
signal generator and power measurement products are located in approximately 47,300 square feet in
San Ramon, California, which the Company occupies under a lease agreement expiring December 31,
2006. ASCORs marketing, sales and engineering offices and manufacturing facilities for its
switching and connecting devices, are located in approximately 18,700 square feet in Fremont,
California, under a lease that expires on June 30, 2009. Included in this lease is approximately
7,700 square feet the use of which the Company effectively abandoned upon sale of Dymatix on March
26, 2004. The Company has an accrued loss of approximately $174,000 for future lease expense, net
of estimated future sub-lease rental income. As of March 26, 2005, the Company has not sub-leased
the available space. Microsources marketing, sales and engineering offices and manufacturing facilities for its
YIG tuned oscillators, filters and microwave synthesizers are located in an approximately 33,400
square foot facility in Santa Rosa, California, which it occupies under a lease expiring May 25,
2013. The Company believes that its facilities are adequate for its business activities. 9




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ITEM 3. LEGAL PROCEEDINGS As of March 26, 2005, the Company has no material pending legal proceedings. From time to
time, Giga-tronics is involved in various disputes and litigation matters that arise in the
ordinary course of business. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the
fiscal year ended March 26, 2005. Executive Officers of the Company are listed in Part III, Item 10 of this Form 10-KSB. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Market Prices Giga-tronics common stock is traded over the counter on NASDAQ Small Cap Market using the
symbol GIGA. The Companys common stock had been quoted on the NASDAQ National Market until July
22, 2004. NASDAQ informed the Company that it no longer met the National Market listing
requirement of $10,000,000 in minimum shareholders equity. Because the Company did not expect to
be able to increase its shareholders equity to this amount in the near term, it applied for and
was accepted for quotation of its common stock on the NASDAQ Small Cap Market under the same ticker
symbol GIGA. The number of record holders of the Companys common stock as of March 26, 2005 was
approximately 1,500. 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. 2005
    
    High
    
    Low
    
    2004
    
    High
    
    LowFirst quarter
    
    
    (3/28-6/26
    )
    
    $
    3.600
    
    
    $
    1.460
    
    
    
    (3/30-6/28
    )
    
    $
    1.450
    
    
    $
    1.190Second quarter
    
    
    (6/27-9/25
    )
    
    
    1.860
    
    
    
    1.510
    
    
    
    (6/29-9/27
    )
    
    
    2.550
    
    
    
    1.600Third quarter
    
    
    (9/26-12/25
    )
    
    
    2.430
    
    
    
    1.610
    
    
    
    (9/28-12/27
    )
    
    
    2.410
    
    
    
    1.720Fourth quarter
    
    
    (12/26-3/26
    )
    
    
    6.160
    
    
    
    2.060
    
    
    
    (12/28-3/27
    )
    
    
    2.870
    
    
    
    1.960
 Giga-tronics has not paid cash dividends in the past and has no plans to do so in the future,
based upon its belief that the best use of its available capital is in the enhancement of its
product position. Giga-tronics has not issued any unregistered securities or repurchased any of its securities
during the past fiscal year. 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. The impact of adopting SAB 101 was to increase
earnings before the cumulative effect of the accounting change in the year ended March 31, 2001 by
$520,000, net of income taxes. The
following table sets forth selected financial data for the Companys last five fiscal
years. This information is derived from the Companys audited financial statements, unless
otherwise stated. This data should be read in conjunction with the financial statements, related
notes, and other financial information included elsewhere in this report. 10




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SELECTED CONSOLIDATED FINANCIAL DATA Summary of Operations : Years EndedMarch 26,
    
    
    March 27,
    
    
    March 29,
    
    
    March 30,
    
    
    March 31,(In thousands except per share data)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Net sales
    
    $
    21,477
    
    
    $
    17,491
    
    
    $
    20,822
    
    
    $
    35,363
    
    
    $
    45,712Gross profit
    
    
    9,598
    
    
    
    4,736
    
    
    
    6,187
    
    
    
    10,432
    
    
    
    16,761Operating expenses
    
    
    8,760
    
    
    
    9,179
    
    
    
    10,412
    
    
    
    14,030
    
    
    
    14,522Interest income, net
    
    
    
    
    
    
    7
    
    
    
    60
    
    
    
    59
    
    
    
    202Pre-tax earnings (loss) from continuing operations
before cumulative effect of accounting change
    
    
    849
    
    
    
    (4,440
    )
    
    
    (4,328
    )
    
    
    (3,514
    )
    
    
    2,673Provision (benefit) for income taxes
    
    
    4
    
    
    
    4
    
    
    
    4,098
    
    
    
    (1,983
    )
    
    
    911Income (loss) from continuing operations
    
    
    845
    
    
    
    (4,444
    )
    
    
    (8,426
    )
    
    
    (1,531
    )
    
    
    1,762Income (loss) on discontinued operations,
net of income taxes
    
    
    (233
    )
    
    
    (2,377
    )
    
    
    (2,336
    )
    
    
    (571
    )
    
    
    659Income (loss) before cumulative effect
of accounting change
    
    
    612
    
    
    
    (6,821
    )
    
    
    (10,762
    )
    
    
    (2,102
    )
    
    
    2,421Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (520
    )Net earnings (loss)
    
    $
    612
    
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )
    
    $
    1,901Basic earnings (loss) per share:From continuing operations
    
    $
    0.18
    
    
    $
    (0.94
    )
    
    $
    (1.81
    )
    
    $
    (0.33
    )
    
    $
    0.39On discontinued operations
    
    
    (0.05
    )
    
    
    (0.51
    )
    
    
    (0.50
    )
    
    
    (0.13
    )
    
    
    0.15Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.12
    )Net earnings (loss) per share  basic
    
    $
    0.13
    
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )
    
    $
    0.42Diluted earnings (loss) per share:From continuing operations
    
    $
    0.18
    
    
    $
    (0.94
    )
    
    $
    (1.81
    )
    
    $
    (0.33
    )
    
    $
    0.37On discontinued operations
    
    
    (0.05
    )
    
    
    (0.51
    )
    
    
    (0.50
    )
    
    
    (0.13
    )
    
    
    0.14Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.11
    )Net earnings (loss) per share  diluted
    
    $
    0.13
    
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )
    
    $
    0.40Shares of common stock  basic
    
    
    4,725
    
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604
    
    
    
    4,474Shares of common stock  diluted
    
    
    4,741
    
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604
    
    
    
    4,803
 Financial Position:(In thousands except ratio)
    
    March 26, 2005
    
    
    March 27, 2004
    
    
    March 29, 2003
    
    
    March 30, 2002
    
    
    March 31, 2001Current ratio
    
    
    4.29
    
    
    
    2.92
    
    
    
    3.50
    
    
    
    5.49
    
    
    
    4.06Working capital
    
    $
    9,337
    
    
    $
    7,997
    
    
    $
    13,697
    
    
    $
    23,135
    
    
    $
    22,924Total assets
    
    $
    12,961
    
    
    $
    13,733
    
    
    $
    21,875
    
    
    $
    32,880
    
    
    $
    37,318Shareholders equity
    
    $
    9,812
    
    
    $
    9,196
    
    
    $
    15,960
    
    
    $
    26,661
    
    
    $
    28,475
 Percentage Data:Percent of net sales
    
    March 26, 2005
    
    
    March 27, 2004
    
    
    March 29, 2003
    
    
    March 30, 2002
    
    
    March 31, 2001Gross profit
    
    
    44.7
    %
    
    
    27.1
    %
    
    
    29.7
    %
    
    
    29.5
    %
    
    
    36.7
    %Operating expenses
    
    
    40.8
    
    
    
    52.5
    
    
    
    50.0
    
    
    
    39.7
    
    
    
    31.8Interest income, net
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.4Pre-tax (loss) income from continuing
operations before cumulative effect
of accounting change
    
    
    4.0
    
    
    
    (25.4
    )
    
    
    (20.8
    )
    
    
    (9.9
    )
    
    
    5.8Income (loss) on discontinued
operations, net of income taxes
    
    
    (1.1
    )
    
    
    (13.6
    )
    
    
    (11.2
    )
    
    
    (1.6
    )
    
    
    1.4Cumulative effect of accounting change
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    (1.1
    )Net income (loss)
    
    
    2.8
    
    
    
    (39.0
    )
    
    
    (51.7
    )
    
    
    (5.9
    )
    
    
    4.2
 11




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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL DATA The following is a summary of unaudited results of operations for the fiscal years ended March
26, 2005 and March 27, 2004: Quarterly Financial Information (Unaudited)2005(In thousands except per share data)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    YearNet sales
    
    $
    5,700
    
    
    $
    5,379
    
    
    $
    5,130
    
    
    $
    5,268
    
    
    $
    21,477Gross profit
    
    
    2,571
    
    
    
    2,329
    
    
    
    2,375
    
    
    
    2,323
    
    
    
    9,598Operating expenses
    
    
    2,257
    
    
    
    2,180
    
    
    
    2,210
    
    
    
    2,113
    
    
    
    8,760Interest income, net
    
    
    4
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )
    
    
    Pre-tax income from continuing operations
    
    
    318
    
    
    
    148
    
    
    
    161
    
    
    
    222
    
    
    
    849Provision for income taxes
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Income from continuing operations
    
    
    314
    
    
    
    148
    
    
    
    161
    
    
    
    222
    
    
    
    845Income (loss) on discontinued
operations, net of income tax
    
    
    43
    
    
    
    (124
    )
    
    
    (133
    )
    
    
    (19
    )
    
    
    (233
    )Net income
    
    $
    357
    
    
    $
    24
    
    
    $
    28
    
    
    $
    203
    
    
    $
    612Basic earnings (loss) per share:From continuing operations
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.18On discontinued operations
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.05
    )Net earnings per share  basic
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.13Diluted earnings (loss) per share:From continuing operations
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.18On discontinued operations
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.05
    )Net earnings per share  diluted
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.13Shares of common stock  basic
    
    
    4,725
    
    
    
    4,725
    
    
    
    4,725
    
    
    
    4,727
    
    
    
    4,725Shares of common stock  diluted
    
    
    4,745
    
    
    
    4,732
    
    
    
    4,734
    
    
    
    4,802
    
    
    
    4,741
 12




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##### Table of Contents



Quarterly Financial Information (Unaudited)2004(In thousands except per share data)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    YearNet sales
    
    $
    5,239
    
    
    $
    5,135
    
    
    $
    3,822
    
    
    $
    3,295
    
    
    $
    17,491Gross profit
    
    
    1,363
    
    
    
    1,915
    
    
    
    1,090
    
    
    
    368
    
    
    
    4,736Operating expenses
    
    
    2,632
    
    
    
    2,285
    
    
    
    2,170
    
    
    
    2,092
    
    
    
    9,179Interest income, net
    
    
    (3
    )
    
    
    13
    
    
    
    
    
    
    
    (3
    )
    
    
    7Pre-tax loss from continuing operations
    
    
    (1,272
    )
    
    
    (357
    )
    
    
    (1,084
    )
    
    
    (1,727
    )
    
    
    (4,440
    )Provision for income taxes
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Loss from continuing operations
    
    
    (1,276
    )
    
    
    (357
    )
    
    
    (1,084
    )
    
    
    (1,727
    )
    
    
    (4,444
    )Loss on discontinued operations, net of income tax
    
    
    (2,356
    )
    
    
    (126
    )
    
    
    90
    
    
    
    15
    
    
    
    (2,377
    )Net loss
    
    $
    (3,632
    )
    
    $
    (483
    )
    
    $
    (994
    )
    
    $
    (1,712
    )
    
    $
    (6,821
    )Basic (loss) earnings per share:From continuing operations
    
    $
    (0.27
    )
    
    $
    (0.08
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.50
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.00
    
    
    
    (0.51
    )Net loss per share  basic
    
    $
    (0.77
    )
    
    $
    (0.10
    )
    
    $
    (0.21
    )
    
    $
    (0.36
    )
    
    $
    (1.45
    )Diluted (loss) earnings per share:From continuing operations
    
    $
    (0.27
    )
    
    $
    (0.08
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.50
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.00
    
    
    
    (0.51
    )Net loss per share  diluted
    
    $
    (0.77
    )
    
    $
    (0.10
    )
    
    $
    (0.21
    )
    
    $
    (0.36
    )
    
    $
    (1.45
    )Shares of common stock  basic
    
    
    4,693
    
    
    
    4,696
    
    
    
    4,708
    
    
    
    4,717
    
    
    
    4,704Shares of common stock  diluted
    
    
    4,693
    
    
    
    4,696
    
    
    
    4,708
    
    
    
    4,717
    
    
    
    4,704
 13




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##### Table of Contents



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION MANAGEMENTS DISCUSSION AND ANALYSIS Overview Giga-tronics produces instruments, subsystems and sophisticated microwave components that have
broad applications in both defense electronics and wireless telecommunications. In 2005, our
business consisted of four operating and reporting segments: Giga-tronics Instrument Division,
ASCOR, Microsource and Corporate. Our business is highly dependent on the wireless telecommunications market. While the Company
has seen some improvement in the commercial business environment we believe it remains challenging.
Giga-tronics experienced improvements in new orders in fiscal 2005. Inquiries for Giga-tronics
products, including the new 2400M synthesizer (part of the 2400 family of products) were also
higher in the year. New orders in the military sector are showing indications of increased
strength; however it is still too early to determine if the commercial wireless telecommunications
market has rebounded. The Companys cost reduction programs, including reductions in personnel and new lease terms,
are on track and have positioned Giga-tronics to take advantage of opportunities in our market.
However, the Companys employees have been on salary reductions over the last three years and the
Company anticipates reinstating prior salary levels in fiscal 2006. The Company has recently released the 2400M synthesizer during the 2005 fiscal year. These
products are being accepted by the marketplace and management believes there is significant room
for growth. This release demonstrates the Companys commitment to new product development.
Giga-tronics intends to continue research and development in key growth areas in order to expand
product lines and update existing lines with additional features. While Microsource received a large long-term order during fiscal 2005, the management at
Microsource anticipates that prospects for new orders will be moderate for the new fiscal year. In the first quarter of 2004, Giga-tronics discontinued the operations at its Dymatix Division
due to the substantial losses incurred over the previous two years. In the fourth quarter of
fiscal 2004, Giga-tronics consummated the sale of its Dymatix Division and recognized a gain of
$53,000 in connection with the sale. The purchase price was $300,000. The Company received a
$50,000 cash payment from the buyer and a $250,000 note receivable with $50,000 due in May 2004 and
quarterly installments of $25,000 due beginning in July 2004. The Company agreed to reschedule the
payment due in May 2004 to August 2004 and, to date, has not received payments due. The note was
secured by collateral and in managements opinion this collateral deteriorated during the year.
Accordingly, the Company considers the note receivable to be impaired and beginning in the second
quarter has recorded a provision to reserve of $250,000 through charges to discontinued operations
of $250,000 in the 2005 fiscal year. Managements designation of the loan as impaired and the
establishment of an allowance for credit losses for financial reporting purposes does not relieve
the purchaser of his obligation to repay the indebtedness. Accordingly, while no assurances can be
provided, the Company plans to pursue all collection options and may ultimately recover all or a
portion of the amounts reserved. 14




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##### Table of Contents



Results of Operations New orders by segment are as follows for the fiscal years ended: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Instrument Division
    
    $
    11,545
    
    
    
    7
    %
    
    $
    10,772
    
    
    
    25
    %
    
    $
    8,590ASCOR
    
    
    4,536
    
    
    
    76
    %
    
    
    2,574
    
    
    
    (47
    %)
    
    
    4,866Microsource
    
    
    4,833
    
    
    
    28
    %
    
    
    3,763
    
    
    
    30
    %
    
    
    2,892Total
    
    $
    20,914
    
    
    
    22
    %
    
    $
    17,109
    
    
    
    5
    %
    
    $
    16,348
 New orders received in fiscal 2005 increased 22% to $20,914,000 from the $17,109,000 received
in fiscal 2004. New orders increased primarily due to strength in our commercial wireless market
coupled with increases in new military orders and other commercial business. New orders received in fiscal 2004 increased 5% to $17,109,000 from the $16,348,000 received
in fiscal 2003. New orders increased primarily due to strength in our commercial wireless market
coupled with increases in new military orders. Increased orders from the military and their prime contractors at the Giga-tronics Instrument
Division improved new orders for fiscal 2005. Orders at ASCOR increased in 2005 primarily due to
increased orders from commercial customers. Orders at Microsource increased 28% primarily as a
result of the recording of a $7.6 million long-term contract from Boeing, partially offset by the
renegotiation of a long term contract with an existing customer as discussed below, whereby
Microsource, during the second quarter, reversed its recorded backlog for deliveries beyond 12
months by $4,854,000. Orders for the new synthesizer at the Giga-tronics Instrument Division helped to improve new
orders in fiscal 2004. Orders at ASCOR decreased in 2004 primarily due to a decrease in military
and commercial demand. In 2004, orders at Microsource improved primarily due to an increase in
military orders. The following table shows order backlog and related information at fiscal year end: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Backlog of unfilled orders
    
    $
    15,792
    
    
    
    (3
    %)
    
    $
    16,355
    
    
    
    (2
    %)
    
    $
    16,737Backlog of unfilled
orders shippable within
one year
    
    
    8,185
    
    
    
    10
    %
    
    
    7,473
    
    
    
    (2
    %)
    
    
    7,660Previous fiscal year end
(FYE) one-year backlog
reclassified during year
as shippable later than
one year
    
    
    1,388
    
    
    
    (23
    %)
    
    
    1,804
    
    
    
    24
    %
    
    
    1,453Net cancellations during
year of previous FYE
one-year backlog
    
    
    25
    
    
    
    (49
    %)
    
    
    49
    
    
    
    (94
    %)
    
    
    861
 The backlog at year-end 2005 declined 3%. This decline is primarily a result of the
following reversal coupled with increased shipments from backlog offset by the $7.6 million
long-term contract from Boeing. During July 2004, Microsource renegotiated a long-term contract
with an existing customer. As a result, during the second fiscal quarter, the customers firm
purchase commitment quantities were significantly reduced and management reversed its recorded
backlog for deliveries beyond 12 months by approximately $4,854,000. The decrease in backlog at year-end 2004 of 2% was primarily due to weak order levels at
ASCOR, partially offset by strong order levels at the Instrument Division and Microsource. 15




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##### Table of Contents



The allocation of net sales was as follows for fiscal years ended: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Commercial
    
    $
    13,336
    
    
    
    23
    %
    
    $
    10,816
    
    
    
    (15
    %)
    
    $
    12,788Government/defense
    
    
    8,141
    
    
    
    22
    %
    
    
    6,675
    
    
    
    (17
    %)
    
    
    8,034
 The allocation of net sales by segment was as follows for fiscal years ended: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Instrument DivisionCommercial
    
    $
    8,170
    
    
    
    26
    %
    
    $
    6,478
    
    
    
    (7
    %)
    
    $
    6,985Government/defense
    
    
    4,279
    
    
    
    104
    %
    
    
    2,095
    
    
    
    (10
    %)
    
    
    2,320ASCORCommercial
    
    
    2,455
    
    
    
    64
    %
    
    
    1,500
    
    
    
    (48
    %)
    
    
    2,907Government/defense
    
    
    1,366
    
    
    
    (33
    %)
    
    
    2,024
    
    
    
    119
    %
    
    
    923MicrosourceCommercial
    
    
    2,711
    
    
    
    (3
    %)
    
    
    2,838
    
    
    
    (2
    %)
    
    
    2,896Government/defense
    
    
    2,496
    
    
    
    (4
    %)
    
    
    2,556
    
    
    
    (47
    %)
    
    
    4,791
 Fiscal 2005 net sales were $21,477,000, a 23% increase from the $17,491,000 of net sales
in 2004. The increase in sales was primarily due to improvement in our commercial wireless market
coupled with increases in new military orders and other commercial business. Sales at the
Giga-tronics Instrument Division increased 45% or $3,876,000. ASCOR sales increased 8% or $297,000.
Sales at Microsource decreased 3% or $187,000. Fiscal 2004 net sales were $17,491,000, a 16% decrease from the $20,822,000 net sales in 2003.
The decrease in sales was primarily due to lower order levels at the Giga-tronics Instrument
Division in the first three quarters due to the weakness in the commercial wireless market coupled
with customer extension of delivery dates at Microsource. Sales at the Giga-tronics Instrument
Division decreased 8% or $732,000. ASCOR sales decreased 8% or $306,000 on weak orders. Sales at
Microsource decreased 30% or $2,293,000. Cost of sales was as follows for the fiscal years ended: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Cost of sales
    
    $
    11,879
    
    
    
    (7
    %)
    
    $
    12,755
    
    
    
    (12
    %)
    
    $
    14,635
 For fiscal 2005, cost of sales decreased 7% to $11,879,000 from $12,755,000 in fiscal
2004. The decrease is primarily attributable to decreased material content of products shipped. For fiscal 2004, cost of sales decreased 12% to $12,755,000 from $14,635,000 in fiscal 2003.
The decrease is primarily attributable to the 16% decline in sales. The reduction in cost of sales
was not proportional to the decline in sales due to the level of fixed manufacturing costs. Operating expenses were as follows for the fiscal years ended: (Dollars in thousands)
    
    2005
    
    
    % change
    
    
    2004
    
    
    % change
    
    
    2003Product development
    
    $
    3,370
    
    
    
    (11
    %)
    
    $
    3,766
    
    
    
    (13
    %)
    
    $
    4,321Selling, general and admin.
    
    
    5,390
    
    
    
    
    
    
    
    5,413
    
    
    
    (11
    %)
    
    
    6,071Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    %)
    
    
    20Total operating expenses
    
    $
    8,760
    
    
    
    (5
    %)
    
    $
    9,179
    
    
    
    (12
    %)
    
    $
    10,412
 16




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##### Table of Contents



Operating expenses decreased 5% or $419,000 in fiscal 2005 over 2004 due to decreases of
$396,000 in product development expenses and decreases of $23,000 in selling, general and
administrative expenses. Product development costs decreased 11% or $396,000 in fiscal 2005
primarily due to decreased product development expenses company wide on personnel cost reductions
and a more streamlined product development focus. Selling, general and administrative expenses
remained flat for fiscal year 2005 compared to the prior year. The decrease is a result of $136,000
less in marketing expenses, coupled with $97,000 less in administrative expenses, offset by higher
commission expense of $210,000. These expense reductions were primarily personnel reductions and
rent reductions due to renegotiated lease terms. The higher commission expense was a direct result
of increased sales in fiscal 2005. Interest income in 2005 decreased from 2004 due to less cash available for investment and
lower interest rates. Operating expenses decreased 12% or $1,233,000 in fiscal 2004 over 2003 due to decreases of
$658,000 in selling, general and administrative, $555,000 in product development expenses and
$20,000 in amortization of intangibles. Product development costs decreased 13% or $555,000 in
fiscal 2004 primarily due to decreased product development expenses company wide on personnel cost
reductions and a more streamlined product development focus. Selling, general and administrative
expenses decreased 11% or $658,000 for the fiscal year 2004 compared to the prior year. The
decrease is a result of $397,000 less in marketing expenses, coupled with $284,000 less in
administrative expenses and higher commission expense of $23,000 on lower sales for the year.
These expense reductions were primarily personnel reductions and rent reductions due to
renegotiated lease terms. For fiscal year 2004 amortization of intangibles decreased 100% or
$20,000 as compared to last fiscal year. The decrease in the amortization of intangibles is
primarily a result of full amortization of patents and licenses. Interest income in 2004 decreased from 2003 due to less cash available for investment and
lower interest rates. Giga-tronics recorded a net profit of $612,000 or $0.13 per fully diluted share for the fiscal
year 2005 versus a net loss of $6,821,000 or $1.45 per fully diluted share in 2004. The loss in
2004 versus the profit in 2005 is attributable to higher revenue in 2005 coupled with the full year
effect of cost reductions initiated in fiscal 2004. Giga-tronics recorded a net loss of $6,821,000 or $1.45 per fully diluted share for the fiscal
year 2004 versus a net loss of $10,762,000 or $2.31 per fully diluted share in 2003. The loss for
2003 includes a one-time charge of approximately $4,098,000 related to an increase in the allowance
against the deferred tax assets, in addition to approximately $1,450,000 in restructuring and
inventory write-offs related to discontinued products. Critical Accounting Policies The Companys discussion and analysis of its financial condition and the results of operations
are based upon the consolidated financial statements included in this report and the data used to
prepare them. The consolidated financial statements have been prepared in accordance with the
accounting principles generally accepted in the United States of America and we are required to
make judgments, estimates, and assumptions in the course of such preparation. The Summary of
Significant Accounting Policies included with the consolidated financial statements describe the
significant accounting policies and methods used in the preparation of the consolidated financial
statements. On an ongoing basis, the Company reevaluates its judgments, estimates, and
assumptions, including those related to revenue recognition, product warranties, allowance for
doubtful accounts, valuation of inventories, and valuation allowance on deferred tax assets. The
Company bases its judgment and estimates on historical experience, knowledge of current conditions,
and its beliefs of what could occur in the future considering available information. Actual
results may differ from these estimates under different assumptions or conditions. Management of
Giga-tronics has identified the following as the Companys critical accounting policies: 17




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##### Table of Contents



Revenues Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the
price is fixed or determinable, and collectability is reasonably assured. This generally occurs
when products are shipped and the risk of loss has passed. Revenue related to products shipped
subject to customers evaluation is recognized upon final acceptance. Product Warranties Upon shipment, the Company also provides for the estimated cost that may be incurred for
product warranties. The Companys warranty policy generally provides three years for Universal
Power Meters and one year for all other products. The Companys policy is to accrue the estimated
cost of warranty coverage at the time the sale is recorded. The estimated cost of warranty
coverage is based on the Companys actual historical experience with its current products or
similar products and the length of the warranty. For new products, the required reserve is based
on historical experience of similar products until such time as sufficient historical data has been
collected on the new product. Accounts Receivable Accounts receivable are stated at the net realizable value. The Company has estimated an
allowance for uncollectible accounts based on analysis of specifically identified problem accounts,
outstanding receivables, consideration of the age of those receivables, and the Companys
historical collection experience. Inventory Inventories are stated at the lower of cost or market. Cost is determined on a first-in,
first-out basis. The Company periodically reviews inventory on hand to identify and write down
excess and obsolete inventory based on estimated product demand. Deferred Income Tax 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. Future tax benefits are subject to a valuation allowance when management is unable
to conclude that its deferred tax assets will more likely than not be realized from the results of
operations. The Company has recorded a valuation allowance to reflect the estimated amount of
deferred tax assets, that may not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based on 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 not realize benefits
of these deductible differences as of March 26, 2005 and March 27, 2004. Management has,
therefore, established a valuation allowance against its net deferred tax assets as of March 26,
2005 and March 27, 2004. Product Development Costs The Company incurs pre-production costs on certain long-term supply arrangements. The costs,
which represent non-recurring engineering and tooling costs, are capitalized as other assets and
amortized over their useful life when reimbursable by the customer. All other pre-production and
product development costs are expensed as incurred. 18




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##### Table of Contents



Financial Condition and Liquidity As of March 26, 2005, Giga-tronics had $2,540,000 in cash and cash equivalents, compared to
$2,752,000 as of March 27, 2004. Working capital for the 2005 fiscal year end was $9,337,000 compared to $7,997,000 in 2004 and
$13,697,000 in 2003. The increase in working capital in 2005 from 2004 is attributed to operating
income in the year coupled with the net change in operating assets and liabilities. The decrease
in working capital in 2004 from 2003 was primarily due to decreases in cash, accounts receivable
and net inventories partially offset by a decrease in customer advances. The Companys current ratio (current assets divided by current liabilities) at March
26, 2005 was 4.3 compared to 2.9 on March 27, 2004 and 3.5 on March 29, 2003. At March 26, 2005,
the improvement in this ratio is primarily the result of the increase in trade receivables
partially offset by the decrease in inventories and the decrease in accounts payable. At March 27,
2004, the reduction in this ratio was primarily the result of decreases in inventories, cash and
cash equivalents, and receivables. Cash used by operations amounted to $237,000 in 2005, $2,326,000 in 2004, and $2,059,000 in
2003. Cash used by operations in 2005 was primarily attributed to the increase in trade accounts
receivable and the decrease in accounts payable, partially offset by the decrease in inventories.
Cash used by operations in 2004 is primarily attributed to the operating loss in the year and a
decrease in customer advances offset by depreciation and amortization expenses that are non-cash
items and decreases in net accounts receivable and net inventories. Additions to property and equipment were $185,000 in 2005 compared to $18,000 in 2004 and
$160,000 in 2003. The increase in capital equipment spending in fiscal 2005 reflected the overall
improvement in business activity. The reduction in capital equipment spending in fiscal 2004
reflected the overall decline in business activity. Other cash inflows in 2005 and 2004 consisted of $4,000 and $57,000 respectively, from the
sale of common stock in connection with the exercise of stock options and purchases under the
employee stock purchase plan. The Company leases various facilities under operating leases that expire through May 2013.
Total future minimum lease payments under these leases amount to approximately $4,979,000 as
follows: Fiscal years(In thousands)2006
    
    $
    1,2482007
    
    
    1,0902008
    
    
    5862009
    
    
    5972010
    
    
    406Thereafter
    
    
    1,052$
    4,979
 The Company is committed to purchase certain inventory under non-cancelable purchase orders.
As of March 26, 2005, total non-cancelable purchase orders were approximately $1,092,000 through
fiscal 2006 and $82,000 beyond fiscal 2006 and were scheduled to be delivered to the Company at
various dates through August 2007. Contractual Obligations The following table discloses the amounts of payments due under certain contractual
obligations in the specified time periods. 19




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##### Table of Contents



(In thousands)
    
    Under one year
    
    
    One to three years
    
    
    Three to five years
    
    
    More than five yearsOperating leases
    
    $
    1,248
    
    
    $
    1,676
    
    
    $
    1,003
    
    
    $
    1,052Purchase obligations
    
    
    1,092
    
    
    
    82
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    2,340
    
    
    $
    1,758
    
    
    $
    1,003
    
    
    $
    1,052
 The Company has no other off-balance-sheet arrangements (including standby letters of
credit, guaranties, contingent interests in transferred assets, contingent obligations indexed to
its own stock or any obligation arising out of a variable interest in an unconsolidated entity that
provides credit or other support to the Company), that have or are likely to have a material effect
on its financial condition, changes in financial condition, revenue, expenses, results of
operations, liquidity, capital expenditures or capital resources. Management believes that the Company has adequate resources to meet its anticipated operating
and capital expenditure needs for the foreseeable future. Giga-tronics intends to maintain
research and development expenditures for the purpose of broadening its product base. From time to
time, Giga-tronics considers a variety of acquisition opportunities to also broaden its product
lines and expand its markets. Such acquisition activity could also increase the Companys operating
expenses and require the additional use of capital resources. Recently Issued Accounting Standards In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)),
Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an
amount equal to the fair value of share-based payments, such as stock options, granted to
employees. The Company is required to apply FAS 123 (R) on a modified prospective method. Under
this method, the Company is required to record compensation expense (as previous awards continue to
vest) for the unvested portion of previously granted awards that remain outstanding at the date of
adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued
financial statements, basing the expense on that previously reported in their pro forma disclosures
required by FAS 123. In April 2005, the Securities and Exchange Commission adopted a rule that
defers the compliance of 123 (R) from the first reporting period beginning after June 15, 2005 to
the first fiscal year beginning after June 15, 2005, March 26, 2006 for the Company. Management
has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the
effect will be consistent with its previous pro forma disclosures. In November 2004, the FASB issued SFAS No. 151, Inventory Costs(FAS 151). FAS 151 requires
that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized
as current-period charges. Further, FAS 151 requires the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. Unallocated overheads must
be recognized as an expense in the period in which they are incurred. FAS 151 is effective for
inventory costs incurred beginning in the first quarter of fiscal 2007. We are currently
evaluating the effect of FAS 151 on our financial statements and related disclosures. 20




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Form 10-KSBFinancial Statements
    
    (Page No.)Consolidated Balance Sheets -
    
    
    22As of March 26, 2005 andMarch 27, 2004Consolidated Statements of Operations -
    
    
    23Years Ended March 26, 2005 andMarch 27, 2004Consolidated Statements of Shareholders Equity -
    
    
    24Years Ended March 26, 2005 andMarch 27, 2004Consolidated Statements of Cash Flows -
    
    
    25Years Ended March 26, 2005 andMarch 27, 2004Notes to Consolidated Financial Statements
    
    
    26 - 35Reports of Independent Registered Public Accounting Firms
    
    
    36 - 37
 21




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS  (In thousands except share data)
    
    March 26, 2005
    
    
    March 27, 2004AssetsCurrent assetsCash and cash equivalents
    
    $
    2,540
    
    
    $
    2,752Notes receivable, net of allowance of $250 and $0,
respectively
    
    
    7
    
    
    
    253Trade accounts receivable, net of allowance
of $77 and $339, respectively
    
    
    3,145
    
    
    
    1,959Inventories
    
    
    6,257
    
    
    
    6,920Prepaid expenses and other assets
    
    
    227
    
    
    
    271Total current assets
    
    $
    12,176
    
    
    $
    12,155Property and equipmentLeasehold improvements
    
    $
    373
    
    
    $
    373Machinery and equipment
    
    
    15,786
    
    
    
    15,969Office furniture and fixtures
    
    
    721
    
    
    
    712Property and equipment
    
    
    16,880
    
    
    
    17,054Less accumulated depreciation and amortization
    
    
    16,206
    
    
    
    15,803Property and equipment, net
    
    
    674
    
    
    
    1,251Other assets
    
    
    111
    
    
    
    327Total assets
    
    $
    12,961
    
    
    $
    13,733Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    1,075
    
    
    $
    1,686Accrued commissions
    
    
    200
    
    
    
    293Accrued payroll and benefits
    
    
    720
    
    
    
    889Accrued warranty
    
    
    378
    
    
    
    548Customer advances
    
    
    2
    
    
    
    58Obligations under capital lease
    
    
    
    
    
    
    10Other current liabilities
    
    
    464
    
    
    
    674Total current liabilities
    
    $
    2,839
    
    
    $
    4,158Deferred rent
    
    
    310
    
    
    
    379Total liabilities
    
    $
    3,149
    
    
    $
    4,537Shareholders equityPreferred stock of no par valueAuthorized 1,000,000 shares; no shares outstanding
at March 26, 2005 and March 27, 2004
    
    
    
    
    
    
    Common stock of no par value;Authorized 40,000,000 shares; 4,728,646 shares at
March 26, 2005 and 4,724,896 shares at
March 27, 2004 issued and outstanding
    
    
    12,756
    
    
    
    12,752Accumulated Deficit
    
    
    (2,944
    )
    
    
    (3,556
    )Total shareholders equity
    
    
    9,812
    
    
    
    9,196Total liabilities and shareholders equity
    
    $
    12,961
    
    
    $
    13,733
 See Accompanying Notes to Consolidated Financial Statements 22




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS  Years Ended(In thousands except per share data)
    
    March 26, 2005
    
    
    March 27, 2004Net sales
    
    $
    21,477
    
    
    $
    17,491Cost of sales
    
    
    11,879
    
    
    
    12,755Gross profit
    
    
    9,598
    
    
    
    4,736Product development
    
    
    3,370
    
    
    
    3,766Selling, general and administrative
    
    
    5,390
    
    
    
    5,413Operating expenses
    
    
    8,760
    
    
    
    9,179Operating income (loss) from continuing operations
    
    
    838
    
    
    
    (4,443
    )Other income (expense)
    
    
    11
    
    
    
    (4
    )Interest income, net
    
    
    
    
    
    
    7Income (loss) from continuing operations before
income taxes
    
    
    849
    
    
    
    (4,440
    )Provision for income taxes
    
    
    4
    
    
    
    4Income (loss) from continuing operations
    
    
    845
    
    
    
    (4,444
    )Loss on discontinued operations, net of income
taxes of nil for 2005 and 2004
    
    
    (233
    )
    
    
    (2,377
    )Net income (loss)
    
    $
    612
    
    
    $
    (6,821
    )Basic net income (loss) per share:From continuing operations
    
    $
    0.18
    
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.05
    )
    
    
    (0.51
    )Basic net income (loss) per share
    
    $
    0.13
    
    
    $
    (1.45
    )Diluted net income (loss) per share:From continuing operations
    
    $
    0.18
    
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.05
    )
    
    
    (0.51
    )Diluted net income (loss) per share
    
    $
    0.13
    
    
    $
    (1.45
    )Shares used in per share calculation:Basic
    
    
    4,725
    
    
    
    4,704Dilutive
    
    
    4,741
    
    
    
    4,704
 See Accompanying Notes to Consolidated Financial Statements 23




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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  Retained EarningsCommon Stock
    
    
    (Accumulated(In thousands except share data)
    
    Shares
    
    
    Amount
    
    
    Deficit)
    
    
    TotalBalance at March 29, 2003
    
    
    4,693,080
    
    
    $
    12,695
    
    
    $
    3,265
    
    
    $
    15,960Comprehensive Income  netNet loss
    
    
    
    
    
    
    
    
    
    
    (6,821
    )
    
    
    (6,821
    )Stock issuance under stock option
and employee stock purchase plans
    
    
    31,816
    
    
    
    57
    
    
    
    
    
    
    
    57Balance at March 27, 2004
    
    
    4,724,896
    
    
    $
    12,752
    
    
    $
    (3,556
    )
    
    $
    9,196Comprehensive Income  netNet income
    
    
    
    
    
    
    
    
    
    
    612
    
    
    
    612Stock issuance under stock option
and employee stock purchase plans
    
    
    3,750
    
    
    
    4
    
    
    
    
    
    
    
    4Balance at March 26, 2005
    
    
    4,728,646
    
    
    $
    12,756
    
    
    $
    (2,944
    )
    
    $
    9,812
 See Accompanying Notes to Consolidated Financial Statements 24




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS  Years Ended(In thousands)
    
    March 26, 2005
    
    
    March 27, 2004Cash flows from operations:Net income (loss)
    
    $
    612
    
    
    $
    (6,821
    )Adjustments to reconcile net income (loss) to
net cash used in operations:Net provision for doubtful accounts and note
receivable
    
    
    (12
    )
    
    
    (14
    )Depreciation and amortization
    
    
    758
    
    
    
    1,041(Gain) loss on sales of fixed assets
    
    
    4
    
    
    
    (4
    )Deferred rent
    
    
    (69
    )
    
    
    (55
    )Changes in operating assets and liabilities:Notes receivable
    
    
    (4
    )
    
    
    (247
    )Trade accounts receivable
    
    
    (924
    )
    
    
    1,380Inventories
    
    
    663
    
    
    
    3,324Prepaid expenses and other current assets
    
    
    44
    
    
    
    217Accounts payable
    
    
    (611
    )
    
    
    (123
    )Accrued commissions
    
    
    (93
    )
    
    
    44Accrued payroll and benefits
    
    
    (169
    )
    
    
    (149
    )Accrued warranty
    
    
    (170
    )
    
    
    (311
    )Accrued other liabilities
    
    
    (210
    )
    
    
    30Customer advances
    
    
    (56
    )
    
    
    (738
    )Income taxes receivable/payable
    
    
    
    
    
    
    100Net cash used in operations
    
    
    (237
    )
    
    
    (2,326
    )Cash flows from investing activities:Proceeds from sale of property and equipment
    
    
    
    
    
    
    4Purchases of property and equipment
    
    
    (185
    )
    
    
    (18
    )Other assets
    
    
    216
    
    
    
    106Net cash provided by investing activities
    
    
    31
    
    
    
    92Cash flows from financing activities:Issuance of common stock
    
    
    4
    
    
    
    57Payments on capital leases
    
    
    (10
    )
    
    
    (76
    )Net cash used in financing activities
    
    
    (6
    )
    
    
    (19
    )Decrease in cash and cash equivalents
    
    
    (212
    )
    
    
    (2,253
    )Beginning cash and cash equivalents
    
    
    2,752
    
    
    
    5,005Ending cash and cash equivalents
    
    $
    2,540
    
    
    $
    2,752Supplementary disclosure of cash flow information:Cash paid for income taxes
    
    $
    4
    
    
    $
    4Cash paid for interest
    
    
    
    
    
    
    
 See Accompanying Notes to Consolidated Financial Statements 25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data) 1 Summary of Significant Accounting Policies The CompanyThe 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 currently has no 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 ConsolidationThe 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 years 2005 and 2004 each contained 52
weeks. ReclassificationsCertain 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 RecognitionRevenue is recorded when there is evidence of an arrangement, delivery has occurred,
the price is fixed or determinable, and collectability is reasonably assured. This occurs when
products are shipped, unless the arrangement involves acceptance terms. If the arrangement
involves acceptance terms, the Company defers revenue until product acceptance is received.
Further, sales made to distributors do not include price protection or product return rights,
except for product defects covered under warranty arrangements. The Company has no other
post-shipment obligations. The Company reports freight costs charged to customers and freight
costs paid for shipments to customers as cost of sales. The Company provides an allowance for doubtful accounts. The Company has estimated an allowance
for un-collectable accounts based on analysis of specifically identified problem accounts,
outstanding receivables, consideration of the age of those receivables and the Companys historical
collection experience. The balance of customer receivables is net of the allowance for doubtful
accounts at March 26, 2005 and March 27, 2004 of $77 and $339, respectively. The activity in the
reserve account is as follows: (In thousands)
    
    March 26, 2005
    
    
    March 27, 2004Beginning balance
    
    $
    339
    
    
    $
    353Provision for doubtful accounts
    
    
    (5
    )
    
    
    4Recoveries of doubtful accounts
    
    
    
    
    
    
    (9
    )Write-off of doubtful accounts
    
    
    (257
    )
    
    
    (9
    )Ending balance
    
    $
    77
    
    
    $
    339
 26




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##### Table of Contents



Accrued WarrantyThe Companys warranty policy generally provides three years for the Universal
Power Meters and one year for all other products. The Companys policy is to accrue the estimated
cost of warranty coverage at the time the sale is recorded. The estimated cost of warranty
coverage is based on the Companys actual historical experience with its current products or
similar products. For new products, the required reserve is based on historical experience of
similar products until such time as sufficient historical data has been collected on the new
product. See Note 10 to the consolidated financial statements, for the reconciliation of changes
in the Companys product warranty liabilities. InventoriesInventories 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. The Company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If such review
indicates that the carrying amount of an asset exceeds the sum of its expected future cash flows on
an undiscounted basis, the assets carrying amount would be written down to fair value.
Additionally, the Company reports long-lived assets to be disposed of at the lower of carrying
amount or fair value less cost to sell. As of March 26, 2005 and March 27, 2004, management
believes that there has been no impairment of the Companys assets. Deferred RentRent 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. Income TaxesIncome 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 that apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Future tax benefits are subject to a valuation allowance
when management is unable to conclude that its deferred tax assets will more likely than not
be realized from the results of operations. Product Development CostsThe Company incurs
pre-production costs on certain long-term supply arrangements. The costs, which represent
non-recurring engineering and tooling costs, are capitalized as other assets and amortized
over their useful life when reimbursable by the customer. All other product development costs
are charged to operations as incurred. Included in other assets as of March 26, 2005 and
March 27, 2004 were capitalized pre-production costs of $115 and $268, respectively. Software Development CostsDevelopment 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 CompensationDuring the first
quarter of fiscal year 2004, the Company adopted Statement of Financial Accounting Standards
(FAS) No. 148 (FAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure
- an Amendment of FAS 123.The Company accounts for stock-based employee compensation using
the intrinsic value method under Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees,and related interpretations and complies with the
disclosure provisions of FAS 123, Accounting for Stock-Based Compensation.The following
table illustrates the effect on net income (loss) and income (loss) per share if the Company
had applied the fair value recognition provisions of FAS 123 to stock-based employee
compensation: 27




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##### Table of Contents



Years Ended(In thousands except per share data)
    
    March 26, 2005
    
    
    March 27, 2004Net income (loss), as reported
    
    $
    612
    
    
    $
    (6,821
    )Deduct:Stock-based compensation expense included in reported net income (loss)
    
    
    
    
    
    
    Add:Total stock-based employee compensation determined under fair value
based method for all awards, net of related tax effects
    
    
    (233
    )
    
    
    (271
    )Pro forma net income (loss)
    
    $
    379
    
    
    $
    (7,092
    )Net income (loss) per share  Basic:As reported
    
    $
    0.13
    
    
    $
    (1.45
    )Pro forma
    
    
    0.08
    
    
    
    (1.51
    )Net income (loss) per share  Diluted:As reported
    
    
    0.13
    
    
    
    (1.45
    )Pro forma
    
    
    0.08
    
    
    
    (1.51
    )
 For purposes of computing pro-forma consolidated net income (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: Years Ended
    
    March 26, 2005
    
    March 27, 2004Expected life of options
    
    4 years
    
    4 yearsExpected life of purchase rights
    
    6 mos
    
    6 mosAnnualized volatility
    
    119%
    
    
    
    87%Risk-free interest rate
    
    3.71% to 4.17%
    
    2.87% to 3.12%Dividend yield
    
    Zero
    
    Zero
 Discontinued OperationsIn the first quarter of 2004, Giga-tronics discontinued the operations
at its Dymatix Division due to the substantial losses incurred over the previous two years. In the
fourth quarter of fiscal 2004, Giga-tronics consummated the sale of its Dymatix Division and
recognized a gain of $53 in connection with the sale. The sales price was $300. The Company
received a $50 cash payment from the buyer and a $250 note receivable with $50 due in May 2004 and
quarterly installments of $25 due beginning in July 2004. The Company agreed to reschedule the
payment due in May 2004 to August 2004 and, to date, has not received payments due. The note was
secured by collateral and in managements opinion this collateral deteriorated during the year.
Accordingly, the Company considers the note receivable to be impaired and has recorded a provision
of loss of $250 through discontinued operations in the 2005 fiscal year. During 2005, the Company
recorded additional $60 in expenses for discontinued operations associated with the partial
abandonment of the leased Fremont facilities. Included in this lease is 7,727 square feet the use
of which the Company effectively abandoned upon sale of Dymatix on March 26, 2004. The Company has
increased the estimated time to market these facilities to a sub-tenant. As of March 26, 2005 and
March 27, 2004, the Company has an accrued loss of $174 and $114, respectively, net of future
estimated sub-lease rental income, for future lease expense. Income (Loss) Per ShareBasic earnings (loss) per share is 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. Comprehensive Income (Loss)There are no items of other comprehensive income (loss). Financial Instruments and Concentration of Credit RiskFinancial instruments, that potentially
subject the Company to credit risk consist principally of cash, cash equivalents and trade accounts
receivable. The Companys cash equivalents consist principally of overnight deposits and money
market funds. Cash and cash equivalents are held in recognized depository institutions. At March
26, 2005 and March 27, 2004, the Company had deposits in 28




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##### Table of Contents



excess of federally insured limits. The Company has not incurred losses on these deposits to date
and does not expect to incur any losses based on the credit ratings of the financial 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 InstrumentsThe 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. Recently Issued Accounting StandardsIn December 2004 the FASB issued Statement Number 123
(revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of share-based payments, such
as stock options, granted to employees. The Company is required to apply FAS 123 (R) on a modified
prospective method. Under this method, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by
restating previously issued financial statements, basing the expense on that previously reported in
their pro forma disclosures required by FAS 123. In April 2005, the Securities and Exchange
Commission adopted a rule that defers the compliance of 123 (R) from the first reporting period
beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, March 26,
2006 for the Company. Management has not completed its evaluation of the effect that FAS 123 (R)
will have, but believes that the effect will be consistent with its previous pro forma disclosures. In November 2004, the FASB issued SFAS No. 151, Inventory Costs(SFAS 151). SFAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as
current-period charges. Further, SFAS 151 requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. Unallocated overheads must be
recognized as an expense in the period in which they are incurred. SFAS 151 is effective for
inventory costs incurred beginning in the first quarter of fiscal 2007. Management is currently
evaluating the effect of SFAS 151 on the financial statements and related disclosures. 2 Cash and Cash Equivalents Cash equivalents of $1,320 and $1,117 at March 26, 2005 and March 27, 2004 respectively,
consist of overnight deposits and money market funds. 3 Inventories Inventories consist of the following: March 26, 2005
    
    
    March 27, 2004Raw materials
    
    $
    3,702
    
    
    $
    4,036Work-in-progress
    
    
    1,925
    
    
    
    1,915Finished goods
    
    
    393
    
    
    
    724Demonstration inventory
    
    
    237
    
    
    
    245$
    6,257
    
    
    $
    6,920
 4 Selling Expenses Selling expenses consist primarily of commissions paid to
various marketing agencies. Commission expense totaled $1,244 and $1,034 for fiscal 2005 and 2004,
respectively. Advertising costs, which are expensed as incurred, totaled $92 and $75 for fiscal
2005 and 2004, respectively. 29




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##### Table of Contents



5 Significant Customers and Industry Segment Information The Company has four reportable segments: Giga-tronics Instrument Division, ASCOR,
Microsource, 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 Yittrium, Iron and Garnet (YIG) tuned oscillators,
filters and microwave synthesizers, which are used in a wide variety of microwave instruments or
devices. 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. Segment net sales include sales
to external customers. Segment pre-tax income (loss) includes an allocation for corporate expenses,
and interest expense on borrowings from Corporate. Corporate expenses are allocated to the
reportable segments based principally on full time equivalent headcount. Interest expense is
charged at approximately prime (which is currently 5.25%) plus 1-1/2% for cash required by each
segment. Inter-segment activities are eliminated in consolidation. Assets include accounts
receivable, inventories, equipment, cash, deferred income taxes, prepaid expenses 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 Instrument Division 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 2005 and 2004. March 26, 2005(In thousands):
    
    Instrument Division
    
    
    ASCOR
    
    
    Microsource
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    12,449
    
    
    $
    3,821
    
    
    $
    5,207
    
    
    $
    
    
    
    $
    21,477Interest income
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    903
    
    
    
    908Interest expense
    
    
    (226
    )
    
    
    (27
    )
    
    
    (645
    )
    
    
    (10
    )
    
    
    (908
    )Depreciation and amortization
    
    
    432
    
    
    
    58
    
    
    
    268
    
    
    
    
    
    
    
    758Income (loss) from continuing operations
before income taxes
    
    
    791
    
    
    
    (105
    )
    
    
    (1,003
    )
    
    
    1,166
    
    
    
    849Assets
    
    
    5,328
    
    
    
    2,427
    
    
    
    4,449
    
    
    
    757
    
    
    
    12,961
 March 27, 2004 (In thousands):
    
    Instrument Division
    
    
    ASCOR
    
    
    Microsource
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    8,573
    
    
    $
    3,524
    
    
    $
    5,394
    
    
    $
    
    
    
    $
    17,491Interest income
    
    
    3
    
    
    
    6
    
    
    
    
    
    
    
    675
    
    
    
    684Interest expense
    
    
    (153
    )
    
    
    (15
    )
    
    
    (509
    )
    
    
    
    
    
    
    (677
    )Depreciation and amortization
    
    
    468
    
    
    
    85
    
    
    
    456
    
    
    
    32
    
    
    
    1,041Loss from continuing operations before income taxes
    
    
    (2,185
    )
    
    
    (763
    )
    
    
    (2,257
    )
    
    
    765
    
    
    
    (4,440
    )Assets
    
    
    5,527
    
    
    
    2,406
    
    
    
    4,415
    
    
    
    1,385
    
    
    
    13,733
 The Companys Giga-tronics Instrument Division, ASCOR, and Microsource segments sell to
agencies of the U.S. government and U.S. defense-related customers. In fiscal 2005 and 2004, U.S.
government and U.S. defense-related customers accounted for 34% and 38% of sales, respectively.
During fiscal 2004, an electronic instrument manufacturer accounted for 12% of the Companys
consolidated revenue and less than 1% of accounts receivable at year-end. Export sales accounted for 29% and 32% of the Companys sales in fiscal 2005 and 2004,
respectively. Export sales by geographical area are shown below: 30




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##### Table of Contents



(In thousands)
    
    March 26, 2005
    
    
    March 27, 2004Americas
    
    $
    225
    
    
    $
    157Europe
    
    
    2,473
    
    
    
    2,562Asia
    
    
    1,935
    
    
    
    1,858Rest of world
    
    
    1,488
    
    
    
    933$
    6,121
    
    
    $
    5,510
 6 Income (loss) per Share Net income (loss) and shares used in per share computations for the years ended March 26, 2005
and March 27, 2004 are as follows: (In thousands except per share data)
    
    March 26, 2005
    
    
    March 27, 2004Net income (loss)
    
    $
    612
    
    
    $
    (6,821
    )Weighted average:Common shares outstanding
    
    
    4,725
    
    
    
    4,704Potential common shares
    
    
    16
    
    
    
    Common shares assuming dilution
    
    
    4,741
    
    
    
    4,704Net earnings (loss) per share of common stock
    
    $
    0.13
    
    
    $
    (1.45
    )Net earnings (loss) per share of common stock
assuming dilution
    
    $
    0.13
    
    
    $
    (1.45
    )Stock options not included in computation
    
    
    575
    
    
    
    556
 The number of stock options not included in the computation of diluted earnings per share
(EPS) for the period ended March 26, 2005 reflects stock options where the exercise prices were
greater than the average market price of the common shares and are, therefore, antidilutive. The
number of stock options not included in the computation of diluted earnings per share (EPS) for the
period ended March 27, 2004 is a result of the Companys loss from continuing operations and,
therefore, all of the options are antidilutive. 7 Income Taxes Following are the components of the provision for income taxes: Years ended (in thousands)
    
    March 26, 2005
    
    
    March 27, 2004CurrentFederal
    
    $
    
    
    
    $
    State
    
    
    4
    
    
    
    44
    
    
    
    4DeferredFederal
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Charge in lieu of taxes attributable to
employer stock option plans
    
    
    
    
    
    
    Provision for income taxes
    
    $
    4
    
    
    $
    4
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities are as follows: 31




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##### Table of Contents



Years ended (in thousands)
    
    March 26, 2005
    
    
    March 27, 2004Allowance for doubtful accounts
    
    $
    33
    
    
    $
    145Inventory reserves and additional costs capitalized
    
    
    2,635
    
    
    
    2,920Fixed assets depreciation
    
    
    84
    
    
    
    (50
    )Accrued vacation
    
    
    115
    
    
    
    110Accrued warranty
    
    
    162
    
    
    
    266Other accrued liabilities
    
    
    161
    
    
    
    201Deferred rent
    
    
    132
    
    
    
    151Net operating loss carryforwards
    
    
    13,919
    
    
    
    11,320Income tax credits
    
    
    2,366
    
    
    
    2,148Future state tax effect
    
    
    (730
    )
    
    
    (771
    )Valuation allowances
    
    
    (18,877
    )
    
    
    (16,440
    )$
    0
    
    
    $
    0
 The effective income tax expense differs from the amount computed by multiplying the statutory
federal income tax by the income before income tax expense due to the following: Years ended(In thousands except percentages)
    
    March 26, 2005
    
    
    March 27, 2004Statutory federal income tax
expense
(benefit)
    
    $
    209
    
    
    
    34.0
    %
    
    $
    (2,318
    )
    
    
    (34.0
    )%Change in valuation allowance
    
    
    2,437
    
    
    
    395.6
    
    
    
    2,519
    
    
    
    37.0Net operating loss generated from
dissolution of subsidiaries
    
    
    (2,947
    )
    
    
    (478.4
    )
    
    
    
    
    
    
    Expiration of net operating losses
    
    
    406
    
    
    
    65.9
    
    
    
    
    
    
    
    State income tax expense
(benefit), net
of federal benefit
    
    
    36
    
    
    
    5.8
    
    
    
    (398
    )
    
    
    (5.8
    )Income tax credits
    
    
    (218
    )
    
    
    (35.4
    )
    
    
    
    
    
    
    Other
    
    
    81
    
    
    
    13.2
    
    
    
    201
    
    
    
    2.9Effective income tax expense
    
    $
    4
    
    
    
    .7
    %
    
    $
    4
    
    
    
    .1
    %
 As of March 26, 2005 and March 27, 2004, the Company had pre-tax federal and state net
operating loss carryforwards of $37,854 and $18,061 and $31,802 and $8,503, respectively, available
to reduce future taxable income. The federal and state net operating loss carryforwards begin to
expire from fiscal 2006 through 2025 and from fiscal 2006 through 2015, respectively. The federal
and state income tax credits begin to expire from fiscal 2021 through 2025 and from fiscal 2010
through 2011, respectively. Utilization of net operating loss carryforwards may be subject to
annual limitations due to certain ownership change limitations as required by Internal Revenue Code
Section 382. During 2004, the Company liquidated two subsidiaries, Ultracision and Viking, in connection
with the sale of its Dymatix Division, resulting in additional pre-tax net operating losses of
$7,400. 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 not realize benefits of these
deductible differences as of March 26, 2005. The change in valuation allowance from March 27,
2004 to March 26, 2005 was $2,437. The change in valuation allowance from March 29, 2003 to March
27, 2004 was $2,519. 32




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##### Table of Contents



8 Stock Options and Employee Benefit Plans Stock Option PlansThe Company established a 1990 Stock Option Plan which provided for the
granting of options for up to 700,000 shares of common stock. The Company 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, ranging from
2003 to 2010, 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. Holders of options may be granted stock appreciation
rights, 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 26,
2005, no SARs have been granted under the option plan. As of March 26, 2005, the total number of
shares of common stock available for issuance is 54,150 under the 1990 and 2000 stock option plans.
All outstanding options have a term of five years. Following is a summary of stock option activity: Options
    
    
    Total Options
    
    
    Weighted AverageExercisable
    
    
    Outstanding
    
    
    Fair ValueOutstanding as
of March 29, 2003
    
    
    269,874
    
    
    
    528,236
    
    
    $
    3.580Exercised
    
    
    
    
    
    
    (21,110
    )
    
    
    2.170Forfeited
    
    
    
    
    
    
    (203,526
    )
    
    
    2.535Granted
    
    
    
    
    
    
    252,500
    
    
    
    2.184Outstanding as of
March 27, 2004
    
    
    168,926
    
    
    
    556,100
    
    
    $
    3.382Exercised
    
    
    
    
    
    
    (3,750
    )
    
    
    1.220Forfeited
    
    
    
    
    
    
    (84,250
    )
    
    
    4.028Granted
    
    
    
    
    
    
    180,000
    
    
    
    2.584Outstanding as of
March 26, 2005
    
    
    239,013
    
    
    
    648,100
    
    
    $
    3.089
 Following is a summary of stock options outstanding and exercisable: Options Outstanding and Exercisable as of March 26, 2005, by Price Range Weighted Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedTotal Options
    
    
    Remaining
    
    
    Average
    
    
    of Options
    
    
    AverageRange of Exercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise PriceFrom $1.22 to $1.96
    
    
    73,250
    
    
    
    3.25
    
    
    $
    1.86
    
    
    
    21,000
    
    
    $
    1.78From $2.12 to $6.13
    
    
    568,850
    
    
    
    3.12
    
    
    
    3.19
    
    
    
    212,013
    
    
    
    4.09From $8.88 to $8.88
    
    
    6,000
    
    
    
    .20
    
    
    
    8.88
    
    
    
    6,000
    
    
    
    8.88From $1.22 to $8.88
    
    
    648,100
    
    
    
    3.11
    
    
    $
    3.09
    
    
    
    239,013
    
    
    $
    4.01
 Employee Stock Purchase PlanUnder 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 26, 2005, 56,631 shares remain available for issuance under the Purchase
Plan. There were no purchase rights granted in fiscal 2005 and 10,706 rights granted in fiscal
2004. The weighted average fair value of the purchase rights granted in fiscal 2004 was $1.05. 401(k) PlansThe Company has established 401(k) plans which cover substantially all employees.
Participants may make voluntary contributions to the plans 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 2005 and 2004 were approximately $25 and
$73, respectively. 33




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##### Table of Contents



9 Commitments The Company leases a 47,397 square foot facility located in San
Ramon, California, under a twelve-year lease (as amended) that commenced in April 1994. The
Company leases a 33,439 square foot facility located in Santa Rosa, California, under a twenty-year
lease that commenced in July 1993 and was amended in April 2003. The amendment resulted in a
reduction of lease space and monthly lease costs. The Company leases an 18,756 square foot facility located in Fremont, California, under a
ten-year lease that commenced in July 1999 and was amended in May 2003. The amendment resulted in
a reduction of lease space and monthly lease costs. Included in this lease is 7,727 square feet
the use of which the Company effectively abandoned upon sale of Dymatix on March 26, 2004. As of
March 26, 2005 and March 27, 2004, the Company has an accrued loss of $174 and $114, respectively,
net of future estimated sub-lease rental income, for future lease expense. These facilities accommodate all of the Companys present operations. The Company also has
acquired equipment under capital and leases other equipment under operating leases. The future
minimum lease payments for operating equipment and facility leases are shown below: Fiscal years(In thousands)2006
    
    $
    1,2482007
    
    
    1,0902008
    
    
    5862009
    
    
    5972010
    
    
    406Thereafter
    
    
    1,052$
    4,979
 The aggregate rental expense was $1,262 and $1,383 in fiscal 2005 and 2004, respectively. In July 2004, the Company fully repaid its capital lease obligations and exercised its bargain
purchase options. As of March 27, 2004, property and equipment includes equipment under capital
lease obligations of $241 and related accumulated amortization of $144. The Company is committed to purchase certain inventory under non-cancelable purchase orders.
As of March 26, 2005, total non-cancelable purchase orders were approximately $1,092 through fiscal
2006 and $82 beyond fiscal 2006 and were scheduled to be delivered to the Company at various dates
through August 2007. 10 Warranty Obligations The Company records a liability for estimated
warranty obligations at the date products are sold. Adjustments are made as new information
becomes available. The following provides a reconciliation of changes in the Companys warranty
reserve. The Company provides no other guarantees. Years Ended(In thousands)
    
    March 26, 2005
    
    
    March 27, 2004Balance at beginning of year
    
    $
    548
    
    
    $
    859Provision for current year sales
    
    
    122
    
    
    
    257Warranty costs incurred

    
    
    (292
    )
    
    
    (568
    )Balance at end of year
    
    $
    378
    
    
    $
    548
 34




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##### Table of Contents



11 Line of Credit On June 1, 2004, the Company executed a commitment letter with a financial institution for a
revolving line of credit. During June the Company executed a loan agreement with this institution
for a secured revolving line of credit for $2,500. The maximum amount that can be borrowed is
limited to 80% of trade receivables, plus 25% of raw material and finished goods inventory up to
$500. Interest is payable at prime plus 11/2%. The Company is required to comply with certain
financial covenants under the arrangement. As of March 26, 2005, this credit line has not been
utilized by the Company. It expires June 21, 2005. The Company is in compliance with the
covenants relating to the line of credit as of March 27, 2005. 35




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##### Table of Contents



R E P O R T   OF
  I N D E P E N D E N T   R E G I S T E R E D
  P U B L I C   A C C O U N T I N G   F I R M The Board of Directors and Shareholders
Giga-tronics Incorporated We have audited the accompanying consolidated balance sheet of Giga-tronics Incorporated and
subsidiaries (the Company) as of March 26, 2005 and the related consolidated statements of
operations, shareholders equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Giga-tronics Incorporated and
subsidiaries as of March 26, 2005, and the results of their consolidated operations and their
consolidated cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles. /s/ Perry-Smith LLP Sacramento, California
June 2, 2005 36




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R E P O R T   OF   I
N D E P E N D E N T   R E G I S T E R E D   P U B
L I C   A C C O U N T I
N G   F I R M The Board of Directors and Shareholders
Giga-tronics Incorporated: We have audited the accompanying consolidated balance sheet of Giga-tronics Incorporated and
subsidiaries (the Company) as of March 27, 2004, and the related consolidated statements of
operations, shareholders equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Oversight Board
(United States). 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Giga-tronics Incorporated and subsidiaries as of
March 27, 2004, and the results of their consolidated operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the United States of
America. /s/ KPMG LLP Mountain View, California
May 7, 2004, except as to Note 11, which is as of June 1, 2004 37




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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES. KPMG LLP was previously the principal accountants for Giga-tronics Incorporated.
On June 18, 2004, that firm resigned. The decision to change accountants was not recommended or
approved by the audit committee of the board of directors. KPMG LLPs report on the registrants consolidated financial statements as of and for the
years ended March 27, 2004 did not contain an adverse opinion or a disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope, or accounting principles, except as
follows: In connection with the audit of the fiscal year ended March 27, 2004 and the subsequent
interim period through June 18, 2004, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of KPMG LLP, would have caused it to
make reference to the subject matter of the disagreement(s) in connection with its report. During the registrants fiscal year ended March 27, 2004 and the subsequent interim period
through June 18, 2004 preceding KPMG LLPs resignation, there were no reportable events requiring
disclosure pursuant to Section 229.304(a)(1)(v) of Regulation S-K. A letter from KPMG LLP was previously filed and is incorporated by reference as Exhibit 16 to
this Form 10-KSB. The Audit Committee of Giga-tronics Incorporated engaged Perry-Smith LLP as its new
independent auditors on July 22, 2004. During the two previous fiscal years and through July 22, 2004, the Company did not consult
with Perry-Smith LLP regarding the application of accounting principles to a specified transaction,
either completed or proposed; the type of audit opinion that might be rendered on the Companys
financial statements and in no case was a written report provided to the Company nor was oral
advice provided that the Company concluded was an important factor in reaching a decision as to an
accounting, auditing or financial reporting issue; or any matter that was either the subject of a
disagreement, as that term is used in Item 304 of Regulation S-B and defined in the related
instructions to Item 304 of Regulation S-B, or a reportable event, as that term is defined in Item
304 of Regulation S-B. 
 ITEM 8A. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures as defined in Exchange Act Rule 13a-15 (e) and 13d  15(e). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective in ensuring that all material information required to be
included in this annual report have been made known to them in a timely fashion. There were no
significant changes in the Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. 
 ITEM 8B. OTHER INFORMATION The Company is not aware of any information required to be
reported on Form 8-K that has not been previously reported. 38




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PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Information regarding directors of the
Company is set forth under the heading Election of Directors of the Companys Proxy Statement for
its 2005 Annual Meeting of Shareholders, incorporated herein by reference. This
Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended
March 26, 2005. 39




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GIGA-TRONICS INCORPORATED EXECUTIVE OFFICERS Name
    
    Age
    
    PositionGeorge H. Bruns, Jr.
    
    
    86
    
    
    Chief Executive Officer since January 1995,
Chairman of the Board and a Director of the
Company. He provided seed financing for the
Company in 1980 and has been a Director
since inception. Mr. Bruns is General
Partner of The Bruns Company, a private
venture investment and management consulting
firm. Mr. Bruns is Director of Testronics,
Inc. of McKinney, Texas.Mark H. Cosmez II
    
    
    54
    
    
    Vice President, Finance/Chief Financial
Officer, Giga-tronics since October 1997.
Before joining Giga-tronics, Mr. Cosmez was
the Chief Financial Officer for Pacific Bell
Public Communications. Prior to 1997, he
was the Vice President of Finance and Chief
Financial Officer for International
Microcomputer Software Inc., a NASDAQ-traded
software company.Jeffrey T. Lum
    
    
    59
    
    
    President, ASCOR, Inc. since November 1987.
Mr. Lum founded ASCOR in 1987 and has been
President since inception. Mr. Lum was a
founder and Vice President of Autek Systems
Corporation, a manufacturer of precision
waveform analyzers. Mr. Lum is on the Board
of Directors for the Santa Clara Aquamaids,
a non-profit organization dedicated to
advancing athletes in synchronized swimming
to the Olympics games.Daniel S. Markowitz
    
    
    54
    
    
    President of Microsource, Inc. since 2003.
Prior to that, President of Dymatix, a
subsidiary of Giga-tronics, Inc., and its
Ultracision and Viking predecessors from
1996 through 2003. General Manager of Mar
Engineering from 1993 to 1996. Prior to
that, some 20 years of varied positions in
the aerospace industry.
 40




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ITEM 10. EXECUTIVE
COMPENSATION Information regarding the Companys compensation of its
executive officers is set forth under the heading Executive Compensation of the Companys Proxy
Statement for its 2005 Annual Meeting of Shareholders, incorporated herein by reference. This
Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended
March 26, 2005. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS Information regarding security ownership of certain beneficial owners and management is
set forth under the heading Stock Ownership of Certain Beneficial Owners and Management of its
Proxy Statement for the 2005 Annual Meeting of Shareholders, incorporated herein by reference.
Information about securities authorized for issuance under equity compensation plans is set forth
under the heading Equity Compensation Plan Information of its Proxy Statement for the 2005 Annual
Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no
later than 120 days after the close of the fiscal year ended March 26, 2005. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information set forth in the Proxy
Statement under the section captioned Transactions with Management and Others is incorporated
herein by reference. 
 ITEM 13. EXHIBITS Reference is made to the Exhibit Index which is found on page 44 of this Annual Report on Form
10-KSB. 41




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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Perry-Smith LLP served as Giga-tronics independent auditors for fiscal year ending March 26,
2005.
KPMG LLP served as Giga-tronics independent auditors for the fiscal year ending March 27,
2004. Audit Fees
Perry-Smith LLPs fee for audit services for our fiscal 2005 were $144,000.
KPMG LLPs fees for audit services for our fiscal 2004 were $194,000. Audit-Related Fees
There were no Perry-Smith LLP fees for audit-related services in our fiscal 2005.
There were no KPMG LLPs fees for audit-related services in our fiscal 2004. Tax Fees
There were no Perry-Smith LLP fees for tax services for our fiscal 2005.
There were no KPMG LLPs fees for tax services for our fiscal 2004. All Other Fees
We did not incur any fees payable to Perry-Smith LLP for other professional services in fiscal 2005.
We did not incur any fees payable to KPMG LLP for other professional services in fiscal 2004. Audit Committee Pre-Approval Policy
Our Audit Committee has not pre-approved any type or amount of non-audit services by the independent accountants. 42




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. GIGA-TRONICS INCORPORATEDBy
    
    /s/ GEORGE H. BRUNS, JRGeorge H. Bruns, Jr.Chairman of the Board andChief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. /s/ GEORGE H. BRUNS, JR
    
    Chairman of the Board
    
    6/13/05George H. Bruns, Jr.
    
    and Chief Executive Officer
    
    (Date)(Principal Executive Officer)/s/ MARK H. COSMEZ II
    
    Vice President, Finance, Chief
    
    6/13/05Mark H. Cosmez II
    
    Financial Officer and Secretary
    
    (Date)(Principal Accounting Officer)/s/ JAMES A. COLE
    
    Director
    
    06/03/05James A. Cole
    
    
    
    (Date)/s/ KENNETH A HARVEY
    
    Director
    
    06/03/05Kenneth A. Harvey
    
    
    
    (Date)/s/ ROBERT C. WILSON
    
    Director
    
    06/03/05Robert C. Wilson
    
    
    
    (Date)/s/ WILLIAM E. WILSON
    
    Director
    
    06/03/05William E. Wilson
    
    
    
    (Date)
 43




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GIGA-TRONICS INCORPORATED 
  3.1
    
    Articles of Incorporation of the Registrant, as amended, previously filed as Exhibit 3.1 to
Form 10-K for the fiscal year ended March 27, 1999 and incorporated herein by reference.3.2
    
    By-laws of Registrant, as amended, previously filed as Exhibit 3.2 to Form 10-K for the
fiscal year ended March 28, 1998, and incorporated herein by reference.10.1
    
    1990 Restated Stock Option Plan and form of Incentive Stock Option Agreement, previously
filed on November 3, 1997 as Exhibit 99.1 to Form S-8 (33-39403) and incorporated herein by
reference.*10.2
    
    Standard form Indemnification Agreement for Directors and Officers, previously filed on June
21, 1999, as Exhibit 10.2 to Form 10-K for the fiscal year ended March 27, 1999 and
incorporated herein by reference.*10.3
    
    Lease between Giga-tronics Incorporated and Calfront Associates for 4650 Norris Canyon Road,
San Ramon, CA, dated December 6, 1993, previously filed as Exhibit 10.12 to Form 10-K for the
fiscal year ended March 26, 1994 and incorporated herein by reference.10.4
    
    Employee Stock Purchase Plan, previously filed on August 29, 1997, as Exhibit 99.1 to Form
S-8 (33-34719), and incorporated herein by reference.*10.5
    
    2000 Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on
September 8, 2000 as Exhibit 99.1 to Form S-8 (33-45476) and incorporated herein by
reference.*10.6
    
    Amendment No. 1 to Employee Stock Purchase Plan, previously filed on September 24, 2001, as
Exhibit 99.1 to Form S-8 (33-69688), and incorporated herein by reference.*16
    
    Letter from KPMG LLP previously filed on June 18, 2004 as Exhibit 16 to Form 8-K and
incorporated herein by reference.21
    
    Significant Subsidiaries. (See page
45 of this Annual Report on Form 10-KSB.)23.1
    
    Consent of Independent Registered
Public Accounting Firm Perry-Smith LLP. (See page 46 of
this Annual Report on Form 10-KSB.)23.2
    
    Consent of Independent Registered
Public Accounting Firm KPMG LLP. (See page 47 of this
Annual Report on Form 10-KSB.)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act.
(See page 48 of this Annual Report on Form 10-KSB.)31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act.
(See page 49 of this Annual Report on Form 10-KSB.)32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act.
(See page 50 of this Annual Report on Form 10-KSB.)32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act.
(See page 51 of this Annual Report on Form 10-KSB.)
   *
    
    Management contract or compensatory plan or arrangement. 44