<PAGE>   1

                                                                   EXHIBIT 13.0


MANAGEMENT'S DISCUSSION AND ANALYSIS


RESULTS OF OPERATIONS FOR FISCAL 1999 AS COMPARED TO 1998

         The Company acquired Microsource, Inc. a manufacturer of YIG
oscillators and communications related synthesizers on May 18, 1998 in a
purchase transaction. Its performance from that date through March 27, 1999 is
included in the Company's operating results. This acquisition positions the
Company to expand its market for microwave instruments and devices.

         New orders received in 1999 were $36,786,000, an increase of 11% from
$33,092,000 in 1998. These orders included $7,900,000 for Microsource for which
there were no comparable orders. At year end 1999, the Company's backlog of
unfilled orders was $17,792,000, compared to $6,492,000 at the end of 1998.
Primarily, the increase in backlog is attributable to addition of the
Microsource backlog which was $11,066,000 at year end.

         Net sales for 1999 were $37,636,000, a 2% increase from 1998. The
increase is due to the addition of Microsource sales of $9,000,000 offset by
reduced sales volume for the Semiconductor Equipment Group as well as
Giga-tronics Instrument products. In 1999, Semiconductor Group sales declined
$6.2 million. Revenues at the Company's semiconductor product lines were
impacted by the substantial downturn of the semiconductor industry together with
the severe economic problems in Asia. The Giga-tronics Instruments sales
reduction of $3.4 million were due to the aging of the product lines, delay in
new product releases, and weakness in the wireless industry. ASCOR sales
improved $1.4 million in 1999 over 1998.

         Cost of sales increased 24% in 1999 to $26,102,000 from $21,024,000 in
1998. The increase in 1999 is attributable to the addition of Microsource as
well as inventory write offs associated with the Company's decision to
discontinue a particular semiconductor equipment line. The cost of sales for
Microsource during fiscal 1999 was $6,978,000.

         Operating expenses increased 1% in 1999 over 1998, which includes
Microsource operating expenses of $2,152,000. Product development costs declined
$.9 million in 1999 to $5.3 million as the development of new products begins to
return to previous levels. Selling, general and administrative expenses
increased in 1999 due to the addition of Microsource which had expenses of
$1,602,000. Amortization of intangibles increased as a result of the addition of
the amortization of goodwill for Microsource offset by reduced amortization of
patents and licenses.

         Other income increased primarily due to the gain from the sale of a
surplus building following facilities consolidation of the Company's
Semiconductor Equipment subsidiaries. Net interest income in 1999 declined 75%
from 1998 due to lower cash available for investment. The cash decline resulted
principally from the extinguishment of debt, reduction of accounts payable and
acquisition costs associated with the acquisition of the Microsource subsidiary.
The benefit for income taxes in 1999 was $1,148,000 or 38% of the pre-tax loss.

         The Company recorded a net loss of $1,858,000, or $0.43 per share, in
1999 versus earnings of $767,000, or $0.18 per share in 1998. The decline in
1999 earnings was due to the Company's lower gross profits in 1999 of
$11,534,000 as compared to $15,789,000 in 1998.


RESULTS OF OPERATIONS FOR FISCAL 1998 AS COMPARED TO 1997

         Orders received in 1998 were $33,092,000, a decrease of 6% from 1997.
At year end 1998, the Company's backlog of unfilled orders was $6,492,000,
compared to $10,192,000 at the end of 1997. The majority of the decline in
backlog is attributable to the semiconductor product line. Several large
semiconductor orders were shipped in 1998.

         Net sales for 1998 were $36,813,000, a 3% decrease from 1997. In 1998,
Giga-tronics Instruments sales declined by $1.7 million. Aging of the product
lines, lack of new product releases, and the continued decline in
defense-related programs was the principal cause of the revenue decline. ASCOR
fiscal 1998 sales also declined $1.7 million due to the timing of large
procurements and declining military programs. These declines were partially
offset by an increase of $2.2 million of Semiconductor Equipment Group sales.
The 1998 growth in the semiconductor products reflects the introduction of
several new products and increased manufacturing output.

         Cost of sales decreased to $21,024,000 or 8% in 1998 from $23,404,000
in 1997. The decrease in cost of sales is attributable to lower labor content,
lower depreciation, and lower controllable manufacturing expenses as a result of
cost cutting measures to control expenses.

         Operating expenses increased 16% in 1998 over 1997. Product development
costs increased $1.6 million in 1998 to $6.2 million in an effort to develop new
products in each of the Company's product lines. The increased product
development spending in 1998 has resulted in the introduction of several new
products, with additional new products anticipated for release in 1999 or later.
Selling, general and administrative expenses increased in 1998 due to $643,000
of transaction costs associated with the mergers of Viking Semiconductor
Equipment, Inc. and Ultracision, Inc.

         Net interest income in 1998 declined 14% from 1997 due to lower cash
available for investment. The cash decline resulted from extinguishing the debt
of the acquired subsidiaries, increased funding for new product development, and
acquisition costs. The provision for income taxes in 1998 was $329,000 or 30% of
pre-tax income and the provision for income taxes in 1997 was $539,000 or 26% of
pre-tax income.

                                       7
<PAGE>   2

         The Company recorded net earnings of $767,000, or $0.18 per share, in
1998, a 47% decrease in earnings per share from $0.34 in 1997. The decline in
1998 earnings was due to the 35% increase in product development spending and
transaction costs for the mergers.

FINANCIAL CONDITION AND LIQUIDITY

         As of March 27, 1999, the Company had $2,686,000 in cash, cash
equivalents, and investments, compared to $10,335,000 as of March 28, 1998 and
$14,209,000 as of March 29, 1997. Cash used by operations amounted to $2,365,000
in 1999, compared to cash used by operations of $1,099,000 in 1998, and cash
provided by operations of $3,285,000 in 1997. In 1999, the losses by operations
were the significant reason for the increase in use of cash by operations. In
1998, the increase in product development costs of $1,619,000 and the merger
transaction costs of $643,000 were the significant reasons for the use of cash
by operations. Cash provided by operations in 1997 is attributed to operating
income in the year and reductions in accounts receivable.

         The Company continues to maintain a strong financial position, with
working capital at year end of $18,021,000 compared to $23,484,000 and
$22,692,000 in 1998 and 1997, respectively. The Company's current ratio of 3.3
decreased from the 1998 and 1997 current ratio of 5.1 and 4.3, respectively. The
decrease in working capital and current ratio is primarily a result of the
Microsource acquisition.

         Additions to property and equipment were $953,000 in 1999, compared to
$779,000 and $1,166,000 in 1998 and 1997, respectively. This spending reflects
continuing investments to support new product development, increased
productivity, and improved product quality. Other cash outflows for 1999 were
payments on credit lines and notes payable of the acquired Microsource
subsidiary of $4,042,000. Other cash inflows in 1999 were $89,000 of common
stock in connection with the exercise of stock options, $1,291,000 from the sale
of the Company's building and $5,742,000 from maturities of investments, net of
purchases, which are principally marketable securities classified as available
for sale.

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


YEAR 2000 (Y2K) ISSUES

         The Company is aware of and is addressing the issues associated with
the programming code in existing computer systems as the year 2000 approaches.
The Year 2000 problem is pervasive and complex, as many computer systems,
manufacturing equipment and industrial control systems will be affected in some
way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such data could generate erroneous information or cause a
system to fail. The Year 2000 issue creates risk for the Company from unforeseen
problems in its own systems and from third parties with which the Company deals
on financial transactions worldwide. Failures of the Company's and/or third
parties' computer systems, manufacturing equipment and industrial control
systems could have a material adverse impact on the Company's ability to conduct
its business.

         The Company is in the process of analyzing internal systems as well as
all external systems (such as vendor, customer, banking systems, etc.) upon
which the Company is dependent, to identify and evaluate any potential Year 2000
issues. The Company is committed to achieving Year 2000 compliance; however,
with a significant portion of the problem external and therefore outside the
direct control of the Company, there can be no assurances that the Company will
be fully or even significantly Year 2000 compliant at the critical juncture. In
addition, as full testing of Year 2000 functionality must occur in a simulated
environment, the Company will not be able to test full system Year 2000
interfaces and capabilities prior to the Year 2000.

         The Company has completed an inventory of internal systems, hardware,
software, manufacturing equipment and embedded chips in industrial control
instruments. Each of these items was identified as mission critical, mission
essential, mission impaired or mission non-critical. The Company is in the
process of prioritizing and evaluating mission critical and mission essential
items, identifying fixes and resources as appropriate, and performing and
testing corrective measures. While the Company believes that its evaluation has
been comprehensive, there can be no assurance that all systems critical to Year
2000 compliance have been identified, or that the corrective actions identified
will be completed on time.

         The Company has upgraded 4 of the 5 packaged financial systems it
currently uses to vendor certified Year 2000 compliant versions. The Company is
in the process of evaluating the plans regarding the last financial system that
is not Year 2000 compliant.


                                       8
<PAGE>   3


         The Company has completed an inventory of current products and their
hardware, software, and embedded chips. Each of the Company's products was
evaluated as to whether it maintained the date and if the date handling was Year
2000 compliant. All of the Company's current products, which maintained the
date, were found to be Year 2000 compliant. Several of the Company's non-current
products were found not to be Year 2000 compliant but the Company has determined
either a manual work around or has an upgrade path to resolve the Year 2000
problem for such non-current products.

         Currently, the Company is inventorying key suppliers of goods and
services to the Company, and considering the potential impact on the Company and
its customers of Year 2000 compliance by these suppliers. The Giga-tronics
Instruments division has mailed surveys to more than 600 of its suppliers, and
is in the process of evaluating responses and sending follow-up letters. The
ASCOR subsidiary has mailed surveys to more than 50 of its suppliers, and is in
the process of evaluating responses and sending follow-up letters. The
Microsource subsidiary has mailed surveys to more than 450 of its suppliers, and
is in the process of evaluating responses and sending follow-up letters. Surveys
to the suppliers of the Company's other subsidiaries and divisions are scheduled
to go out during the next fiscal quarter. The Company plans to determine if its
suppliers pose a threat to it for non compliance. If these suppliers pose a
threat, the Company plans to disqualify the non-complaint suppliers, look for
alternative sources and re-qualify new suppliers to help mediate potential
business disruptions. While the Company believes that it will be able to qualify
alternative suppliers as needed, until all supplier and customer survey
responses have been received and evaluated, the Company can not fully evaluate
the extent of potential problems and the costs associated with corrective
actions.

         To date, the Company has not incurred significant costs associated with
Year 2000 compliance. The Company estimates the cost to complete its current
compliance program will not be significant. Of these costs, less than $50,000 is
associated with the upgrade of packaged software systems used by the Company's
subsidiaries most of which has been expended. These are systems that would not
otherwise have been replaced or upgraded at this time. The Company may incur
significant additional costs depending largely on the response from the
Company's suppliers and the extent to which supplier re-qualification is needed.
Cost estimates will also be evaluated as the status of the overall compliance
program is updated. Currently, the Company has no other contingency plan for
Year 2000 compliance. There can be no assurance that actual costs will not be
materially higher than currently anticipated. Most of these costs are not likely
to be incremental costs to the Company, but rather will represent the
re-deployment of existing information technology resources. The Company is
unable to determine what effect the failure of systems because of Year 2000
issues by the Company or its suppliers or customers will have, but any
significant failures could have an adverse material effect on the Company's
results of operations and financial condition.


FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

With the addition of Microsource, Inc. the Company's defense-related orders have
become more important. If the defense market should soften, shipments in the
current year could fall short of plan with a concurrent decline in earnings.
Current softness in the market for the Company's commercial products has
resulted in a leveling of the commercial backlog. If this trend cannot be
reversed in the near term, shipments in the current year could fall short of
plan with a continued decline in earnings.

As part of its business strategy, the Company intends to broaden its product
lines and expand its markets, in part through the acquisition of other business
entities. The Company had acquired Viking Semiconductor Equipment, Inc. and
Ultracision, Inc. in fiscal 1998 in transactions accounted for as a
pooling-of-interests and Microsource, Inc. in fiscal 1999 in a transaction
accounted for as a purchase. The Company is subject to various risks in
connection with these and 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 the Company's management to maximize the financial and strategic
position of the Company by the successful incorporation of acquired technology
and rights into the Company's product offerings, the maintenance of uniform
standards, controls, procedures and policies, and the potential loss of key
employees of acquired companies. No assurance can be given that any acquisition
by the Company will or will not occur, that if an acquisition does occur, that
it will not materially and adversely affect 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 the Company's common stock. Any such issuance may result in
dilution to all shareholders of the Company, and sales of such shares in
significant volume by the shareholders of acquired companies may depress the
price of the Company's common stock.

Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report to Stockholders contain
forward-looking statements that involve risks and uncertainties. The actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed herein and in the Company's 1999 Report
10-K under "Item 1. Business" as filed with the Securities and Exchange
Commission.

                                       9
<PAGE>   4

CONSOLIDATED  BALANCE  SHEETS


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                   March 27, 1999        March 28, 1998
                                                                   --------------        --------------
                                                                    (In thousands except share data)
<S>                                                                  <C>                    <C>
ASSETS
Current assets
    Cash and cash equivalents                                        $  2,686               $  4,611
    Investments                                                            --                  5,724
    Notes receivable                                                       --                    860
    Trade accounts receivable, net of allowance
          of $435 and $293 respectively                                 6,434                  6,924
    Inventories, net                                                   13,249                  8,064
    Income tax receivable                                                 725                    732
    Prepaid expenses                                                      383                    265
    Deferred income taxes                                               2,309                  2,092
                                                                     --------               --------
TOTAL CURRENT ASSETS                                                   25,786                 29,272

Property and equipment
    Land                                                                   --                    279
    Building and leasehold improvements                                   311                    782
    Machinery and equipment                                            13,460                  8,880
    Office furniture and fixtures                                       1,060                    689
                                                                     --------               --------
Property and equipment, gross cost                                     14,831                 10,630
Less accumulated depreciation and amortization                          9,179                  7,885
                                                                     --------               --------
PROPERTY AND EQUIPMENT, NET                                             5,652                  2,745
PATENTS AND LICENSES                                                      349                    577
GOODWILL, NET                                                           1,194                     --
DEFERRED INCOME TAXES                                                     169                     --
OTHER ASSETS                                                              109                     78
                                                                     --------               --------
TOTAL ASSETS                                                         $ 33,259               $ 32,672
                                                                     ========               ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable                                                 $  3,022               $  2,659
    Accrued commissions                                                   369                    516
    Accrued payroll and benefits                                        1,346                    939
    Accrued warranty                                                      467                    673
    Customer advances                                                   1,648                    612
    Obligation under capital lease                                        112                     27
    Other current liabilities                                             801                    362
                                                                     --------               --------
TOTAL CURRENT LIABILITIES                                               7,765                  5,788
OBLIGATIONS UNDER CAPITAL LEASE                                           210                     24
DEFERRED INCOME TAXES                                                      --                     57
DEFERRED RENT                                                             574                    342
                                                                     --------               --------
TOTAL LIABILITIES                                                       8,549                  6,211
SHAREHOLDERS' EQUITY
Preferred stock of no par value
    Authorized 1,000,000 shares; no shares outstanding
    at March 27, 1999 and March 28, 1998                                   --                     --
Common stock of no par value;
    Authorized 40,000,000 shares; 4,361,902 shares at
    March 27, 1999 and 4,326,299 shares at
    March 28, 1998 issued and outstanding                              11,621                 11,532
Accumulated other comprehensive income                                     --                    (18)
Retained earnings                                                      13,089                 14,947
                                                                     --------               --------
TOTAL SHAREHOLDERS' EQUITY                                             24,710                 26,461
                                                                     --------               --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $ 33,259               $ 32,672
                                                                     ========               ========
</TABLE>


See Accompanying Notes to Consolidated Financial Statements


                                       10
<PAGE>   5

CONSOLIDATED  STATEMENTS  OF  OPERATIONS


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                              Years ended
                                                     --------------------------------------------------------------
                                                     March 27, 1999          March 28, 1998          March 29, 1997
                                                     --------------          --------------          --------------
                                                                     (In thousands except share data)
<S>                                                      <C>                     <C>                    <C>
NET SALES                                                $ 37,636                $ 36,813               $ 38,031
Cost of sales                                              26,102                  21,024                 23,404
                                                         --------                --------               --------
GROSS PROFIT                                               11,534                  15,789                 14,627
Product development                                         5,313                   6,200                  4,581
Selling, general and administrative                         9,418                   8,537                  7,956
Amortization of intangibles                                   562                     435                    559
                                                         --------                --------               --------

Operating expenses                                         15,293                  15,172                 13,096
                                                         --------                --------               --------

OPERATING INCOME (LOSS)                                    (3,759)                    617                  1,531

Other income (expense)                                        632                      22                    (16)
Interest income, net                                          121                     457                    533
                                                         --------                --------               --------
EARNINGS (LOSS) BEFORE INCOME TAXES                        (3,006)                  1,096                  2,048
Provision (benefit) for income taxes                       (1,148)                    329                    539
                                                         --------                --------               --------
NET EARNINGS (LOSS)                                      $ (1,858)               $    767               $  1,509
                                                         ========                ========               ========

EARNINGS (LOSS) PER COMMON SHARE - BASIC                 $  (0.43)               $   0.18               $   0.35
                                                         ========                ========               ========
EARNINGS (LOSS) PER COMMON SHARE - DILUTED               $  (0.43)               $   0.18               $   0.34
                                                         ========                ========               ========
WEIGHTED AVERAGE BASIC
    COMMON SHARES OUTSTANDING                               4,338                   4,319                  4,300
                                                         --------                --------               --------

WEIGHTED AVERAGE DILUTED
    COMMON SHARES OUTSTANDING                               4,338                   4,377                  4,376
                                                         --------                --------               --------
</TABLE>


See Accompanying Notes to Consolidated Financial Statements


                                       11
<PAGE>   6

CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY


<TABLE>
<CAPTION>

                                                                                        Accumulated
                                                 Common Stock                              Other
                                            ------------------------    Comprehensive   Comprehensive    Retained
                                             Shares         Amount      Income (Loss)   Income (Loss)    Earnings        Total
--------------------------------------------------------------------------------------------------------------------------------
                                                                   (In thousands except share data)
<S>                                        <C>           <C>            <C>            <C>            <C>            <C>
BALANCE AT MARCH 30, 1996                   4,259,965     $   11,059     $       --     $      (47)    $   12,463     $   23,475

Comprehensive Income
    Net earnings                                   --             --          1,509             --          1,509          1,509
    Unrealized gain on investments, net
        of income tax expenses of $31              --             --             58             58             --             58
                                                                              -----
Comprehensive Income                               --             --          1,567             --             --             --
                                                                              =====
Stock issuance under stock
    option plans                               81,857            345             --             --             --            345
Stock repurchase                              (25,634)           (42)            --             --            (19)           (61)
Dividends declared                                 --             --             --             --            (27)           (27)
Tax benefit associated with exercise
    of stock options                               --            101             --             --             --            101
Adjustment to conform year-end
    of subsidiary                                  --             --             --             --            254            254
--------------------------------------------------------------------------------------------------------------------------------

BALANCE AT MARCH 29, 1997                   4,316,188         11,463             --             11         14,180         25,654
Comprehensive Income
    Net earnings                                   --             --            767             --            767            767
    Unrealized loss on investments, net
        of income tax benefit of $16               --             --            (29)           (29)            --            (29)
                                                                              -----
Comprehensive Income                               --             --            738             --             --             --
                                                                              =====
Stock issuance under stock
    option plans                               10,111             69             --             --             --             69

--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 28, 1998                   4,326,299         11,532             --            (18)        14,947         26,461
Comprehensive Income
    Net loss                                       --             --         (1,858)            --         (1,858)        (1,858)
    Unrealized gain on investments, net
        of income tax benefit of $10               --             --             18             18             --             18
                                                                             ------
Comprehensive Income                               --             --         (1,840)            --             --             --
                                                                             ======
Stock issuance under stock
    option plans                               35,603             89             --             --             --             89

--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 27, 1999                   4,361,902     $   11,621     $       --     $       --     $   13,089     $   24,710
================================================================================================================================
</TABLE>


         See Accompanying Notes to Consolidated Financial Statements


                                       12
<PAGE>   7
CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Years ended
                                                                        March 27, 1999        March 28, 1998       March 29, 1997
                                                                        --------------        --------------       --------------
                                                                                              (In thousands)
<S>                                                                        <C>                  <C>                  <C>
CASH FLOWS PROVIDED FROM OPERATIONS:
Net earnings (loss)                                                         $ (1,858)            $    767             $  1,509
Adjustments to reconcile net earnings to
    net cash provided by (used in) operations:
Provision for bad debts                                                          142                  (31)                  17
Depreciation  and amortization                                                 2,208                1,407                1,599
Gain on sales of fixed assets                                                   (521)                  (3)                  54
Deferred income taxes                                                           (443)                (120)                (411)
Changes in operating assets and liabilities:
    Trade accounts receivable                                                  1,738               (2,337)               1,698
    Inventories                                                               (1,710)                 196                  525
    Prepaid expenses                                                              74                 (522)                (202)
    Accounts payable                                                            (622)                 204                 (732)
    Accrued commissions                                                         (180)                 206                  (51)
    Accrued payroll and benefits                                                  67                 (118)                 133
    Accrued warranty                                                            (269)                 (67)                  10
    Accrued other expenses                                                      (209)                (212)                (347)
    Customer advances                                                           (968)                (469)                (401)
    Income taxes payable                                                         186                   --                 (116)
                                                                            --------             --------             --------
NET CASH PROVIDED BY (USED IN) OPERATIONS                                     (2,365)              (1,099)               3,285

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments                                                      (2,268)             (36,294)             (28,105)
Maturities of investments                                                      8,010               37,751               26,266
Proceeds from sale of property and equipment                                   1,291                   --                   --
Additions to property and equipment                                             (953)                (779)              (1,166)
Payment for purchase of Microsource, including transaction costs                (605)                  --                   --
Advances to Microsource                                                         (940)                  --                   --
Issuance of notes receivable                                                      --                 (860)                  --
Other assets                                                                     (17)                  57                  120
                                                                            --------             --------             --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                            4,518                 (125)              (2,885)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock                                                          89                   69                  446
Repurchase of common stock                                                        --                   --                  (61)
Dividends paid                                                                    --                  (27)                 (21)
Payment on line of credit                                                     (1,500)                (189)                 (66)
Payment on notes payable and long term debt                                   (2,497)                (985)                (414)
Payments on capital lease and other long term obligations                       (170)                 (32)                  20
                                                                            --------             --------             --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                           (4,078)              (1,164)                 (96)

CHANGE IN SUBSIDIARY FISCAL YEAR END                                              --                   --                  254
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              (1,925)              (2,388)                 558
                                                                            --------             --------             --------
BEGINNING CASH AND CASH EQUIVALENTS                                            4,611                6,999                6,441
ENDING CASH AND CASH EQUIVALENTS                                               2,686                4,611                6,999
                                                                            ========             ========             ========
Supplementary disclosure of cash flow information:
    Cash paid for income taxes                                              $      7             $    951             $  1,123
    Cash paid for interest                                                        --                   58                  131
Non-cash investing and financing activities:
    Purchases under capital lease obligations                                     --                   --                   36
    Dividends declared                                                            --                   --                   27
</TABLE>


See Accompanying Notes to Consolidated Financial Statements


                                       13
<PAGE>   8

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


1        BUSINESS COMBINATIONS

         In June 1997, Giga-tronics Incorporated (Giga-tronics) completed a
         merger with Viking Semiconductor Equipment, Inc. (Viking) by issuing
         approximately 420,000 shares of the Company's common stock in exchange
         for all of the common stock of Viking. The merger has been accounted
         for using the pooling-of-interests method of accounting and
         accordingly, the consolidated financial statements for periods prior to
         the combination have been restated to include the accounts and results
         of operations of Viking. Viking manufactures and markets 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.

         Prior to the combination, Viking's fiscal year ended May 31. In
         recording the pooling-of-interests combination, Viking's financial
         statements for the twelve months ended March 31, 1997 were combined
         with Giga-tronics' financial statements for the year ended March 29,
         1997, and Viking's financial statements for the year ended May 31, 1996
         were combined with Giga-tronics' financial statements for the year
         ended March 30, 1996. An adjustment has been made to retained earnings
         as of March 29, 1997 to eliminate the effect of including Viking's
         results of operations for the two month period ended May 31, 1996, in
         both the years ended March 29, 1997 and March 30, 1996. Viking's
         unaudited results of operations for the two month period ended May 31,
         1996 included sales of $323,000 and a net loss of $254,000.

         In December 1997, Giga-tronics completed a merger with Ultracision,
         Inc. (Ultracision) by issuing approximately 517,000 shares of the
         Company's common stock in exchange for all of the common stock of
         Ultracision. Ultracision is a manufacturer of automation equipment for
         the test and inspection of silicon wafers. Ultracision additionally
         produces a line of probers for the testing and inspection of silicon
         devices. The merger has been accounted for using the
         pooling-of-interests method of accounting and accordingly, the
         consolidated financial statements for periods prior to the combination
         have been restated to include the accounts and results of operations of
         Ultracision. Prior to the combination, Ultracision's fiscal year ended
         March 31.

         On May 18, 1998, Giga-tronics Incorporated acquired Microsource, Inc.
         (Microsource) of Santa Rosa, California. Microsource develops and
         manufactures a broad line of YIG tuned oscillators, filters, and
         microwave synthesizers. The acquisition was accounted for using the
         purchase method of accounting, and accordingly, the results of
         operations of Microsource have been included in the Company's
         consolidated financial statements from May 18, 1998. The purchase price
         consisted of $1,500,000 plus contingent payments based upon future net
         income of Microsource during the two fiscal years after the effective
         time of the merger. The excess of the purchase price over the fair
         value of the net identifiable assets of $1,509,000 was recorded as
         goodwill and other intangibles (primarily, patents) and is being
         amortized on a straight-line basis over five years. The additional
         payments, if any, over the next two years contingent on future net
         income of Microsource will be accounted for as additional goodwill.

         The total purchase price of $1,500,000 has been allocated to the net
         assets acquired based on the estimated fair value as follows (in
         thousands):

<TABLE>
<S>                                                                          <C>
         Current assets                                                      $ 5,119
         Property and equipment                                                4,370
         Goodwill and other intangibles                                        1,509
         Current liabilities                                                  (7,018)
         Capital lease and other long term obligations, net                     (517)
                                                                             -------
                                                                               3,463
                                                                             -------
         Less advances to Microsource, net, and transaction costs             (1,963)
                                                                             -------
                                                                             $ 1,500
                                                                             =======
</TABLE>



         Results of operations previously reported by the separate entities
         prior to the mergers and the pro-forma combined amounts are summarized
         below.

<TABLE>
<CAPTION>
         ----------------------------------------------------------------------------------------------------------------
         Year ended March 28, 1998 (unaudited)                                           Pro-forma              Pro-forma
                                               Giga-tronics          Microsource         Adjustments            Combined
<S>                                              <C>                 <C>                  <C>                  <C>
         Net sales                                $ 36,813            $  6,262             $     --             $ 43,075
         Net earnings (loss)                           767              (4,531)                (390)              (4,154)
         Net earnings (loss) per share            $   0.18            $     --             $     --             $  (0.96)
         ----------------------------------------------------------------------------------------------------------------
</TABLE>

         Pro-forma adjustment represents increased depreciation on the step-up
         basis (to fair market value) on property, plant and equipment, the
         amortization of goodwill created as a result of the acquisition of
         Microsource, and interest accrued by Microsource on the notes due to
         Giga-tronics for which no income had previously been recorded by
         Giga-tronics.

2        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         THE COMPANY The accompanying consolidated financial statements include
         the accounts of Giga-tronics and its wholly owned subsidiaries.
         Giga-tronics and its subsidiary companies design, manufacture and
         market a broad line of test and measurement equipment used in the
         development, test, and maintenance of wireless communications products
         and systems, flight navigational equipment, electronic defense systems,
         and automatic testing systems. The Company also manufactures and
         markets a line of test, measurement, and handling equipment used in the
         manufacturing of semiconductor devices. The Company's products are sold
         worldwide to customers in the test and measurement and semiconductor
         industries. The Company has no foreign operations, and all non-U.S.
         sales are made in U.S. dollars.

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

         USE OF ESTIMATES The preparation of financial statements in conformity
         with generally accepted accounting principles 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.


                                       14
<PAGE>   9

         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 1999, 1998 and 1997 each contained 52 weeks, and
         fiscal year 1996 contained 53 weeks.

         REVENUE RECOGNITION Revenues are recognized when products are shipped.
         Upon shipment, the Company also provides for the estimated cost that
         may be incurred for product warranties.

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

         INVESTMENTS The Company's investments in debt securities are classified
         as available-for-sale securities and are reported at fair value.
         Unrealized gains and losses are reported as a separate component of
         shareholders' equity. The cost of securities sold is determined based
         on the specific identification method.

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

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

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

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

         PATENTS AND LICENSES Patents and licenses are being amortized using the
         straight-line method over periods of five to seven years. As of March
         27, 1999 and March 28, 1998 accumulated amortization on patents and
         licenses was $3,329,000 and $2,735,000, respectively.

         PRODUCT DEVELOPMENT COSTS Product development costs are charged to
         operations in the year incurred.

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

         STOCK-BASED COMPENSATION The Company uses the intrinsic value method to
         account for stock-based compensation.

         EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are computed
         using the weighted average number of common shares outstanding during
         the period. Diluted earnings per share incorporate the incremental
         shares issuable upon the assumed exercise of stock options.
         Antidilutive options are not included in the computation of diluted
         earnings per share.

         FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial
         instruments, which potentially subject the Company to credit risk as of
         March 27, 1999, consist principally of cash, cash equivalents and trade
         accounts receivable. The Company's cash equivalents consist principally
         of money market funds and the cash deposits are held in recognized
         depository institutions. Concentration of credit risk in trade accounts
         receivable results primarily from sales to major customers. The Company
         individually evaluates the creditworthiness of its customers and
         generally does not require collateral or other security. Historically,
         the Company has not incurred any significant credit related losses.

         FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying amount for the
         Company's cash equivalents, trade accounts receivable, notes
         receivable, notes payable, accounts payable and other accrued expenses
         approximates fair market value because of the short maturity of these
         financial instruments.

         COMPREHENSIVE INCOME The Company has adopted the provisions of
         Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
         Comprehensive Income," which established standards for reporting and
         disclosures of comprehensive income and its components (revenues,
         expenses, gains, and losses) in a full set of general purpose financial
         statements. Financial statements for earlier periods have been
         reclassified for comparative purposes.

         SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures
         about Segments of an Enterprise and Related Information" which
         supersedes SFAS 14, "Financial Reporting for Segments of a Business
         Enterprise."

         RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards
         Board (FASB) issued SFAS No. 133, "Accounting for Derivative
         Instruments and Hedging Activities." SFAS No. 133 establishes
         accounting and reporting standards for derivative instruments,
         including certain derivative instruments embedded in other contracts
         (collectively referred to as derivatives), and for hedging activities.
         It requires that an entity recognize all derivatives as either assets
         or liabilities in the statement of financial position and measure those
         instruments at fair value. For a derivative not designated as a hedging
         instrument, changes in the fair value of the derivative are recognized
         in earnings in the period of change. The Company must adopt SFAS No.
         133 by July 1, 1999. Management does not believe the adoption of SFAS
         No. 133 will have a material effect on the financial position or
         operations of the Company.

         RECLASSIFICATIONS Certain amounts in the accompanying 1998 financial
         statements have been reclassified in order to conform to the
         presentation of the 1999 financial statements.


                                       15
<PAGE>   10
3        CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

         Cash, cash equivalents, and short-term investments consisted of the
         following at March 27, 1999 and March 28, 1998:


<TABLE>
<CAPTION>
         --------------------------------------------------------------------------------------------------------
         March 27, 1999                       Cash and Cash Equivalents                 Short-term Investments
         (In thousands)                    -----------------------------              ---------------------------
                                           Amortized               Fair              Amortized              Fair
                                              Cost                 Value                Cost                Value
                                           ----------             ------              ---------             -----
<S>                                         <C>                  <C>                  <C>                  <C>
         Cash                                $1,093               $1,093               $    --               $  --
         Money market funds                   1,593                1,593                    --                  --
         Municipal obligations                   --                   --                    --                  --
                                             ------               ------               -------               -----
         Total debt securities               $2,686               $2,686               $    --               $  --
                                             ======               ======               =======               =====
</TABLE>


<TABLE>
<CAPTION>
         --------------------------------------------------------------------------------------------------------
         March 28, 1998                       Cash and Cash Equivalents                 Short-term Investments
         (In thousands)                    -----------------------------              ---------------------------
                                           Amortized               Fair              Amortized              Fair
                                              Cost                 Value                Cost                Value
                                           ----------             ------              ---------             -----
<S>                                         <C>                  <C>                  <C>                  <C>
         Cash                                $1,190               $1,190               $    --              $   --
         Money market funds                   1,421                1,421                   214                 214
         Municipal obligations                2,000                2,000                 5,538               5,510
                                             ------               ------               -------              ------
         Total debt securities               $4,611               $4,611               $ 5,752              $5,724
                                             ======               ======               =======              ======
</TABLE>

         There were realized gains (losses) of ($37,000) and $1,000 on sales of
         available-for-sale securities in fiscal 1999 and fiscal 1998,
         respectively. Unrealized losses on available-for-sale securities were
         $28,000 as of March 28, 1998, and were included, net of income taxes,
         as a separate component of Shareholder equity.

         As of March 28, 1998, all of the Company's short-term investments had
         maturities within one year. These securities had interest rates that
         ranged from 2.3% to 6.1%.

4        INVENTORIES


<TABLE>
<CAPTION>
         ------------------------------------------------------------------
         Years ended
         (In thousands)                March 27, 1999        March 28, 1998
         ------------------------------------------------------------------
<S>                                       <C>                   <C>
         Raw materials                    $ 6,386               $ 3,943
         Work-in-progress                   6,124                 2,999
         Finished goods                       739                 1,122
                                          -------               -------
                                          $13,249               $ 8,064
                                          =======               =======
</TABLE>

5        NOTES RECEIVABLE

         Notes receivable at March 28, 1998 consisted of $860,000 due from
         Microsource with interest payable at 10% per annum. Additionally, the
         Company received warrants equal to 10% of the face value of the note
         per month, at an exercise price of $0.10 per share. The note was
         collateralized by the fixed assets of Microsource with principal and
         interest due and payable on May 29, 1998. On May 18, 1998, the Company
         exercised the warrants and received principal and interest payments on
         the note as part of its acquisition of Microsource.

6        SELLING EXPENSES

         Selling expenses consist primarily of commissions paid to various
         marketing agencies. Commission expense totaled $2,051,000, $2,155,000,
         and $2,014,000 in fiscal 1999, 1998, and 1997, respectively.
         Advertising costs, which were expensed as incurred, totaled $558,000,
         $431,000, and $425,000 for fiscal 1999, 1998, and 1997, respectively.


                                       16
<PAGE>   11
7        SIGNIFICANT CUSTOMERS AND INDUSTRY SEGMENT INFORMATION

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

         The accounting policies for the segments are the same as those
         described in the "Summary of Significant Accounting Policies." The
         Company evaluates the performance of its segments and allocates
         resources to them based on earnings before income taxes (pre-tax income
         (loss)). Segment net sales includes sales to external customers.
         Segment pre-tax loss includes an allocation for corporate expenses,
         amortization of goodwill, and interest expense from borrowings from
         Corporate. Corporate expenses are allocated to the reportable segments
         based principally on full time equivalent headcount. The interest
         expense is charged at 3/4% over prime which is currently 8 1/2% for
         cash required by each segment. Goodwill associated with acquisitions
         are recorded as assets of the individual segments. Assets include
         accounts receivable, inventories, land, building and equipment, cash,
         deferred income taxes, prepaid expenses, goodwill and other long-term
         assets. The Company accounts for inter-segment sales and transfers at
         terms that allow a reasonable profit to the seller. During the periods
         reported there were no inter-segment sales or transfers.

         The Company's reportable operating segments are strategic business
         units that offer different products and services. They are managed
         separately because each business utilizes different technology and
         requires different marketing strategies. All of the businesses except
         for Giga-tronics Instruments were acquired. The Company's chief
         operating decision maker is considered to be the Company's Chief
         Executive Officer ("CEO"). The CEO reviews financial information
         presented on a consolidated basis accompanied by disaggregated
         information about revenues and pre-tax income by operating segment. The
         tables below present information for the fiscal years ended in 1999,
         1998 and 1997:


         March 27, 1999 (In thousands):
<TABLE>
<CAPTION>

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


         March 28, 1998 (In thousands):

<TABLE>
<CAPTION>
                                        Giga-tronics                                Semiconductor
                                        Instruments       ASCOR      Microsource        Group       Corporate        Total
                                        ------------     --------    -----------    -------------   ---------       --------
<S>                                       <C>            <C>           <C>            <C>            <C>            <C>
         Revenue                          $ 20,441       $  5,070      $     --       $ 11,302       $     --       $ 36,813
         Interest income                        --             40            --              5            470            515
         Interest expense                        5             --            --            183           (130)            58
         Amortization & depreciation         1,110            163            --            134             --          1,407
         Pre-tax income (loss)               1,626             62            --         (1,192)           600          1,096
         Assets                             12,778          3,425            --          7,326          9,143         32,672
</TABLE>


         March 29, 1997 (In thousands):


<TABLE>
<CAPTION>
                                        Giga-tronics                                Semiconductor
                                        Instruments       ASCOR      Microsource        Group       Corporate        Total
                                        ------------     --------    -----------    -------------   ---------       --------
<S>                                       <C>            <C>           <C>            <C>            <C>            <C>
         Revenue                          $ 22,149       $  6,740      $     --       $  9,145       $     --       $ 38,034
         Interest income                        --             42            --             28            571            641
         Interest expense                       --             31            --             81             (4)           108
         Amortization & depreciation         1,307            137            --            155             --          1,599
         Pre-tax income (loss)                 820            795            --           (142)           575          2,048
         Assets                             10,575          3,694            --          6,597         12,752         33,618
</TABLE>

         Sales to agencies of the U.S. Government and defense-related customers
         accounted for 24%, 12%, and 28% of the Company's sales in fiscal 1999,
         1998, and 1997, respectively. Export sales accounted for 20%, 28%, and
         31% of the Company's sales in fiscal 1999, 1998, and 1997,
         respectively. Export sales by geographical area are shown below:


<TABLE>
<CAPTION>
         ----------------------------------------------------------------------------------
         Years ended
         (In thousands)           March 27, 1999       March 28, 1998        March 29, 1997
         ----------------------------------------------------------------------------------
<S>                                  <C>                   <C>                   <C>
         Americas                    $   445               $   345               $   422
         Europe                        3,446                 3,990                 3,467
         Asia                          3,371                 5,747                 7,547
         Rest of world                   403                   328                   460
                                     -------               -------               -------
                                     $ 7,665               $10,410               $11,896
                                     =======               =======               =======
</TABLE>

                                       17
<PAGE>   12
8        EARNINGS (LOSS) PER SHARE

         Shares used in per share computations for the years ended March 27,
         1999, March 28, 1998 and March 29, 1997 are as follows:


<TABLE>
<CAPTION>
         --------------------------------------------------------------------------------------------------------------------
         Years ended
         (In thousands except per share data)                   March 27, 1999          March 28, 1998         March 29, 1997
         --------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>                     <C>
         Net earnings (loss)                                     $    (1,858)              $     767               $1,509
                                                                 ===========               =========               ======
         Weighted average:
         Common shares outstanding                                     4,338                   4,319                4,300
         Common share equivalents                                         --                      58                   76
                                                                 -----------               ---------               ------
         Common shares assuming dilution                               4,338                   4,377                4,376
                                                                 ===========               =========               ======

         Net earnings per share of common stock                  $     (0.43)              $    0.18               $ 0.35
                                                                 ===========               =========               ======
         Net earnings per share of common stock
           assuming dilution                                     $     (0.43)              $    0.18               $ 0.34
                                                                 ===========               =========               ======

         Stock options not included in computation                       537                     177                   38
                                                                 ===========               =========               ======
</TABLE>

         The number of stock options not included in the computation of diluted
         EPS for the period ended March 27, 1999 is a result of the Company's
         loss from continuing operations and therefore the options are
         antidilutive. The number of stock options not included in the
         computation of diluted EPS for the periods ending March 28, 1998 and
         March 29, 1997 reflects stock options where the exercise prices were
         greater than the average market price of the common shares and are
         therefore antidilutive.

         Dividends declared in fiscal year 1997 were $27,000. These dividends
         were associated with Ultracision prior to the merger. Dividends paid
         were $27,000 and $21,000 in 1998 and 1997, respectively, to Ultracision
         shareholders.

9        INCOME TAXES

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


<TABLE>
<CAPTION>
         ------------------------------------------------------------------------------------------------------------
         Years ended
         (In thousands)                                 March 27, 1999          March 28, 1998         March 29, 1997
         ------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                    <C>                    <C>
         Current:
              Federal                                       $  (720)               $   413                $   761
              State                                               4                     20                    239
                                                            -------                -------                -------
                                                               (716)                   433                  1,000

         Deferred:
              Federal                                          (205)                    50                   (325)
              State                                            (227)                  (154)                  (136)
                                                            -------                -------                -------
                                                               (432)                  (104)                  (461)

         Provision (benefit) for income taxes               $(1,148)               $   329                $   539
                                                            =======                =======                =======
</TABLE>

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

<TABLE>
<CAPTION>
         ---------------------------------------------------------------------------------------------------
         Years ended
         (In thousands)                                                March 27, 1999         March 28, 1998
         ---------------------------------------------------------------------------------------------------
<S>                                                                       <C>                    <C>
         Current tax assets, net                                           $ 2,309                $ 2,092
         Noncurrent tax asset (liabilities), net                               169                    (57)
                                                                           -------                -------
         Net deferred taxes                                                $ 2,478                $ 2,035
                                                                           =======                =======

         Future state tax effect                                              (238)                  (138)
         Allowance for doubtful accounts                                       187                    125
         Fixed asset depreciation                                              188                    (57)
         Inventory reserves and additional costs capitalized                 2,797                  1,598
         Deferred revenue                                                       52                     53
         Accrued vacation                                                      251                    153
         Accrued warranty                                                      162                    249
         Other accrued liabilities                                             269                    143
         Net operating loss carryforward                                     6,576                     --
         Unrealized loss (gain) on equity securities                           (18)                     9
         Valuation allowances                                               (7,748)                  (100)
                                                                           -------                -------
                                                                           $ 2,478                $ 2,035
                                                                           =======                =======

         ---------------------------------------------------------------------------------------------------
</TABLE>

                                       18
<PAGE>   13
         Income tax expense (benefit) differs from the amounts computed by
         applying the U.S. federal income tax rate to pre-tax income as a result
         of the following:

<TABLE>
<CAPTION>
         -----------------------------------------------------------------------------------------------------------------------
         Years ended
         (In thousands except percentages)                March 27, 1999             March 28, 1998             March 29, 1997
         -----------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>        <C>             <C>        <C>             <C>
         Statutory federal income tax (benefit)       $(1,022)        34.0%      $   372         34.0%      $   697         34.0%
         Beginning of year change in deferred
             tax asset valuation allowance                 --           --           (85)        (7.8)         (272)       (13.3)
         State income tax, net of federal benefit        (146)         4.9           (87)        (8.0)           67          3.3
         Nontax deductible expenses                        14         (0.4)          210         19.2            64          3.1
         Interest income exempt from federal tax          (19)         0.6           (83)        (7.5)          (23)        (1.1)
         Tax credits                                      (58)         1.9           (24)        (2.2)          (95)        (4.6)
         Goodwill and patent amortization                  84         (2.8)           --           --            --           --
         Other                                             (1)          --            26          2.3           101          4.9
                                                      --------------------       --------------------       --------------------
         Effective income tax (benefit)               $(1,148)        38.2%      $   329         30.0%      $   539         26.3%
                                                      ====================       ====================       ====================
</TABLE>

         The change in valuation allowance from March 28, 1998 to March 27, 1999
         was $7,648,000. The change in valuation allowance from March 29, 1997
         to March 28, 1998 was $272,000. The change from March 30, 1996 to March
         29, 1997 was $453,000.

         The Company has recorded a valuation allowance to reflect the estimated
         amount of deferred tax assets which may not be realized. The ultimate
         realization of deferred tax assets is dependent upon generation of
         future taxable income during the periods in which those temporary
         differences became 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 is more likely than not that the
         Company will realize the benefits of these deductible differences, net
         of valuation allowances as of March 27, 1999.

         From the acquisition of Microsource, the Company acquired approximately
         $7,600,000 of deferred tax assets which were fully offset by a
         valuation allowance. Subsequent recognition of tax benefits relating to
         the valuation allowance for deferred tax assets of Microsource will be
         allocated to goodwill and the remainder will be allocated to income tax
         benefit.

10       STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

         STOCK OPTION PLAN The Company has established a stock option plan which
         provides for the granting of up to 700,000 shares of common stock at
         100% of fair market value at the date of grant, with each grant needing
         approval by the Board of Directors of the Company. Options granted vest
         in one or more installments as set forth in the option agreement and
         must be exercised while the grantee is employed by the Company or
         within a certain period after termination of employment. Options
         granted to employees shall not have terms in excess of 10 years from
         the grant date. During fiscal 1999, the Company offered options holders
         the opportunity to have outstanding options repriced to current fair
         value, with the related vesting period starting over. The Company
         cancelled and reissued (repriced) 405,250 options pursuant to the
         repricing. Holders of options may be granted stock appreciation rights
         (SAR's), which entitle them to surrender outstanding options for a cash
         distribution under certain changes in ownership of the Company, as
         defined in the stock option plan. As of March 27, 1999, no SAR's have
         been granted under the option plan. As of March 27, 1999, the total
         number of shares of common stock available for issuance is 623,500. All
         outstanding options have a term of five years. With the merger of
         Ultracision, the Company also assumed 56,370 options granted under the
         Ultracision option plans. These options vest 100% after two years and
         have a term of five years.

         Following is a summary of stock option activity:

<TABLE>
<CAPTION>
         -------------------------------------------------------------------------------------------------------------------
                                             Per Share Weighted
                                              Average Fair Value       Options                               Weighted Average
                                             of Options Granted      Exercisable              Shares          Exercise Price
         -------------------------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>                  <C>                  <C>
         Outstanding as of March 30, 1996                               48,350               172,932              $4.885
         -------------------------------------------------------------------------------------------------------------------
              Exercised                                                                      (55,550)              4.945
              Forfeited                                                                      (51,750)              4.874
              Granted                              $  3.426                                  253,238               7.628
         -------------------------------------------------------------------------------------------------------------------
         Outstanding as of March 29, 1997                               12,150               318,870               7.058
         -------------------------------------------------------------------------------------------------------------------
              Exercised                                                                         (950)              4.000
              Forfeited                                                                      (16,250)              4.115
              Granted                              $  3.822                                   89,000               7.410
         -------------------------------------------------------------------------------------------------------------------
         Outstanding as of March 28, 1998                              106,682               390,670               7.268
         -------------------------------------------------------------------------------------------------------------------
              Exercised                                                                       (1,400)              2.660
              Forfeited                                                                     (561,456)              6.399
              Granted                              $  2.914                                  807,750               2.818
         -------------------------------------------------------------------------------------------------------------------
         Outstanding as of March 27, 1999                               48,814               635,564              $2.391
         -------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       19

<PAGE>   14
         In accordance with SFAS No. 123, "Accounting for Stock-Based
         Compensation", the Company is required to disclose the effects on net
         earnings and earnings per share as if it had elected to use the fair
         value method to account for employee stock-based compensation plans.
         Had the Company recorded a charge for the fair value of options granted
         consistent with SFAS No. 123, net earnings (loss) and net earnings
         (loss) per share would have changed to the pro-forma amounts shown
         below:


<TABLE>
<CAPTION>
         -------------------------------------------------------------------------------------------------------------
         Years ended
         (In thousands except per share data)              March 27, 1999          March 28, 1998       March 29, 1997
         -------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                       <C>                  <C>
         Net earnings (loss)
              As reported                                  $    (1,858)              $      767           $    1,509
              Pro-forma                                         (2,234)                     404                1,361
         Net earnings (loss) per share - basic
              As reported                                        (0.43)                    0.18                 0.35
              Pro-forma                                          (0.52)                    0.09                 0.32
         Net earnings (loss) per share - diluted
              As reported                                        (0.43)                    0.18                 0.34
              Pro-forma                                          (0.52)                    0.09                 0.31
</TABLE>

         Pro-forma net earnings (loss) reflects only options granted in 1999,
         1998, 1997 and 1996. Therefore, the full impact of calculating
         compensation cost for stock options under SFAS No. 123 is not reflected
         in the pro-forma net income amounts presented above because
         compensation cost is reflected over the options' vesting period of five
         years, and compensation cost for options granted prior to April 1, 1995
         is not considered.

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

<TABLE>
<CAPTION>
         Years ended                                 March 27, 1999         March 28, 1998           March 29, 1997
         ----------------------------------------------------------------------------------------------------------
<S>                                                   <C>                    <C>                     <C>  <C>
         Expected life of options                     4 years                4 years                 3 to 4 years
         Expected life of purchase rights             6 mos                  6 mos                   6 mos
         Volatility                                   60%                    60%                     56%
         Risk-free interest rate                      4.53 to 5.66           5.50 to 6.25            5.11 to 6.60
         Dividend yield                               zero                   zero                    zero
</TABLE>


<TABLE>
<CAPTION>

         Options Outstanding and Exercisable as of March 27, 1999, by Price Range
         ------------------------------------------------------------------------------------------------------------
                                      Number       Weighted Average     Weighted         Number           Weighted
         Range of                  of Options          Remaining        Average        of Options         Average
         Exercise Prices           Outstanding     Contractual Life  Exercise Price    Exercisable     Exercise Price
         ------------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>              <C>               <C>              <C>
         $2.09                        522,250             4.70          $ 2.094               --            $  --
         From $2.12 to $4.00           89,314             3.75            2.686           30,814            2.693
         $7.75                         24,000             1.79            7.750           18,000            7.750
                                      -------          -------          -------          -------          -------
         From $2.09 to $7.75          635,564             4.46          $ 2.391           48,814          $ 4.558
                                      =======          =======          =======          =======          =======
</TABLE>

         EMPLOYEE STOCK PURCHASE PLAN Under the Company's Employee Stock
         Purchase Plan (the Purchase Plan), employees meeting specific
         employment qualifications are eligible to participate and can purchase
         shares semi-annually through payroll deductions at the lower of 85% of
         the fair market value of the stock at the commencement or end of the
         offering period. The Purchase Plan permits eligible employees to
         purchase common stock through payroll deductions for up to 10% of
         qualified compensation. As of March 27, 1999, 86,636 shares remain
         available for issuance under the Purchase Plan. The weighted average
         fair value of the purchase rights granted in 1999 was $2.495.

         401(K) PLAN The Company has established 401(k) plans which cover
         substantially all employees. Participants may make voluntary
         contributions to the plan up to 20% of their defined compensation. The
         Company is required to match a percentage of the participants'
         contributions in accordance with the plan. Participants vest ratably in
         Company contributions over a four-year period. Company contributions to
         the plans for fiscal 1999, 1998, and 1997 were approximately $153,000,
         $151,000, and $148,000, respectively.


                                       20
<PAGE>   15
11       COMMITMENTS

         The Company leases a 47,300 square foot facility located in San Ramon,
         California, under a twelve-year lease (as amended) that commenced in
         April 1994. The Company leased a 12,160 square foot facility located in
         Fremont, California, under an operating lease agreement, which expired
         on January 31, 1999. The Company will continue to rent this facility on
         a month to month basis until the completion of a new facility. The new
         facility will be approximately 18,600 square feet in Fremont,
         California with a lease commencing upon completion of the building and
         expiring five years thereafter. The Company leases a 20,400 square foot
         facility located in Santa Clara, California, under a seven-year lease
         that commenced in July 1995. The Company leases a 35,000 square foot
         facility located in Santa Rosa, California, under a ten-year lease that
         commenced in July 1993. These facilities accommodate all of the
         Company's present operations. The Company also has acquired equipment
         under capital and operating leases. The future minimum lease payments
         for equipment leases and facilities are shown below and assume the new
         facility lease will commence on July 1, 1999:


<TABLE>
<CAPTION>
         ---------------------------------------------------
         Fiscal years
         (In thousands)
         ---------------------------------------------------
<S>                                                   <C>
         2000                                         $1,408
         2001                                          1,595
         2002                                          1,646
         2003                                          1,218
         2004                                            954
         Thereafter                                    1,889
</TABLE>

         The aggregate rental expense was $1,462,000, $959,000, and $937,000, in
         fiscal 1999, 1998, and 1997, respectively.

         As of March 27, 1999, Property and Equipment includes equipment under
         capital lease of $502,000 and related accumulated depreciation of
         $111,000. As of March 28, 1998 and March 29, 1997, equipment under
         capital lease was not significant. The future minimum lease payments
         for capital equipment leases are shown below.


<TABLE>
<CAPTION>
         ------------------------------------------------------------
         Fiscal years
         (In thousands)
         ------------------------------------------------------------
<S>                                                              <C>
         2000                                                    $178
         2001                                                     150
         2002                                                     105
         2003                                                      10
                                                                 ----
         Total                                                    443
         Less interest costs                                      121
                                                                 ----
         Present value of minimum lease payments                  322
         Less current portion                                     112
                                                                 ----
         Long term portion of capital lease obligations          $210
                                                                 ====
</TABLE>


12       LINE OF CREDIT

         The Company signed an agreement with a bank for an unsecured revolving
         line of credit loan for $7,000,000 with interest payable at prime rate
         or at LIBOR plus 1 1/2 percent. This credit line has not been utilized
         by the Company and expires July 31, 1999. The line of credit requires
         the Company be in compliance with certain financial covenants as of
         March 29, 1999. The Company was in violation of one such covenant,
         which such violation has subsequently been waived by the bank.


                                       21
<PAGE>   16

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



The Board of Directors and Shareholders
Giga-tronics Incorporated:

         We have audited the accompanying consolidated balance sheets of
Giga-tronics Incorporated and subsidiaries as of March 27, 1999 and March 28,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for years ended March 27, 1999, March 28, 1998, and March
29, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Giga-tronics
Incorporated and subsidiaries as of March 27, 1999, and March 28, 1998, and the
results of their operations and their cash flows for the years ended March 27,
1999, March 28, 1998, and March 29, 1997, in conformity with generally accepted
accounting principles.



/s/
KPMG LLP


Mountain View, California
May 4, 1999



                                       22
<PAGE>   17

SELECTED  FINANCIAL  DATA


<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS:
------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)           March 27,        March 28,       March 29,       March 30,       March 25,
                                                 1999             1998            1997            1996            1995
<S>                                            <C>              <C>             <C>             <C>             <C>
Net sales                                      $ 37,636         $ 36,813        $ 38,031        $ 40,804        $ 33,980
Gross profit                                     11,534           15,789          14,627          15,916          11,988
Operating expenses                               15,293           15,172          13,096          13,714          13,336
Interest income, net                                121              457             533             221             157
Earnings (loss) before income taxes              (3,006)           1,096           2,048           2,623          (1,170)
Net earnings (loss)                              (1,858)             767           1,509           2,193            (695)
Net earnings (loss) per share - basic          $  (0.43)        $   0.18        $   0.35        $   0.52        $  (0.16)
Net earnings (loss) per share - diluted        $  (0.43)        $   0.18        $   0.34        $   0.51        $  (0.16)
</TABLE>


<TABLE>
<CAPTION>
FINANCIAL POSITION:
------------------------------------------------------------------------------------------------------------------------
(In thousands except ratio)                    March 27,        March 28,       March 29,       March 30,       March 25,
                                                 1999             1998            1997            1996             1995
<S>                                            <C>              <C>             <C>             <C>             <C>
Current ratio                                      3.32             5.06            4.32            3.15            2.75
Working capital                                $ 18,021         $ 23,484        $ 22,692        $ 19,638        $ 16,080
Total assets                                     33,259           32,672          33,618          33,448          30,981
Shareholders' equity                           $ 24,710         $ 26,461        $ 25,654        $ 23,475        $ 21,131
Shares of common stock - basic                    4,338            4,319           4,300           4,232           4,249
Shares of common stock - diluted                  4,338            4,377           4,376           4,297           4,249
</TABLE>


<TABLE>
<CAPTION>
PERCENTAGE DATA:
---------------------------------------------------------------------------------------------------------------------------
                                                March 27,         March 28,       March 29,        March 30,      March 25,
                                                   1999             1998            1997             1996           1995
<S>                                               <C>              <C>             <C>             <C>             <C>
Percent of net sales

       Gross profit                                30.6             42.9            38.5            39.0            35.3
       Operating expenses                          40.6             41.2            34.4            33.6            39.2
       Interest income, net                         0.3              1.2             1.4             0.5             0.5
       Earnings (loss) before income taxes         (8.0)             3.0             5.4             6.4            (3.4)
       Net earnings (loss)                         (4.9)             2.1             4.0             5.4            (2.0)
</TABLE>


                                       23
<PAGE>   18


SELECTED  FINANCIAL  DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)                                              1999
                                                  ------------------------------------------------------------------------
                                                    First          Second          Third          Fourth           Year
                                                  ------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>            <C>             <C>
Net sales                                         $  8,677        $  9,030        $ 11,343       $  8,586        $ 37,636
Gross profit                                         3,313           2,834           3,690          1,697          11,534
Operating expenses                                   3,806           3,950           3,672          3,865          15,293
Interest income, net                                   112               6               2              1             121
Earnings (loss) before income taxes                   (377)         (1,076)             47         (1,600)         (3,006)
Net earnings (loss)                                   (264)           (753)             34           (875)         (1,858)
Net earnings (loss) per share - basic             $  (0.06)       $  (0.17)       $   0.01       $  (0.20)       $  (0.43)
Net earnings (loss) per share - diluted           $  (0.06)       $  (0.17)       $   0.01       $  (0.20)       $  (0.43)
Equivalent shares of common stock - basic            4,326           4,331           4,344          4,350           4,338
Equivalent shares of common stock - diluted          4,326           4,331           4,362          4,350           4,338
</TABLE>


QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data)                                              1998
                                                  ------------------------------------------------------------------------
                                                    First          Second          Third          Fourth           Year
                                                  ------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>            <C>             <C>
Net sales                                         $  9,081        $  9,574        $  9,514       $  8,644        $ 36,813
Gross profit                                         4,177           4,342           3,916          3,354          15,789
Operating expenses                                   3,659           3,913           3,913          3,687          15,172
Interest income, net                                   124              98              97            138             457
Earnings (loss) before income taxes                    664             530             107           (205)          1,096
Net earnings (loss)                                    465             371              72           (141)            767
Net earnings (loss) per share - basic             $   0.11        $   0.09        $   0.02       $  (0.03)       $   0.18
Net earnings (loss) per share - diluted           $   0.11        $   0.08        $   0.02       $  (0.03)       $   0.18
Equivalent shares of common stock - basic            4,316           4,318           4,320          4,322           4,319
Equivalent shares of common stock - diluted          4,359           4,378           4,413          4,322           4,377
</TABLE>


COMMON STOCK MARKET PRICES

The Company's common stock is traded over the counter on NASDAQ/NMS National
Market System using the symbol "GIGA". The number of record holders of the
Company's common stock as of March 28, 1998 exceeded 1,000. The table below
shows the high and low closing bid quotations for the common stock during the
indicated fiscal periods.


<TABLE>
<CAPTION>
                     ---------------------------------------------------------------------------------------------
                          1999             High           Low               1998                High          Low
                     ---------------------------------------------------------------------------------------------
<S>                  <C>                  <C>            <C>             <C>                  <C>           <C>
First quarter         (3/29-6/27)         7              4 3/4           (3/30-6/28)           8 1/2        6 9/16
Second quarter        (6/28-9/26)         5              2 13/32         (6/29-9/27)          10            6 7/8
Third quarter        (9/27-12/28)         3 1/4          2               (9/28-12/27)         11 3/8        7 3/4
Fourth quarter       (12/29-3/27)         3 7/16         2 1/8           (12/28-3/28)          9 3/4        6 1/4
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       24