UNITED STATES

FORM 10-QSB

GIGA-TRONICS INCORPORATED

4650 Norris Canyon Road, San Ramon, CA 94583
(Address of principal executive offices)

Issuer’s telephone number: (925) 328-4650

N/A

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ   No  o

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common stock outstanding as of February 1, 2005: 4,724,896 shares

Transitional Small Business Disclosure Format (Check one) Yes  o   No  þ

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GIGA-TRONICS INCORPORATED

INDEX

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Item 1

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to unaudited condensed consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

   Supplementary disclosure of cash flow information:

(1) Cash paid for income taxes was $4 for the nine month periods ended December 25, 2004 and December 27, 2003.

See accompanying notes to unaudited condensed consolidated financial statements.

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GIGA-TRONICS INCORPORATED

(1)        Basis of Presentation

(2)        Discontinued Operations

(3)        Revenue Recognition

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(4)        Inventories

(5)        Earnings (Loss) Per Share

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(6)        Stock Based Compensation

(7)        Significant Customers and Industry Segment Information

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(8)        Warranty Obligations

(9)        Recent Accounting Pronouncements

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION

The forward-looking statements included in this report including, without limitation, statements containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends” and words of similar import, which reflect management’s best judgment based on factors currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including but not limited to those listed in Giga-tronics’ Annual Report on Form 10-K for the fiscal year ended March 27, 2004 Part I, under the heading “Certain Factors Which May Adversely Affect Future Operations or an Investment in Giga-tronics”, and Part II, under the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.

Overview

The commercial business environment remains challenging; however Giga-tronics is showing improvements in new orders. Inquiries for Giga-tronics’ products were also higher as the Company recently introduced the 2400M Modulation Series microwave synthesizer. New orders in the military sector are showing indications of increased strength, but it is still too early to determine if the commercial wireless telecommunications market has rebounded. Giga-tronics intends to continue research and development in key growth areas in order to expand product lines and update existing lines with features that improve its competitive product offerings.

Cost reductions, including personnel reductions and renegotiated lease terms, are on track and have positioned Giga-tronics to take advantage of any potential opportunities in our market. If new orders should decrease or are canceled, cash may be used faster than currently anticipated. Management would anticipate further cost and expense reductions in this circumstance. While the management at Microsource anticipates that prospects for new orders will improve results for the new fiscal year, its short-term growth will be less than previously anticipated as there continue to be timing delays associated with currently booked orders.

In the first quarter of fiscal 2004, Giga-tronics discontinued the operations at its Dymatix division due to the substantial losses incurred over the last two years. In the third quarter of fiscal 2005, the net loss from discontinued operations was $133,000, compared to a net income of $90,000 for the same period in fiscal 2004. For the first nine months of fiscal 2005, the net loss for discontinued operations was $214,000 as compared to a net loss of $2,392,000 for the same period a year ago. With the sale of Dymatix that occurred in the fourth quarter of fiscal 2004, Giga-tronics will be able to focus on its core business in order to release new products to market more quickly.

Results of Operations

New orders received from continuing operations in the third quarter of fiscal 2005 decreased 22% to $4,032,000 from the $5,151,000 received in the third quarter of fiscal 2004.

Improvement in the military and government business at the Instrument Division helped to increase new orders in the third quarter of FY 2005. Orders at ASCOR increased in the third quarter primarily due to an increase in commercial demand for their products. Orders at Microsource decreased for the third quarter primarily due to a

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defense contractor order for $2,200,000 recorded during the prior year’s third quarter where no corresponding or similar order was recorded during the current fiscal quarter. Orders at Microsource for the nine months decreased primarily due to the renegotiation of a long term contract with an existing customer as discussed below, whereby Microsource, during the second quarter, reversed its recorded backlog for deliveries beyond 12 months by $4,854,000 and the inability to repeat the $2,200,000 defense contractor order from the prior year’s period; the decrease was offset in part by an increase in commercial orders.

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

Backlog at the end of the third quarter 2005 has declined as compared to the end of the same period last year. This decline is a result of the following reversal offset by commercial orders received during the quarter. During July 2004, Microsource renegotiated a long-term contract with an existing customer. As a result, during the second fiscal quarter, the customer’s firm purchase commitment quantities were significantly reduced and management reversed its recorded backlog for deliveries beyond 12 months by approximately $4,854,000.

Fiscal 2005 third quarter net sales from continuing operations were $5,130,000, a 34% increase from the $3,822,000 in the third quarter of 2004. The increase in sales was primarily due to higher order levels at the Instrument Division due to the improvement in the commercial wireless market and commercial business at ASCOR offset with weakness in the military sector and customer extension of delivery dates at Microsource. For the nine months ended December 25, 2004 sales improved 14% to $16,209,000 from the $14,196,000 for the same period in the prior year. The increase in sales was primarily due to higher order levels at the Instrument Division due to the strength in the commercial market as well as the military and government market coupled with limited improvement in the commercial market at ASCOR partially offset by weakness in the military sector and customer extension of delivery dates at Microsource.

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Operating expenses from continuing operations (which do not include cost of sales) increased 2% or $40,000 in the third quarter of fiscal 2005 over 2004 due to increases of $189,000 in selling, general and administrative expenses offset by a decrease in product development expenses. Product development costs from continuing operations decreased 16% or $149,000 in the fiscal 2005 third quarter primarily due to a reduction in personnel and consulting costs and a more streamlined product development focus. Selling, general and administrative expenses from continuing operations increased 16% or $189,000 for the third quarter of fiscal year 2005 compared to the same period in the prior year. The increase is a result of $46,000 more in marketing and administrative expenses along with a higher commission expense of $143,000 on higher commissionable sales for the quarter.

Operating expenses from continuing operations (which do not include cost of sales) decreased 6% or $440,000 for the nine months ended December 25, 2004 over the same period of the prior year due to decreases of $91,000 in selling, general and administrative and $349,000 in product development expenses. Product development costs from continuing operations decreased 12% or $349,000 for the nine months ended December 25, 2004 primarily due to a reduction in personnel and consulting costs and a more streamlined product development focus. Selling, general and administrative expenses from continuing operations decreased 2% or $91,000 for the nine months ended December 25, 2004 as compared to the same period in the prior year. The decrease is a result of $226,000 less in marketing and administrative expenses offset by higher commission expense of $135,000. These expense reductions were primarily personnel reductions and rent reductions due to renegotiated lease terms.

Net income from continuing operations for the three and nine month periods ended December 25, 2004 was $161,000 and $623,000, respectively. The net loss from continuing operations for the three and nine month periods ended December 27, 2003 was $1,084,000 and $2,717,000, respectively. Giga-tronics recorded a net profit of $28,000 or $0.01 per fully diluted share for the third quarter of fiscal year 2005 versus a net loss of $994,000 or $0.21 per fully diluted share in the same period last year. Giga-tronics recorded a net profit of $409,000 or $0.09 per fully diluted share for the nine month period ended December 25, 2004 versus a net loss of $5,109,000 or $1.09 per fully diluted share for the nine month period ended December 27, 2003.

Loss from discontinued operations for the nine month period ended December 25, 2004 and December 27, 2003 totaled $214,000 and $2,392,000. The Company discontinued and subsequently sold its Dymatix division in the fourth quarter of 2004. The loss recorded for the nine month period ended December 25, 2004 reflects changes in estimated expense related to the discontinuation of the Dymatix division and a reserve for impairment established by management as discussed in Footnote 2 the Interim Consolidated Financial Statement – Discontinued Operations.

Financial Condition and Liquidity

As of December 25, 2004, Giga-tronics had $2,685,000 in cash and cash equivalents, compared to $2,752,000 as of March 27, 2004.

Working capital at the end of the third quarter of fiscal 2005 was $9,054,000 compared to $9,358,000 at the end of the same period last year. The decrease in working capital at the end of the third quarter of 2005 versus 2004 was primarily due to decreases in cash partially offset by a decrease in accrued warranty.

The Company’s current ratio (current assets divided by current liabilities) at December 25, 2004 was 3.5 compared to 3.4 on December 27, 2003.

Cash provided by operations amounted to $33,000 for the nine month period ended December 25, 2004. Cash used by operations was $1,064,000 in the same period of fiscal 2004. Cash provided by operations for the first nine months of fiscal 2005 is primarily attributed to the operating profit in the quarter offset by net change in operating assets and liabilities. Cash used by operations in the nine month period ended December 27, 2003 was primarily attributed to the operating loss in the year offset by a decrease in inventory.

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Based on current operations, management believes that cash and cash equivalents remain adequate to meet anticipated operating needs for the next two years. However, this estimate is based on projections that may or may not be realized, and therefore actual cash usage could be greater than projected. To operate beyond that term would require the Company to earn additional cash from operations, maintain a line of credit or obtain additional funds from other sources. On June 1, 2004, the Company obtained a secured revolving line of credit for $2,500,000, with interest payable at prime rate plus 1 1/2%. Borrowing under this line of credit is based on the Company’s accounts receivable and inventory and is secured by all of the assets of the Company. The Company had no borrowing under this line of credit during the three and nine month periods ended December 25, 2004.

Additions to property and equipment were $38,000 for the nine month period ended December 25, 2004 compared to $50,000 for the same period last year. The low level of capital equipment spending reflects the overall decline in business activity and increased productivity.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement Number 123 (revised 2004) (“FAS 123 (R)”), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of shared-based payments such as stock options granted to employees. The Company is required to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in the pro forma disclosures that had been required by FAS 123. FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. Management has not completed its evaluation of the effect that FAS 123 (R) will have but believes that the effect will be consistent with the application disclosed in its pro forma disclosures.

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this section of the report, including statements regarding sales under “OVERVIEW” and statements under “FINANCIAL CONDITION AND LIQUIDITY”, are forward-looking. While Giga-tronics believes that these statements are accurate, Giga-tronics’ business is dependent upon general economic conditions and various conditions specific to the test and measurement, wireless and semiconductor industries. Future trends and these factors could cause actual results to differ materially from the forward-looking statements that we have made. In particular:

Giga-tronics’ core business is test and measurement, as well as components for the wireless communications market, which continues to be soft. The Company’s commercial product backlog has a number of risks and uncertainties such as the cancellation or deferral of orders, dispute over performance, the ability to satisfy requirements related to the Sarbanes-Oxley Act and other regulation on internal control, civil disturbances or terrorist threats or acts, or apprehension about the possible future occurrences of acts of this type, the involvement of the United Sates in war or other hostilities, restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends, the ability to collect receivables, and other risks and unforeseen events. If the commercial market should decline further, then shipments in the current year could fall short of plan resulting in a decline in earnings. Also, Giga-tronics has a significant number of defense-related orders. While Giga-tronics has seen some improvement in the defense sector, it is not significant enough to offset the decline in the commercial sector. If the defense market should decline, shipments in the current year could be less than anticipated and cause a decrease in earnings.

The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards. Giga-tronics believes that its future success will depend, in part, upon its ability to develop and commercialize its existing products, develop new products and applications and in part to develop, manufacture and successfully introduce new products and product lines with improved capabilities and continue enhancing existing products. There can be no assurance that Giga-tronics will successfully complete the development of current or future products or that such products will achieve market acceptance. Giga-tronics may also experience difficulty obtaining critical parts or components required in the manufacturing of our products, resulting in an inability to fulfill orders in a timely manner, which may have a negative impact on earnings. Also, the Company may not timely ramp manufacturing capacity to meet order demand and quickly adapt cost structures to changing market conditions.

As part of its business strategy, Giga-tronics has in the past broadened its product lines and expanded its markets, in part through the acquisition of other business entities, and it may do so in the future. The Company acquired Microsource, Inc. in fiscal 1999 in a transaction accounted for as a purchase. The Company is subject to various risks in connection with past 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 Giga-tronics 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. Giga-tronics 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.

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Item 3

Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures provide reasonable assurances that the information the Company is required to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period required by the Commission’s rules and forms. There was no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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Part II — OTHER INFORMATION

Item 1

Legal Proceedings

As of February 1, 2005, Giga-tronics has no material pending legal proceedings. From time to time, Giga-tronics is involved in various disputes and litigation matters that arise in the ordinary course of business.

Item 6

Exhibits

          Exhibits

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

E-1