Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE E -– COMPREHENSIVE INCOME

For the ~~nine~~three months ended ~~January~~July 31, 2008 and 2007, total comprehensive (loss) income was ~~$4,128,000~~($780,000) and ~~$1,296,000,~~$2,013,000, respectively. Comprehensive income or loss is composed of net income or loss for the period plus the impact of foreign currency translation adjustments and the change in the valuation allowance on marketable securities.

NOTE F ~~- EQUITY-BASED COMPENSATION~~

Effective May 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“FAS 123(R)”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost of $407,000 and $438,000 was recognized during the nine months ended January 31, 2008 and 2007, respectively, and $137,000 and $162,000, respectively, was recognized during the three month periods then ended. Such amounts include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to May 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).

Upon adoption of FAS 123(R), the Company elected to continue to value its share-based payment transactions using the Black-Scholes valuation model, which was previously used by the Company for purposes of preparing the pro forma disclosures under FAS 123. Such value is recognized as expense on a straight-line basis over the service period of the awards, which is generally the vesting period, net of estimated forfeitures. This is the same attribution method that was used by the Company for purposes of its pro forma disclosures under FAS 123.

At January 31, 2008, unrecognized compensation cost for all the Company’s stock-based compensation awards was approximately $1.3 million. The unrecognized compensation cost for stock-based compensation awards at January 31, 2008 is expected to be recognized over a weighted average period of 3.0 years.

In accordance with the provisions of the Securities and Exchange Commission’s (the “SEC”) Staff Accounting Bulletin No. 107 (“SAB 107”), which requires that compensation be classified in the same expense line items as cash compensation, during the nine months ended January 31, 2008 and 2007, stock-based compensation expense included in cost of sales was $236,000 and $226,000, respectively and the amount charged to selling, general and administrative expense was $171,000 and $212,000, respectively. During the three months ended January 31, 2008 and 2007, stock-based compensation expense included in cost of sales was $82,000 and $87,000, respectively, and the amount charged to selling, general and administrative expense was $55,000 and $75,000, respectively.

The weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in the nine months ended January 31, 2008 and 2007: dividend yield of 1.6% and 1.4%, respectively; expected volatility of 38% and 59%, respectively; risk free interest rate of 4.3% and 5.0%, respectively, and expected lives of six and one-half years.

The expected life assumption was determined based on the Company’s historical experience. The expected volatility assumption was based on the historical volatility of the Company’s common stock. The dividend yield assumption was determined based upon the Company’s past history of dividend payments and its intention to make future dividend payments at the time of grant. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options.

~~Employee Stock Option Plans~~

The Company has various stock option plans for key management employees, including officers and directors who are employees. The plans include Nonqualified Stock Option (“NQSO”) plans, Incentive Stock Option ("ISO”) plans, and Stock Appreciation Rights (“SARs”). Under these plans, options and awards are granted at the discretion of the Stock Option committee at an exercise price not less than the fair market value of the Company's common stock on the date of grant. Under one NQSO plan the options are exercisable one year after the date of grant. Under the remaining plans the options/awards are exercisable over a four-year period beginning one year after the date of grant. The options/awards expire ten years after the date of grant and are subject to certain restrictions on transferability of the shares obtained on exercise. As of January 31, 2008, eligible employees had been granted awards to purchase approximately 350,000 shares of Company stock under SARs, all of which are outstanding and approximately 43,000 shares of which are exercisable. As of January 31, 2008, eligible employees had been granted options to purchase 1,182,500 shares of Company stock under ISO plans of which approximately 389,000 options are outstanding and approximately 354,000 of which are exercisable. Through January 31, 2008, eligible employees have been granted options to acquire 1,090,000 shares of Company stock under NQSO plans. Of the NQSO options, approximately 640,000 are both outstanding and exercisable (see tables below).

~~Page 8~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

The excess of the consideration received over the par value of the common stock or cost of treasury stock issued under both types of option plans has been recognized as an increase in additional paid-in capital prior to the adoption of FAS 123(R). Unrecognized compensation charges for nonvested awards relating to the SARs grant is approximately $1,096,000 which will be recognized during a weighted average period of 3.1 years. Unrecognized compensation charges for nonvested awards relating to the ISO plan is approximately $168,000, which will be recognized over a weighted average period of 1.2 years.

Although the Company continues to maintain a stock repurchase program, no stock repurchases will be necessary to process stock exercises during the fiscal year. Shares issued to individuals as a result of stock exercises will be taken from available treasury stock.

~~Transactions under these stock award plans, including the weighted average exercise prices of the options, are as follows~~:

Nine months ended January 31, 2008
Weighted Wtd Avg Aggregate
Average Remaining Intrinsic
Shares Ex. Price Term (yrs) Value
Outstanding at beginning of period 1,265,587 $ 11.53 4.4 $ 4,510,000
Granted 177,875 $ 10.14
Exercised (18,312 ) $ 8.60
Expired or canceled (46,375 ) $ 10.23
Outstanding at end of period 1,378,775 $ 11.43 4.6 $ 3,203,000
Exercisable at end of period 1,037,650 $ 11.55 3.1 $ 3,203,000
Available for grant at end of period 49,625
Weighted average fair value of options granted during the period
$
3.89

The aggregate intrinsic value in the table above represents the total pretax intrinsic value for in-the-money options, based on the $9.00 closing stock price of the Company’s common stock on the NASDAQ Global Market at January 31, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. As of January 31, 2008, the total number of in-the-money options outstanding was 355,900, all of which were exercisable.

~~NOTE G -~~– SEGMENT INFORMATION

The Company operates under three reportable segments:

(1)

FEI-NY -– consists principally of precision time and frequency control products used in three principal markets: communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations and other components and systems for the U.S. military.

(2)

Gillam-FEI - the Company’s Belgian subsidiary primarily sells wireline synchronization and network ~~monitoring~~management systems.

(3)

FEI-Zyfer - the products of the Company’s subsidiary incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications.

The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiary, FEI-Asia, which functions primarily as a manufacturing facility for the FEI-NY segment.

The Company’s Chief Executive Officer measures segment performance based on total revenues and profits generated by each geographic center rather than on the specific types of customers or end-users or types of markets served.

~~Page 9~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

The table below presents information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the statement of operations or the balance sheet for each of the periods (in thousands):

	Nine months						Three months
	Periods ended January 31,												Three months ended July 31,
	2008			2007			2008			2007			2008			2007
Net sales:
FEI-NY	$	37,175		$	28,449		$	11,803		$	8,244		$	8,844		$	11,765
Gillam-FEI		8,058			7,470			3,308			3,019			2,619			2,288
FEI-Zyfer		6,733			6,155			2,442			1,417			2,303			2,022
less intersegment sales		(1,861	)		(1,323	)		(498	)		(563	)
Consolidated sales	$	50,105		$	40,751		$	17,055		$	12,117

Operating profit (loss):
less intercompany sales														(703	)		(518	)
Consolidated Sales													$	13,063		$	15,557
Operating (loss) profit:
FEI-NY	$	471		$	(1,063	)	$	517		$	(1,511	)	$	(1,228	)	$	(540	)
Gillam-FEI		(109	)		344			78			182			(55	)		(143	)
FEI-Zyfer		410			53			317			(318	)		74			3
Corporate		(383	)		(336	)		(107	)		(65	)		(81	)		(112	)
Consolidated operating profit (loss)	$	389		$	(1,002	)	$	805		$	(1,712	)
Consolidated Operating (Loss) Profit													$	(1,290	)	$	(792	)

	July 31, 2008			April 30, 2008
Identifiable assets:
FEI-NY	$	55,167		$	54,522
Gillam-FEI		19,309			18,611
FEI-Zyfer		6,544			6,538
less intercompany balances		(17,539	)		(17,786	)
Corporate		33,973			35,035
Consolidated Identifiable Assets	$	97,454		$	96,920

7 of 17

NOTE G – RELATED PARTY TRANSACTIONS

January 31, 2008 April 30, 2007
Identifiable assets:
FEI-NY $ 56,246 $ 49,868
Gillam-FEI 15,474 13,750
FEI-Zyfer 7,533 5,366
less intercompany balances (15,654 ) (11,773 )
Corporate 33,569 36,615
Consolidated identifiable assets $ 97,168 $ 93,826
Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the three month periods ended July 31, 2008 and 2007, the Company acquired technical services from Elcom Technologies, Inc. (“Elcom”) in the amount of approximately $75,000 and $259,000, respectively, and purchased product from Morion Inc. in the amount of approximately $212,000 and $79,000, respectively. The Company also recorded interest income on Elcom’s convertible note in the amount of approximately $19,000 and $31,000 in the first quarters of fiscal years 2009 and 2008, respectively. Subsequent to July 31, 2008, the Company acquired from Elcom 29,651 shares of its outstanding common stock at an aggregate cost of approximately $150,000. The amount paid was at the market value of the Company’s common stock on the date of purchase.

NOTE H – SUBSEQUENT EVENTS

On September 11, 2008, the Company announced that it had acquired 615,000 shares of its outstanding common stock in a block transaction with what had been its largest institutional shareholder. Coupled with other purchases of common stock subsequent to July 31, 2008, the Company acquired a total of 659,651 shares at an aggregate average price per share of $4.34. With these purchases, the Company has acquired approximately $4 million of its common stock out of the total authorization of $5 million.

NOTE I - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes recognition thresholds and measurement attributes for tax positions taken in a tax return. FIN 48 is effective for the Company beginning in fiscal year 2008. The adoption of the provisions of FIN 48 has not had a material impact on the Company’s financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value ~~Measurements”~~Measurements.” (“FAS 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. FAS 157 does not require any new fair value measurements but simplifies and codifies related guidance. The Company ~~will comply with the provisions of~~adopted FAS 157 ~~when it becomes effective~~ in fiscal year 2009. Such adoption isdid not ~~expected to~~ have a material impact on the Company’s financial ~~statements since the Company utilizes fair value measures wherever required by current GAAP.~~statements.

The SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) in September 2006. SAB 108 expresses the views of the SEC staff regarding the process of quantifying the materiality of financial misstatements. SAB 108 requires both the balance sheet (iron curtain) and income statement (rollover) approaches be used when quantifying the materiality of misstatement amounts. In addition, SAB 108 contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. SAB 108 is now effective for the Company and, for the fiscal year ended April 30, 2007, there was no impact on the Company’s consolidated financial statements from application of this bulletin.

~~Page 10~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS No. 115” (“FAS 159”). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. The ~~Company is currently evaluating the potential impact~~adoption of FAS 159 in fiscal year 2009 had no impact on ~~its~~the Company’s financial ~~position and results of operations.~~statements since the Company elected not to measure any financial assets or liabilities at fair value other than those for which previous pronouncements required it to do so.

In December 2007, the FASB issued Statements No. 141(R), “Business Combinations”, and No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” Effective for fiscal years beginning after December 15, 2008, these statements revise and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The adoption of these statements will change the Company’s accounting treatment for business combinations on a prospective basis.

In March 2008, the FASB issued Statement No.161, Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of FAS 161 on its consolidated financial statements although it does not anticipate that the statement will have a material impact since the Company has not historically engaged in hedging activities or acquired derivative instruments.

8 of 17

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“FAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.” FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. FAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement is not expected to change the Company’s current accounting practice.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing a renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets (“FAS 142”). FSP FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141 (R) and other U.S. generally accepted accounting principles. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. The Company will be assessing the potential effect of FSP FAS 142-3 if applicable, once we enter into a business combination

On December 21, 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110”) to permit entities, under certain circumstances to continue to use the "simplified" method, in developing estimates of expected term of "plain-vanilla" share options in accordance with Statement No. 123R Share-Based Payment. SAB 110 amended SAB 107 to permit the use of the "simplified" method beyond December 31, 2007. The Company believes that the adoption of SAB 110 will not have a material impact on ~~the Company’s~~its consolidated financial statements.

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe ~~Harbor~~”Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute "forward-looking" statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this report.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s April 30, ~~2007~~2008 Annual Report to Stockholders. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation of inventory. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the realizable value of its inventory or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.

9 of 17

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Revenue Recognition

Revenues under ~~larger,~~ long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the percentage of completion method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract ~~costs.~~costs through a process of aggregating actual costs incurred and updating estimated costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin percentage for a contract is reflected in revenues in the period in which the change is known. Provisions for anticipated losses on contracts are made in the period in which they become determinable.

On production-type contracts, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final ~~contract~~program costs. Changes in job performance may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on contracts are made in the period in which they become determinable.

For customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments ~~smaller~~or nonlong-term contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to ~~contractual terms.~~terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

~~Page 11~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

Costs and Expenses

Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.

Inventory

~~In accordance with industry practice, inventoried~~Inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory reserves are established for slow-moving and obsolete items and are based upon management’s experience and expectations for future business. Any changes in reserves ~~arising from revised expectations~~ are reflected in cost of sales in the period the revision is made.

~~Stock-based Compensation~~

Effective May 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“FAS 123(R)”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost of $407,000 and $438,000 was recognized during the nine months ended January 31, 2008 and 2007, respectively, and $137,000 and $162,000, respectively, was recognized during the three month periods then ended. Such costs include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to May 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).

RESULTS OF OPERATIONS

The table below sets forth for the respective periods of fiscal years ~~2008~~2009 and ~~2007~~2008 the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:

	Nine months						Three months
	Periods ended January 31,												Three months ended July 31,
	2008			2007			2008			2007			2008			2007
Net Sales
FEI-NY		74.2	%		69.8	%		69.2	%		68.0	%		67.7	%		75.6	%
Gillam-FEI		16.1			18.3			19.4			24.9			20.0			14.7
FEI-Zyfer		13.4			15.1			14.3			11.7			17.6			13.0
Less intersegment sales		(3.7	)		(3.2	)		(2.9	)		(4.6	)
Less Intersegment Sales														(5.3	)		(3.3	)
		100.0			100.0			100.0			100.0			100.0			100.0
Cost of Sales		69.3			65.7			68.0			68.8			75.6			71.3
Gross Margin		30.7			34.3			32.0			31.2			24.4			28.7
Selling and administrative expenses		18.9			20.5			18.3			23.8			23.9			19.8
Research and development expenses		11.0			16.3			9.0			21.5			10.4			14.0
Operating Profit (Loss)		0.8			(2.5	)		4.7			(14.1	)
Operating Loss														(9.9	)		(5.1	)
Other income, net		8.0			3.8			3.4			5.4			1.5			19.5
Pretax Income (Loss)		8.8			1.3			8.1			(8.7	)
Provision (benefit) for income taxes		3.7			0.5			3.7			(2.5	)
Net Income (Loss)		5.1	%		0.8	%		4.4	%		(6.2	)%
Pretax (Loss) Income														(8.4	)		14.4
(Benefit) Provision for income taxes														(2.5	)		5.5
Net (Loss) Income														(5.9	)%		8.9	%

~~Page 12~~10 of 17

(Note: All dollar amounts in ~~the~~ following tables are in thousands, except Net Sales which are in millions)

Net sales

Net sales	(dollar amounts in millions)
	Nine months											Three months										(in millions)
	Periods ended January 31,																					Three months ended July 31,
Segment	2008			2007			Change					2008			2007			Change
																						2008			2007			Change
FEI-NY	$	37.2		$	28.4		$	8.8		31	%	$	11.8		$	8.2		$	3.6	43	%	$	8.9		$	11.8		$	(2.9	)	(25	)%
Gillam-FEI		8.1			7.5			0.6		8	%		3.3			3.0			0.3	10	%		2.6			2.3			0.3		14	%
FEI-Zyfer		6.7			6.2			0.5		9	%		2.4			1.4			1.0	72	%		2.3			2.0			0.3		14	%
Intersegment sales		(1.9	)		(1.3	)		(0.6	)				(0.5	)		(0.5	)		0.0				(0.7	)		(0.5	)		(0.2	)
	$	50.1		$	40.8		$	9.3		23	%	$	17.0		$	12.1		$	4.9	41	%	$	13.1		$	15.6		$	(2.5	)	(16	)%

~~As illustrated in the table above, the 23% and 41% increases~~The decrease in revenues for the ~~nine and~~ three month ~~periods~~period ended January 31, 2008, respectively, compared to the same periods of fiscal year 2007, were driven by the improvement in revenues in the FEI-NY segment by 31% and 43%, respectively. Revenues from space programs increased by greater than 50% over the revenue rate realized in the prior fiscal year. Similarly, revenues from U.S. Government/Department of Defense (“DOD”) non-satellite sales, which are recorded in both the FEI-NY and FEI-Zyfer segments, were more than 25% higher than the revenue rate realized in the prior year and sales to telecommunication infrastructure equipment manufacturers for the nine months were approximately the same as the record revenue rate recorded in fiscal year 2008. Revenues in the Gillam-FEI segment improved 8% and 10%, respectively, from the same periods of fiscal year 2007 due primarily to the rise in the value of the euro to the dollar. Euro-denominated sales were relatively flat year-to-year. The Company anticipates that fourth quarter fiscal year 2008 revenues for Gillam-FEI will increase in terms of both dollars and euros. Revenues for the FEI-Zyfer segment increased by 9% and 72%, respectively, for the nine and three months ended JanuaryJuly 31, 2008 compared to the same ~~periods~~period of fiscal year ~~2007. The Company expects FEI-Zyfer~~2008, was primarily the result of lower revenues ~~for~~from satellite payload programs recorded in the FEI-NY segment. Satellite revenues were reduced as a consequence of higher than anticipated levels of engineering and manufacturing costs which were incurred in the fourth quarter of fiscal year 2008 ~~to be comparable to prior quarters~~ and ~~full year revenues to exceed that realized in~~carried over into the fiscal year ~~2007. The~~2009 quarter. These additional costs reduced the expected gross margins of these programs on which revenue is recognized on the percentage of completion basis. Sequentially, satellite payload revenues increased from the levels reported during the fourth quarter of fiscal year 2008. Revenues from telecommunication customers which are recorded in each of the Company’s operating segments and revenues from non-space U.S. Government customers which are recorded in the FEI-NY and FEI-Zyfer segments, were essentially flat year over year. During fiscal year 2009, the Company expects revenues from both U.S. Government and commercial satellite programs to ~~show continued strength~~increase from current levels as a result of recent contract awards and expectations for additional contract awards during this fiscal year. Telecommunication infrastructure revenues and sales to non-space U.S. Government programs are also expected to increase over the balance of the fiscal year.

Gross margin

	Three months ended July 31,
		2008			2007			Change
	$	3,191		$	4,471		$	(1,280	)	(29	)%
GM Rate		24.4	%		28.7	%

The 29% decrease in gross margin for the ~~final quarter~~three months ended July 31, 2008, is due to lower revenues and higher levels of engineering and manufacturing costs on certain satellite payload programs that the Company began to experience in late fiscal year ~~2008 and should comprise approximately 40%~~2008. The current quarter’s gross margin rate of ~~total revenues for~~24.4% reflects a sequential improvement from the fiscal year. Historically, revenues from telecommunication infrastructure sales are subject to wide swings over short-term intervals. Certain of the Company’s infrastructure customers indicate that near term requirements have decreased substantially. The Company thus expects telecommunications revenues for16% rate recorded in the fourth quarter of fiscal year 2008 ~~to decline from current levels. Telecommunication revenues~~which was also impacted by a high level of engineering and manufacturing costs on the same satellite payload programs. As the level of engineering effort decreases and these satellite programs are ~~expected to be between 30% and 35% of consolidated revenues for~~completed during fiscal year ~~2008.~~

~~(dollar amounts in thousands)~~

Gross margin

Nine months Three months
Periods ended January 31,
2008 2007 Change 2008 2007 Change
$ 15,395 $ 13,970 $ 1,425 10 % $ 5,455 $ 3,777 $ 1,678 44 %
GM Rate 30.7 % 34.3 % 32.0 % 31.2 %

~~Gross margin rates for~~2009, the nine months ended January 31, 2008, were lower than those realized during the same period of fiscal year 2007 primarily reflecting the higher engineering costs incurred on certain of the Company’s long-term satellite contracts. A higher level of spending on engineering costs began in the third quarter of fiscal year 2007 and is reflected in the 31.2% rate above. For the three-months ended January 31, 2008, theCompany anticipates that its gross margin rate improved to 32% but continued to be impacted by higher costs. While the rate of engineering spending during fiscal year 2008 has abated from the levels incurred in fiscal year 2007, the current level is still higher than historical averages. As the Company completes the lower margin programs on which these costs are applied, the gross margin rate is expected to improve over the balance of fiscal year 2008. As revenues increase and engineering costs return to more normal levels, the Company expects the gross margin rate to approach its target of 40%.

Also, for the nine months ended January 31, 2008 and 2007, gross margin was reduced by $236,000 and $226,000, respectively, and for the three months ended January 31, 2008 and 2007, was reduced by $82,000 and $87,000, respectively, due to the inclusion in cost of sales of the charge for stock compensation expense as required by FAS 123(R).

~~Page 13~~

~~(Continued)~~will significantly improve.

Selling and administrative expenses

Nine months								Three months
Periods ended January 31,
Three months ended July 31,																Three months ended July 31,
2008	2008	2007		Change				2008		2007		Change				2008	2007		Change
$	9,480	$	8,344	$	1,136	14	%	$	3,109	$	2,889	$	220	8	%	3,116	$	3,086	$	30	1	%

For the ~~nine and~~ three months ended ~~January~~July 31, 2008 and 2007, selling and administrative expenses were ~~19%~~23.9% and 19.8%, respectively, of ~~revenues which is the~~consolidated revenues. The Company’s target for such ~~expenses. The increases in~~ expenses inis not to exceed 20% of revenues. In the fiscal year ~~2008 periods were~~2009 period, this ratio was not achieved due to a lower level of sales and increases in professional fees, marketing expenses, and the operating expenses at Gillam-FEI resulting primarily ~~related~~from the impact of the declining value of the US dollar compared to ~~compensation, including additional personnel, normal salary increases and accruals for incentive compensation, partially offset by reduced accruals for deferred compensation costs.~~the Euro. In ~~addition, during the second quarter~~subsequent quarters of fiscal year ~~2008, FEI-Zyfer moved to a new facility which increased administrative costs at that segment.~~

Included in selling and administrative expenses for the nine months ended January 31, 2008 and 2007, is $171,000 and $212,000, respectively, and for the three month periods ended January 31, 2008 and 2007, $55,000 and $75,000, respectively, related to stock compensation expense as described above and in the footnotes to the financial statements.

~~With fiscal year 2008 revenues at current or increasing levels,~~2009, the Company expects selling and administrative expenses to ~~remain~~be incurred at 20% or less of revenues both by controlling costs as well as increasing revenues.

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Research and development expenditures represent investments that keep the Company’s products at the leading edge of time and frequency technology and enhance competitiveness for future sales. AnIn the period ended July 31, 2007, the Company incurred exceptional ~~level~~levels of engineering spending and development work on ~~the Company’s~~its satellite payload ~~products began in the second quarter of~~products. This effort abated throughout fiscal year ~~2007~~2008. Research and ~~continued through~~development spending for the ~~first~~ quarter ended July 31, 2008, was 10.4% of revenues compared to 14% of revenues for the same period of fiscal year 2008. ~~As of the second quarter of fiscal year 2008, the initial effort to increase production throughput has been largely achieved and~~The Company targets research and development spending ~~has returned~~at approximately 10% of sales, but the rate of spending can increase or decrease from quarter to ~~a more normal level. For the~~ quarter ~~ended January 31, 2008, spending on research~~as new projects are identified and ~~development was 9% of revenues which is within the Company’s normal target range.~~others are concluded. The Company will continue to devote significant resources to develop new products, enhance existing products and implement efficient manufacturing processes. ~~Where possible,~~In fiscal 2009, many of the Company ~~attempts~~development resources will be applied to ~~obtain~~certain cost-plus-fee satellite payload programs. As a consequence, some of the Company’s development ~~contracts from its customers. For programs without such funding, internally~~expenditures will be customer-funded thus reducing the level of internal research and development spending. Internally generated cash and cash reserves are adequate to fund these development efforts.

Research and development expense

Nine months Three months
Periods ended January 31,
2008 2007 Change 2008 2007 Change
$ 5,526 $ 6,628 ($ 1,102 ) (17) % $ 1,541 $ 2,600 ($1,059 ) (41) %

Three months ended July 31,
2008		2007		Change
$	1,365	$	2,177	$	(812	)	(37	)%

Operating ~~Profit (Loss)~~ Loss

Nine months								Three months
Periods ended January 31,
Three months ended July 31,																Three months ended July 31,
2008	2008	2007			Change			2008		2007			Change			2008		2007			Change
$	389	$	(1,002	)	$	1,391	NM	$	805	$	(1,712	)	$	2,517	NM	(1,290	)	$	(792	)	$	(498	)	(63	)%

~~Reduced~~Lower revenues and the continuing level of engineering ~~costs on~~and manufacturing effort related to satellite payload programs ~~and lower research and development spending during~~resulted in an operating loss for the ~~nine and~~ three ~~month periods~~months ended ~~January~~July 31, 2008, ~~resulted in significantly improved operating margins.~~compared to the same period of fiscal year 2008. Sequentially, the operating ~~profit~~loss was reduced by $2.0 million from that realized in the ~~third~~fourth quarter of fiscal year 2008, ~~was more than twice the operating profit~~on a lower level of ~~the second quarter, continuing the positive trend of increasing profits over the preceding three fiscal quarters.~~sales. The Company anticipates that as the gross margin rate improves and as sales ~~are maintained at or~~ increase ~~above~~from current levels, ~~and as engineering and development costs are lowered from previous elevated levels,~~that it will generate an operating profit for the full fiscal year ~~2008.~~

~~Page 14~~

During the ~~nine~~three months ended ~~January~~July 31, ~~2008,~~2007, the Company reduced its investment in Morion, Inc. ~~(“Morion”)~~ from 36.6% to 8% by selling ~~its~~ shares to a ~~third party.~~Russian government majority-owned bank. The Company received proceeds of approximately $5.8 million and realized a book gain of approximately $3.0 million. Such gain ~~was~~is included in investment income for the first quarter of fiscal year 2008. ~~During~~Comparable gains were not recorded during the ~~third~~first quarter of fiscal year 2008, the Company recognized net loss on marketable securities of approximately $5,000 compared to a loss of $56,000 during the same period of the prior fiscal year. In addition to these gains and losses, additional2009.

~~(Continued)~~2009.

Other income (expense)

	Nine months											Three months
	Periods ended January 31,																						Three months ended July 31,
	2008			2007			Change					2008			2007			Change					2008			2007			Change
Investment income	$	3,965		$	785		$	3,180		405	%	$	202		$	206		$	(4	)	(2	%)	$	158		$	3,243		$	(3,085	)	(95	)%
Equity (loss) income		(17	)		566			(583	)	(103	%)		128			292			(164	)	(56	%)		37			(80	)		117		NM
Interest expense		(402	)		(74	)		(328	)	443	%		(110	)		(17	)		(93	)	(547	%)		(84	)		(131	)		47		36	%
Other income, net		449			270			179		66	%		366			169			197		117	%		81			-			81		NM
	$	3,995		$	1,547		$	2,448		158	%	$	586		$	650		$	(64	)	(10	%)	$	192		$	3,032		$	(2,840	)	(94	)%

The equity income ~~is derived from dividend and interest income on invested cash. The rates of return~~or (loss) in the fiscal year 2009 and 2008 periods ~~were generally lower than fiscal year 2007.~~

~~As a result of~~represent the reduced investment in Morion, the Company no longer records its share of Morion’s earnings on the equity method, as it did in the fiscal year 2007 periods. The equity loss for the nine months ended January 31, 2008 and the equity income for the three months then ended, represent itsCompany’s share of the quarterly ~~loss~~income or ~~profit~~(loss) recorded by Elcom Technologies in which the Company ~~acquired~~owns a 25% ~~interest during the third quarter of fiscal year 2007.~~interest.

The ~~increase~~decrease in interest expense for the ~~nine and~~ three month ~~periods~~period ended ~~January~~July 31, 2008, resulted ~~primarily~~ from ~~an increase~~both a decrease in borrowings under the Company’s line of credit ~~during the fiscal year 2008 periods~~as well as a lower rate of interest charged on such borrowings compared to the ~~same periods of fiscal year~~three month period ended July 31, 2007.

Under the provisions of sale and leaseback accounting, a portion of the capital gain realized on a fiscal year 2005 real estate transaction is deferred and recognized in income over the initial lease term. Under the caption “Other income, net” the Company recognized deferred gain of ~~$265,000 and~~ $88,000 ~~respectively,~~ for each of the ~~nine and~~ three months ended ~~January~~July 31, 2008 and 2007. In addition, for the nine and three month periods ended January 31, 2008, other income includes a realized gain of approximately $290,000 derived from the excess of proceeds over the cash values of life insurance policies on the lives of two former employees. In the fiscal year 2008 ~~periods, other~~period, deferred gain income was ~~partially~~ offset by certain nonrecurring expenses at the FEI-NY and Gillam-FEI segments, including certain business interruption costs and foreign currency exchange losses. Other insignificant income and expense items are also recorded under this caption.

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Net ~~income~~loss for the ~~nine~~three months ended ~~January~~July 31, 2008, ~~was~~resulted from the decrease in sales and the higher engineering and production costs on certain satellite programs as discussed above. The fiscal year 2008 results were positively impacted by the investment gain recorded on the sale of a portion of the Company’s investment in Morion which ~~is in addition to~~offset the prior year quarter’s operating profit recorded during this period. For the third quarter of fiscal year 2008, an operating profit was generated by higher revenues and lower costs and, coupled with other income as detailed above, resulted in increased profitability.loss. The Company expects to realize improved gross and operating margins in the ~~fourth quarter~~subsequent quarters of fiscal year ~~2008~~2009 and anticipates that it will report a profit for the full year.

Net (Loss) income ~~(loss)~~

Nine months Three months
Periods ended January 31,
2008 2007 Change 2008 2007 Change
$ 2,547 $ 332 $ 2,215 667 % $ 758 $ (754) $ 1,512 NM

Three months ended July 31,
2008			2007		Change
$	(773	)	$	1,380	$	(2,153	)	(156	)%

Income Taxes

The Company is subject to taxation in several countries as well as the states of New York and California. The statutory federal rates vary from 34% in the United States to 35% in Europe. The effective rate is impacted by the income or loss of certain of the Company’s European and Asian subsidiaries which are currently not taxed. In addition, the Company utilizes the availability of research and development tax credits in the United States to lower its tax rate. As of April 30, ~~2007,~~2008, the Company’s European subsidiaries had available net operating loss carryforwards of approximately ~~$1.3~~$1.2 million, ~~and the Company’s U.S. subsidiaries had operating loss carryforwards of approximately $700,000,~~ which will offset future taxable income. ~~During fiscal year 2008, the~~The Company’s effective tax rate ~~is expected to be~~for fiscal year 2008 was higher than in prior years as a result of the gain recognized on the Morion transaction. The Company’s tax basis in its Morion investment was less than its book basis resulting in greater taxable income than that recorded for financial reporting purposes.

~~Page 15~~

LIQUIDITY AND CAPITAL RESOURCES

~~(Continued)~~

The Company’s balance sheet continues to reflect a strong working capital position of $59 million at ~~January~~July 31, 2008, which is comparable to working capital at April 30, ~~2007.~~2008. Included in working capital at ~~January~~July 31, 2008 is ~~$15.7~~$14.4 million of cash, cash equivalents and marketable securities which ~~were~~are offset by ~~$5.5~~$6.5 million in borrowings under its bank line of credit. The Company’s current ratio at ~~January~~July 31, 2008 is ~~5.9~~5.4 to 1.

For the ~~nine~~three months ended ~~January~~July 31, 2008, the Company used ~~approximately $4.0~~$2.1 million in cash from ~~operations~~operating activities compared to ~~$830,000~~$4.4 million used inby operations in the ~~same period of~~comparable fiscal year ~~2007.~~2008 period. The ~~most significant~~primary uses of cash in the fiscal year ~~2008 periods~~2009 period were due to the growth in accounts receivable, acquisition of additional parts inventory to support current and anticipated programs. In the three month period ended July 31, 2007, the decrease in operating cash flow was ~~the growth~~due primarily to increases in unbilled accounts receivable, inventory and ~~the payment of trade~~payments against accounts payable. For the ~~fourth quarter~~balance of fiscal year ~~2008,~~2009, the Company expects to generate positive cash flow from operating activities, particularly as billing milestones are achieved on certain of its large satellite production contracts. ~~Such cash flow may not be sufficient to generate positive operating cash flow for the full fiscal year.~~

Net cash used in investing activities for the three months ended July 31, 2008, was $6.7 million compared to cash provided by investing activities ~~for the nine months ended January 31, 2008, was $9.7 million compared to $1.8~~of $4.9 million for the same period of fiscal year ~~2007.~~2008. During the fiscal year ~~2008~~2009 period, the Company invested $6.6 million in marketable securities and acquired additional fixed assets for $111,000. In the first quarter of the prior year, the Company received net proceeds of $5.6 million from the sale of a portion of its investment in ~~Morion~~Morion. This cash inflow was partially offset by fixed asset acquisitions of $559,000 and ~~an additional $5.5 million on~~ the ~~sale or redemption~~purchase of ~~other~~ marketable securities net of purchases. The principal source of cash in the fiscal year 2007 period was the sale or redemption of certain marketable securities, net of purchases, aggregating $6.8 million. During the nine months ended January 31, 2008 and 2007, the Company also acquired capital equipment for approximately $1.5 million and $1.7 million, respectively. In the 2007 period, the Company also made an investment in Elcom Technologies and provided Elcom with a long-term note for an aggregate cash investment of $2.3 million.$174,000. The Company may continue to acquire or sell marketable securities as dictated by its investment strategies as well as by the cash requirements for its development activities. Capital equipment purchases for all of fiscal year ~~2008~~2009 are expected to aggregate approximately $3.0 ~~million, including approximately $1.2 million~~million. Internally generated cash is adequate to acquire this level of ~~equipment obtained under a long-term~~ capital ~~lease during the 2008 period.~~equipment.

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Net cash ~~used in~~provided by financing activities for the ~~nine~~three months ended ~~January~~July 31, 2008, was $1.3 million compared to ~~a use of cash of $1.6 million~~$629,000 during the comparable fiscal year ~~2007~~2008 period. ~~Included in both fiscal periods is payment of the Company’s semiannual dividend in the amount of approximately $1.7 million.~~ During the ~~nine months ended January 31, 2008,~~first quarter of fiscal year 2009, the Company borrowed ~~$3.5~~$1.5 million against its line of credit, made principle payments of $52,000 against a long-term capital lease and ~~repaid $3.0~~reacquired capital stock for treasury in the approximate amount of $100,000. During the three months ended July 31, 2007, the Company paid a cash dividend of $869,000 which was offset by $1.5 million borrowed under its line of credit. In the same period of the prior fiscal year, the Company borrowed $1.6 million under the line of credit and repaid such borrowing early in the second quarter of fiscal year 2007. The Company received an aggregate of $157,000 in fiscal year 2008 and $158,000 in fiscal year 2007 from the exercise of stock options.

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock for treasury whenever appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future. During the ~~nine months~~quarter ended ~~January~~July 31, 2008, the Company acquired ~~22,312~~18,000 shares of its stock under this ~~authorization~~authorization. The average price paid per share was $5.57. Subsequent to the end of the quarter, the Company acquired an additional 659,651 shares at an ~~aggregate cost~~average price of ~~$233,000.~~$4.34. With these purchases, the Company has acquired approximately $4 million of its common stock.

The Company will continue to expend resources to develop and improve products for space applications, guidance and targeting systems, wireless networks and wireline communication systems which management believes will result in future growth and continued profitability. During fiscal year ~~2008,~~2009, the Company intends to make a substantial investment of capital and technical resources to develop new products to meet the needs of the U.S. Government, commercial space and telecommunications infrastructure marketplaces and to investinvestments in more efficient product designs, automatic test equipment, employee training and improved manufacturing ~~procedures. Where possible,~~processes. For the current fiscal year and for the foreseeable future, the Company has been awarded several cost-plus-fee development contracts for satellite payloads. Such customer-funded programs will ~~secure partial customer funding~~enable the Company to conduct important development activities but will be reimbursed for ~~such development efforts but is targeting~~its efforts. Thus, the Company expects to spend its own funds at a lower rate ~~of at least 10% of revenues~~than it has historically to achieve its development goals. Internally generated cash ~~is expected to~~will be adequate to fund these internal research and development efforts.

~~At January~~As of July 31, 2008, the ~~Company’s~~Company's consolidated backlog amounted to approximately ~~$40 million compared~~$36 million. Approximately 80% of this backlog is expected to ~~$44 million at~~be filled during the Company’s fiscal year ending April 30, ~~2007. Of this backlog, approximately 80% is realizable in the next twelve months.~~2009. Included in the backlog at ~~January~~July 31, 2008 is approximately $8$7 million under cost plus fee contracts which the Company believes represent firm commitments from its customers for which the Company has not received full funding to date.

~~Page 16~~

~~(Continued)~~ The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

~~Contractual obligations~~

~~As of January 31, 2008~~

Contractual Obligations

Total
(in thousands)

Less than
1 Year

1 to 3 Years

3 to 5 Years

More than
5 Years

Operating Lease Obligations $ 6,736 $ 763 $ 2,807 $ 2,220 $ 946
Capital Lease Obligation 1,175 280 842 53 0
Deferred Compensation 8,742 * 331 402 146 7,863
Total $ 16,653 $ 1,374 $ 4,051 $ 2,419 $ 8,809

*Deferred Compensation liability reflects payments due to current retirees receiving benefits. The amount of $7,863 in the more than 5 years column includes benefits due to participants in the plan who are not yet receiving benefits although some participants may opt to retire and begin receiving benefits within the next 5 years.

~~Item 3.~~~~Quantitative and Qualitative Disclosures about Market Risk~~

~~Interest Rate Risk~~

The Company is exposed to market risk related to changes in interest rates and market values of securities. The Company's investments in fixed income and equity securities were approximately $8.6 million and $395,000, respectively, at January 31, 2008. The investments are carried at fair value with changes in unrealized gains and losses recorded as adjustments to stockholders' equity. The fair value of investments in marketable securities is generally based on quoted market prices. Typically, the fair market value of investments in fixed interest rate debt securities will increase as interest rates fall and decrease as interest rates rise. Based on the Company's overall interest rate exposure at January 31, 2008, a 10% change in market interest rates would not have a material effect on the fair value of the Company's fixed income securities or results of operations.

~~Foreign Currency Risk~~

The Company is subject to foreign currency translation risk. The Company does not have any near-term intentions to repatriate invested cash in any of its foreign-based subsidiaries. For this reason, the Company does not intend to initiate any exchange rate hedging strategies which could be used to mitigate the effects of foreign currency fluctuations. The effects of foreign currency rate fluctuations will be recorded in the equity section of the balance sheet as a component of other comprehensive income. As of January 31, 2008, the amount related to foreign currency exchange rates is a $4,929,000 unrealized gain.

The results of operations of foreign subsidiaries, when translated into U.S. dollars, will reflect the average rates of exchange for the periods presented. As a result, similar results of operations measured in local currencies can vary significantly upon translation into U.S. dollars if exchange rates fluctuate significantly from one period to the next.

~~Page~~14 of 17

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ~~“ Exchange Act ”)~~“Exchange Act”)) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on ~~such~~their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of ~~the end of such period,~~July 31, 2008, the Company’s disclosure controls and procedures ~~are~~were not effective ~~(i)~~for the reasons discussed below, to ensure that information relating to the Company, including its consolidated subsidiaries, required to be ~~disclosed by the Company~~included in ~~the~~its reports that it ~~files~~filed or ~~submits~~submitted under the Exchange Act isare recorded, processed, summarized and reported within the time periods specified in ~~the SEC’s~~Securities and Exchange Commission rules and forms and (ii) to ensure that information required to be disclosed by the Company in the reports that it submits under the Exchange Act is accumulated and communicated to its management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.forms.

Item 4.4T.

Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Management of Frequency Electronics is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2008. In making this assessment, management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2008. The Company’s chief executive officer and chief financial officer have concluded that the Company has material weaknesses in its internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Financial Reporting

The Company had inadequate resources and an insufficient number of personnel having adequate knowledge, experience and training to provide effective oversight and review of our internal controls within the prescribed timeframe. As a result, as of July 31, 2008, there was a material weakness in the Company’s internal control because management has not performed a self-assessment or the necessary documentation and testing of the internal controls at two of the Company’s subsidiaries, Gillam-FEI and FEI-Zyfer. The lack of documentation and testing of these subsidiaries constitutes a material weakness. In order to remediate this material weakness, management will continue to establish policies and procedures to provide for the necessary documentation and testing of such internal controls over the coming year. During fiscal year 2009, the Company plans to fully document and test the internal controls over financial reporting at its Gillam-FEI and FEI-Zyfer subsidiaries. If this process identifies material weaknesses or significant deficiencies over such internal controls, the Company will implement appropriate remediation efforts.

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