The Company has an equity interest in two strategically important companies: Elcom Technologies, Inc. (“Elcom”) and Morion Inc. (“Morion”).  During the sixnine and three month periods ended OctoberJanuary 31, 20082009 and 2007,2008, the Company acquired technical services from Elcom, purchased crystal oscillator products from Morion and sold certain of its products to both companies.  The Company also receives interest from Elcom under a convertible note receivable.  The table below summarizes these transactions:

During the second quarter of fiscal 2009, the Company repurchased from Elcom 29,651 shares of the Company’s 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.

In September 2006, the FASB issued Statement No. 157, “Fair Value 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 adopted FAS 157 in fiscal year 2009.  Such adoption did not have a material impact on the Company’s financial statements.

During calendar year 2008, the FASB issued FASB Staff Positions (“FSP FAS”) 157-1, 157-2, and 157-3.  FSP FAS 157-1 amends FAS 157 to exclude FAS No. 13, “Accounting for Leases”, and its related interpretive accounting pronouncements that address leasing transactions, FSP FAS 157-2 delays the effective date of the application of FAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, and FSP FAS 157-3 clarifies how the fair value of a financial asset is determined when the market for that financial asset is inactive.

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 adoption of FAS 159 in fiscal year 2009 had no impact on the Company’s financial 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.Statements, an amendment of ARB 51.”  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.basis but will have no impact on the Company’s current financial statements.

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.

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, if it enters into a business combinationcombination.

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.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s April 30, 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.

On production-type contracts, revenue is recorded as units are delivered with the related cost of revenues recognized on each shipment based upon a percentage of estimated final 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 or nonlong-term contracts or orders in the FEI-NY segment which are not long-term contracts, revenues ofon 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 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.

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.

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 are reflected in cost of revenues in the period the revision is made.

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

The decrease in revenues forFor the sixnine and three month periods ended OctoberJanuary 31, 20082009, revenues declined in all major market areas and in each segment of the Company, compared to the same periods of fiscal year 2008, was primarily the result of lower revenues from commercial 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 and carried over into the fiscal year 2009 periods.  These additional costs reduced the expected gross margins of these programs on which revenue is recognized on the percentage of completion basis.2008.  Revenues from telecommunicationtelecommunications customers, which are recorded in each of the Company’s operating segments, were 16% lower for the nine month period and 38% lower in the third quarter of fiscal year 2009 compared to the same periods of fiscal year 2008.  The Company expects wireless telecommunication revenues to remain soft for the near term but expects an increase in wireline product sales during the fourth quarter of fiscal year 2009 based on current backlog.  Revenues from satellite payloads, which are recorded in the FEI-NY segment, remained relatively constant over each of the three quarters of fiscal year 2009 but are lower by 35% and 18%, respectively, for the nine and three month periods ended January 31, 2009, compared to the same periods of fiscal year 2008.  These results reflect the conclusion of certain long-term programs and the lower level of recent contract awards partially as a result of current macroeconomic conditions.  With its current backlog and potential new contracts, the Company expects satellite payload revenue to continue at the current pace.  For the nine and three month periods ended January 31, 2009, 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.  Duringlower by 9% and 23%, respectively.  This is primarily the remainder of fiscal year 2009, the Company expects revenues from U.S. Government satellite programs to increase from current levels as a result of recent contract awards and expectationstemporary delays in the awarding of certain orders.  The Company anticipates that revenues for additional contract awards during this market area will be higher in the last quarter of the current fiscal year.  However, commercial satellite revenue is expected to continue to decline as operators deal with tight credit conditions.  Telecommunication infrastructure revenues and sales to non-space U.S. Government programs are expected to increase over the balance of fiscal year 2009.

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 revenues.  Research and development spending for the sixnine and three-month periods ended OctoberJanuary 31, 2008,2009, was 8.3%7.6% and 6.2%6.3% of revenues, respectively, compared to 12.1%11.0% and 10.4%9.0% of revenues for the same periods of fiscal year 2008, respectively.  The decreased spending in fiscal year 2009 is a result of many of the Company’s development resources being applied to certain cost-plus-fee satellite payload programs.  As a consequence, some of the Company’s development expenditures will be customer-funded and the costs will appear in cost of revenues, thus reducing the level of internal research and development spending.  In the sixnine and three-month periods ended OctoberJanuary 31, 2007,2008, the Company incurred exceptional levels of engineering spending and development work on its satellite payload products.  This effort abated throughout fiscal year 2008.  The Company targets research and development spending at approximately 10% of revenues, but the rate of spending can increase or decrease from quarter to quarter as new projects are identified and others are concluded.  The number of such projects, their size and duration can vary widely depending on the intermediate and long-term needs of the Company.  The Company willexpects to continue to devote significant resources to develop new products, enhance existing products and implement efficient manufacturing processes.  Internally generated cash and cash reserves are adequate to fund these development efforts.

Lower revenues, the continuinghigher level of engineering and manufacturing effort related to satellite payload programs during the first half of the year, higher overhead costs and recording a higher level of inventory reserves resulted in operating losses for the sixnine and three-month periods ended OctoberJanuary 31, 2008,2009, compared to the same periods of fiscal year 2008.  Although fiscal year 2009 revenues have been relatively flat during the year, the operating loss in the third quarter has decreased significantly from the first half of the year as the Company has made adjustments to the lower level of business.  The Company anticipates that as the gross margin rate improvescombination of cost reductions and asimproving revenues increase from current levels, thatwill enable it willto generate an operating profit forin the second halflast quarter of fiscal year 2009.

During the sixnine months ended OctoberJanuary 31, 2007,2008, the Company reduced its investment in Morion, Inc. from 36.6% to 8% by selling shares to a 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 included in investment income for the first quarter of fiscal year 2008.  Comparable gains were not recorded during the fiscal year 2009 periods.  In addition, investment income from interest and dividends was reduced in the fiscal year 2009 period due to a lower level of marketable securities than in the same periods of the prior year.

The equity loss(loss) income in the fiscal year 2009 and 2008 periods represent the Company’s share of the quarterly lossresults recorded by Elcom Technologies in which the Company owns a 25% interest.

The decrease in interest expense for the sixnine and three month periods ended OctoberJanuary 31, 2008,2009, resulted from both a decrease in borrowings under the Company’s line of credit as well as a lower rate of interest charged on such borrowings compared to the same periods ended OctoberJanuary 31, 2007.2008.

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 $177,000$236,000 and $88,000$59,000 for the sixnine and three months ended OctoberJanuary 31, 2009, respectively.  The deferred gain was fully amortized during the third quarter of fiscal year 2009.  In the same periods of fiscal 2008, deferred gain was $265,000 and 2007,$88,000, respectively.  These gains were partially offset by certain nonrecurring expenses at the FEI-NY and Gillam-FEI segments, including certain foreign currency exchange losses, settlement of European insurance claims and business interruption costs.  Other insignificant income and expense items are also recorded under this caption.

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, 2008, the Company’s European subsidiaries had available net operating loss carryforwards of approximately $1.2 million, which willmay be used to offset future taxable income.  The Company’s effective tax rate 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.

The Company’s balance sheet continues to reflect a strong working capital position of $55 million at OctoberJanuary 31, 2008,2009, which is compared to working capital of $59 million at April 30, 2008.  Included in working capital at OctoberJanuary 31, 20082009 is $13.3$13.1 million of cash, cash equivalents and marketable securities which are offset by $5.6$1.1 million in borrowings under its bank line of credit.  The Company’s current ratio at OctoberJanuary 31, 20082009 is 5.86.6 to 1.

For the sixnine months ended OctoberJanuary 31, 2008,2009, the Company had positive cash flow from operating activities of $466,000$5.3 million compared to $2.6$4.0 million used by operations in the comparable fiscal year 2008 period.  The primary source of cash in the fiscal year 2009 period was the collection of accounts receivable.  As the Company achieved milestones on certain large satellite programs, it was contractually permitted to issue invoices to its customers muchand a significant portion of which wasthe receivables were collected by the end of the fiscal quarter.  In the sixnine month period ended OctoberJanuary 31, 2007,2008, the decrease in operating cash flow was due primarily to increases in unbilled accounts receivable, inventory and payments against accounts payable.  For the balance of fiscal year 2009, the Company expects to generate positive cash flow from operating activities, particularly as additional billing milestones are achieved on certain of its large satellite production contracts.activities.

Net cash used in financing activities for the sixnine months ended OctoberJanuary 31, 2008,2009, was $2.6$7.3 million compared to cash provided by financing activities of $2.5$1.3 million used during the comparable fiscal year 2008 period.  During the first sixnine months of fiscal year 2009, the Company repurchased over 677,000approximately 725,000 shares of its common stock at an average per share price of $4.39,$4.29, or approximately $3.0$3.1 million, compared to treasury stock purchases of $233,000 for the same period of fiscal year 2008.  During fiscal year 2009, the Company had net borrowings of $0.5repaid $4.0 million against its line of credit and made principle payments of $106,000$163,000 against a long-term capital lease.  During the sixnine months ended OctoberJanuary 31, 2007,2008, the Company paid a cash dividend of $869,000 which was offset by$1.7 million and repaid $3.0 million of the $3.5 million borrowed under its line of credit.

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.  Subsequent toAs of the end of the currentmost recent fiscal quarter, the Company acquired approximately 43,000 shares at an average price of $2.85.  Including these purchases, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.

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 2009, the Company intends to make investments in more efficient product designs, automatic test equipment, employee training and improved manufacturing 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 enable the Company to conduct important development activities and the Company will be reimbursed by its customers for its efforts.  Thus, the Company expects to spend its own funds at a lower rate than it has historically to achieve its development goals.  Internally generated cash will be adequate to fund these internal research and development efforts.

As of OctoberJanuary 31, 2008,2009, the Company's consolidated backlog amounted to approximately $36$39 million.  Approximately 75%70% of this backlog is expected to be realized in the next twelve months.  Included in the backlog at OctoberJanuary 31, 20082009 is approximately $7.3$12.8 million under cost plus feecost-plus-fee contracts which the Company believes represent firm commitments from its customers for which the Company has not yet received full funding to date.funding.  The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed.

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.