UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-Q
 
 (Mark
one)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
Quarterly Period ended July 31, 2009
 
 OR
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from __________ to __________
 
 Commission
File No. 1-8061
 
 FREQUENCY
ELECTRONICS, INC.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
                  11-1986657(State
      or other jurisdiction of
                  (I.R.S.
      Employer Identification No.)incorporation
      or organization)55
      CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.
                  11553(Address
      of principal executive offices)
                  (Zip
      Code)
 
 Registrant's
telephone number, including area code: 516-794-4500
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x No  ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes   ̈  No x (the registrant is not
yet required to submit Interactive Data)
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
  Large
accelerated filer  ̈   
    Accelerated filer  ̈                 
Non-accelerated filer  ̈Smaller Reporting
Company x
 (do
not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  ̈No x
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS:
 
 The
number of shares outstanding of Registrant's Common Stock, par value $1.00 as of
September 11, 2009 – 8,175,550
  
 
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 INDEX
 
 Page
      No.Part
      I.  Financial Information:Item
      1 - Financial Statements:Condensed
      Consolidated Balance Sheets -July
      31, 2009 and April 30, 2009
                          3Condensed
      Consolidated Statements of OperationsThree
      Months Ended July 31, 2009 and 2008
                          4Condensed
      Consolidated Statements of Cash FlowsThree
      Months Ended July 31, 2009 and 2008
                          5Notes
      to Condensed Consolidated Financial Statements
                          6-11Item
      2 - Management's Discussion and Analysis ofFinancial
      Condition and Results of Operations
                          12-17Item
      4T- Controls and Procedures
                          17-18Part
      II.  Other Information:Items
      1, 1A, 2, 3, 4 and 5 are omitted because they are not
      applicableItem
      6 - Exhibits
                          18Signatures
                          19Exhibits
  2 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
  Condensed
Consolidated Balance Sheets
 __________________________
 
 
 July
      31,
                        
                        
                        April
      30,2009
                        
                        
                        2009(UNAUDITED)
                        
                        
                        (AUDITED)(NOTE
      A)(In
      thousands except share data)ASSETS:Current
      assets:Cash
      and cash equivalents
                        
                        $
                        5,662
                        
                        
                        $
                        4,911Marketable
      securities
                        
                        
                        10,321
                        
                        
                        
                        9,998Accounts
      receivable, net of allowance for doubtful accounts of $285 at July 31 and
      April 30, 2009
                        
                        
                        10,778
                        
                        
                        
                        10,775Costs
      and estimated earnings in excess of billings
                        
                        
                        3,083
                        
                        
                        
                        2,193Inventories
                        
                        
                        26,589
                        
                        
                        
                        26,051Income
      taxes refundable
                        
                        
                        788
                        
                        
                        
                        886Prepaid
      expenses and other
                        
                        
                        992
                        
                        
                        
                        1,257Total
      current assets
                        
                        
                        58,213
                        
                        
                        
                        56,071Property,
      plant and equipment, at cost, less accumulated depreciation and
      amortization
                        
                        
                        7,693
                        
                        
                        
                        7,961Goodwill
      and other intangible assets, net
                        
                        
                        218
                        
                        
                        
                        218Cash
      surrender value of life insurance and cash held in trust
                        
                        
                        8,543
                        
                        
                        
                        8,423Investments
      in and loans receivable from affiliates
                        
                        
                        4,386
                        
                        
                        
                        4,430Other
      assets
                        
                        
                        817
                        
                        
                        
                        817Total
      assets
                        
                        $
                        79,870
                        
                        
                        $
                        77,920LIABILITIES
      AND STOCKHOLDERS’ EQUITY:Current
      liabilities:Short-term
      credit obligations
                        
                        $
                        1,336
                        
                        
                        $
                        1,327Accounts
      payable - trade
                        
                        
                        3,167
                        
                        
                        
                        2,305Accrued
      liabilities and other
                        
                        
                        3,868
                        
                        
                        
                        4,408Total
      current liabilities
                        
                        
                        8,371
                        
                        
                        
                        8,040Lease
      obligation – noncurrent
                        
                        
                        626
                        
                        
                        
                        684Deferred
      compensation
                        
                        
                        9,561
                        
                        
                        
                        9,546Other
      liabilities
                        
                        
                        547
                        
                        
                        
                        484Total
      liabilities
                        
                        
                        19,105
                        
                        
                        
                        18,754Stockholders’
      equity:Preferred
      stock  - $1.00 par value
                        
                        
                        -
                        
                        
                        
                        -Common
      stock  -  $1.00 par value
                        
                        
                        9,164
                        
                        
                        
                        9,164Additional
      paid-in capital
                        
                        
                        49,133
                        
                        
                        
                        48,997Retained
      earnings
                        
                        
                        3,176
                        
                        
                        
                        2,52261,473
                        
                        
                        
                        60,683Common
      stock reacquired and held in treasury -at cost, 988,389 shares at July 31,
      2009
                          and
      1,021,159 shares at April 30, 2009
                        
                        
                        (4,858
                        )
                        
                        
                        (4,972
                        )Accumulated
      other comprehensive income
                        
                        
                        4,150
                        
                        
                        
                        3,455Total
      stockholders' equity
                        
                        
                        60,765
                        
                        
                        
                        59,166Total
      liabilities and stockholders' equity
                        
                        $
                        79,870
                        
                        
                        $
                        77,920
 See
accompanying notes to condensed consolidated financial
statements.
  3 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Condensed
Consolidated Statements of Operations
 
 Three
Months Ended July 31,
 (Unaudited)
 
 2009
                  
                  
                  2008(In
      thousands except share data)Net
      revenues
                  
                  $
                  12,442
                  
                  
                  $
                  13,063Cost
      of revenues
                  
                  
                  8,141
                  
                  
                  
                  9,872Gross
      margin
                  
                  
                  4,301
                  
                  
                  
                  3,191Selling
      and administrative expenses
                  
                  
                  2,567
                  
                  
                  
                  3,116Research
      and development expense
                  
                  
                  1,075
                  
                  
                  
                  1,365Operating
      profit (loss)
                  
                  
                  659
                  
                  
                  
                  (1,290
                  )Other
      income (expense):Investment
      income
                  
                  
                  128
                  
                  
                  
                  158Equity
      (loss) income
                  
                  
                  (49
                  )
                  
                  
                  37Interest
      expense
                  
                  
                  (44
                  )
                  
                  
                  (84
                  )Other
      (expense) income, net
                  
                  
                  (40
                  )
                  
                  
                  81Income
      (Loss) before benefit for income taxes
                  
                  
                  654
                  
                  
                  
                  (1,098
                  )Benefit
      for income taxes
                  
                  
                  -
                  
                  
                  
                  (325
                  )Net
      income (loss)
                  
                  $
                  654
                  
                  
                  $
                  (773
                  )Net
      income (loss) per common share:Basic
                  
                  $
                  0.08
                  
                  
                  $
                  (0.09
                  )Diluted
                  
                  $
                  0.08
                  
                  
                  $
                  (0.09
                  )Average
      shares outstanding:Basic
                  
                  
                  8,164,627
                  
                  
                  
                  8,742,086Diluted
                  
                  
                  8,172,080
                  
                  
                  
                  8,742,086
 
 See
accompanying notes to condensed consolidated financial
statements.
  4 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Condensed
Consolidated Statements of Cash Flows
 
 Three
Months Ended July 31,
 (Unaudited)
 
 2009
                  
                  
                  2008(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  654
                  
                  
                  $
                  (773
                  )Non-cash
      charges to earnings
                  
                  
                  1,024
                  
                  
                  
                  811Net
      changes in other assets and liabilities
                  
                  
                  (495
                  )
                  
                  
                  (2,108
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  1,183
                  
                  
                  
                  (2,070
                  )Cash
      flows from investing activities:Purchase
      of marketable securities
                  
                  
                  -
                  
                  
                  
                  (6,586
                  )Capital
      expenditures
                  
                  
                  (175
                  )
                  
                  
                  (111
                  )Net
      cash used in investing activities
                  
                  
                  (175
                  )
                  
                  
                  (6,697
                  )Cash
      flows from financing activities:Proceeds
      from short-term credit obligations
                  
                  
                  -
                  
                  
                  
                  1,500Payment
      of short-term credit and lease obligations
                  
                  
                  (70
                  )
                  
                  
                  (52
                  )Stock
      transactions, net
                  
                  
                  -
                  
                  
                  
                  (100
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (70
                  )
                  
                  
                  1,348Net
      increase (decrease) in cash and cash equivalents before effect of exchange
      rate changes
                  
                  
                  938
                  
                  
                  
                  (7,419
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (187
                  )
                  
                  
                  135Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  751
                  
                  
                  
                  (7,284
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  4,911
                  
                  
                  
                  11,029Cash
      and cash equivalents at end of period
                  
                  $
                  5,662
                  
                  
                  $
                  3,745Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                  
                  $
                  55
                  
                  
                  $
                  32Income
      Taxes
                  
                  
                  -
                  
                  
                  
                  -
 
 See
accompanying notes to condensed consolidated financial
statements.
  5 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 NOTE A -
CONSOLIDATED FINANCIAL STATEMENTS
 
 In the
opinion of management of Frequency Electronics, Inc. (“the Company”), the
accompanying unaudited condensed consolidated interim financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly, in all material respects, the consolidated
financial position of the Company as of July 31, 2009 and the results of its
operations and cash flows for the three months ended July 31, 2009 and
2008.  The April 30, 2009 condensed consolidated balance sheet was
derived from audited financial statements.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.  It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's April 30, 2009 Annual Report to
Stockholders.  The results of operations for such interim periods are
not necessarily indicative of the operating results for the full
year.
  NOTE B -
EARNINGS PER SHARE
 
 Reconciliation
of the weighted average shares outstanding for basic and diluted Earnings Per
Share are as follows:
 Three
      months ended July 31,2009
                      
                      
                      2008Basic
      EPS Shares outstanding(weighted
      average)
                      
                      
                      8,164,627
                      
                      
                      
                      8,742,086Effect
      of Dilutive Securities
                      
                      
                      7,453
                      
                      
                      
                      ***Diluted
      EPS Shares outstanding
                      
                      
                      8,172,080
                      
                      
                      
                      8,742,086
 
 ***
              Dilutive
      securities are excluded for the three-month period ended July 31, 2008
      since the inclusion of such shares would be antidilutive due to the net
      loss for the period then ended.
  The
computation of diluted earnings per share excludes those options and stock
appreciation rights with an exercise price in excess of the average market price
of the Company’s common shares during the periods presented.  The
inclusion of such options in the computation of earnings per share would have
been antidilutive.  The number of excluded options for the three
months ended July 31, 2009 and 2008 were 1,325,525 and 1,408,675,
respectively.
  NOTE C –
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
  At July
31, 2009 and April 30, 2009 costs and estimated earnings in excess of billings
on uncompleted contracts accounted for on the percentage of completion basis
were approximately $3,083,000 and $2,193,000, respectively.  Such
amounts represent revenue recognized on long-term contracts that had not been
billed at the balance sheet dates.  Such amounts are billed pursuant
to contract terms.
  NOTE D -
INVENTORIES
  Inventories,
which are reported net of reserves of $4,701,000 and $4,596,000 at July 31, 2009
and April 30, 2009, respectively, consist of the following:
 
 July 31, 2009
                            
                            
                            April 30, 2009(In
      thousands)Raw
      materials and Component parts
                            
                            $
                            12,879
                            
                            
                            $
                            12,542Work
      in progress
                            
                            
                            11,440
                            
                            
                            
                            10,613Finished
      Goods
                            
                            
                            2,270
                            
                            
                            
                            2,896$
                            26,589
                            
                            
                            $
                            26,051
 As of
July 31, 2009 and April 30, 2009, approximately $18.1 million and $18.0 million,
respectively, of total inventory is located in the United States, approximately
$7.4 million and $6.8 million, respectively, is in Belgium and $1.1 million and
$1.2 million, respectively, is in China.
  6 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 NOTE E –
COMPREHENSIVE INCOME
  For the
three months ended July 31, 2009 and 2008, comprehensive income (loss) is
composed of:
  Three months ended July 31,(in
      thousands)2009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        654
                        
                        
                        $
                        (
      773
                        )Foreign
      currency translation adjustment
                        
                        
                        372
                        
                        
                        
                        223Change
      in market value of marketable securities
                        
                        
                        323
                        
                        
                        
                        (384
                        )Deferred
      tax effect of change in market value of  marketable securities
      (net of valuation allowance on deferred tax assets)
                        
                        
                        -
                        
                        
                        
                        154Comprehensive
      income (loss)
                        
                        $
                        1,349
                        
                        
                        $
                        (780
                        )
  NOTE F –
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 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.  Beginning in fiscal year 2009, this segment
      assumed responsibility for marketing, sales and support of the Company’s
      wireline synchronization products for the U.S. telecommunications
      market.
  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.
  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):
 Three months ended July 31,2009
                    
                    
                    2008Net
      revenues:FEI-NY
                    
                    $
                    7,065
                    
                    
                    $
                    8,844Gillam-FEI
                    
                    
                    2,474
                    
                    
                    
                    2,619FEI-Zyfer
                    
                    
                    4,249
                    
                    
                    
                    2,303less
      intercompany revenues
                    
                    
                    (1,346
                    )
                    
                    
                    (703
                    )Consolidated
      Revenues
                    
                    $
                    12,442
                    
                    
                    $
                    13,063Operating
      profit (loss):FEI-NY
                    
                    $
                    87
                    
                    
                    $
                    (1,228
                    )Gillam-FEI
                    
                    
                    (20
                    )
                    
                    
                    (55
                    )FEI-Zyfer
                    
                    
                    656
                    
                    
                    
                    74Corporate
                    
                    
                    (64
                    )
                    
                    
                    (81
                    )Consolidated
      Operating Profit (Loss)
                    
                    $
                    659
                    
                    
                    $
                    (1,290
                    )
  7 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 July 31, 2009
                      
                      
                      April 30, 2009Identifiable
      assets:FEI-NY
                      
                      $
                      40,469
                      
                      
                      $
                      39,658Gillam-FEI
                      
                      
                      19,379
                      
                      
                      
                      17,615FEI-Zyfer
                      
                      
                      8,931
                      
                      
                      
                      8,672less
      intercompany balances
                      
                      
                      (18,955
                      )
                      
                      
                      (17,853
                      )Corporate
                      
                      
                      30,046
                      
                      
                      
                      29,828Consolidated
      Identifiable Assets
                      
                      $
                      79,870
                      
                      
                      $
                      77,920
 
 NOTE G –
RELATED PARTY TRANSACTIONS
  The
Company has an equity interest in two strategically important companies: Elcom
Technologies, Inc. (“Elcom”) and Morion Inc. (“Morion”).  During the
three month periods ended July 31, 2009 and 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:
  Three months ended July 31,2009
                        
                        
                        2008(in
      thousands)Purchases
      from:Elcom
                        
                        $
                        6
                        
                        
                        $
                        75Morion
                        
                        
                        166
                        
                        
                        
                        291Sales
      to:Elcom
                        
                        $
                        25
                        
                        
                        $
                        13Morion
                        
                        
                        8
                        
                        
                        
                        18Interest
      on Elcom note receivable
                        
                        $
                        12
                        
                        
                        $
                        19
  NOTE H –
FAIR VALUE OF FINANCIAL INSTRUMENTS
  The cost,
gross unrealized gains, gross unrealized losses and fair market value of
available-for-sale securities at July 31, 2009 and April 30, 2009 are as follows
(in thousands):
  July 31, 2009Gross
                                    
                                    
                                    Gross
                                    
                                    
                                    FairUnrealized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    MarketCost
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    ValueFixed
      income securities
                                    
                                    $
                                    10,165
                                    
                                    
                                    $
                                    234
                                    
                                    
                                    $
                                    (391
                                    )
                                    
                                    $
                                    10,008Equity
      securities
                                    
                                    
                                    450
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (137
                                    )
                                    
                                    
                                    313$
                                    10,615
                                    
                                    
                                    $
                                    234
                                    
                                    
                                    $
                                    (528
                                    )
                                    
                                    $
                                    10,321April 30, 2009Gross
                                    
                                    
                                    Gross
                                    
                                    
                                    FairUnrealized
                                    
                                    
                                    Unrealized
                                    
                                    
                                    MarketCost
                                    
                                    
                                    Gains
                                    
                                    
                                    Losses
                                    
                                    
                                    ValueFixed
      income securities
                                    
                                    $
                                    10,165
                                    
                                    
                                    $
                                    278
                                    
                                    
                                    $
                                    (803
                                    )
                                    
                                    $
                                    9,640Equity
      securities
                                    
                                    
                                    450
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (92
                                    )
                                    
                                    
                                    358$
                                    10,615
                                    
                                    
                                    $
                                    278
                                    
                                    
                                    $
                                    (895
                                    )
                                    
                                    $
                                    9,998
 8 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 The
following table presents the fair value and unrealized losses, aggregated by
investment type and length of time that individual securities have been in a
continuous unrealized loss position:
  Less
      than 12 months
                                          
                                          
                                          12 Months or
      more
                                          
                                          
                                          TotalFair
                                          
                                          
                                          Unrealized
                                          
                                          
                                          Fair
                                          
                                          
                                          Unrealized
                                          
                                          
                                          Fair
                                          
                                          
                                          UnrealizedValue
                                          
                                          
                                          Losses
                                          
                                          
                                          Value
                                          
                                          
                                          Losses
                                          
                                          
                                          Value
                                          
                                          
                                          LossesJuly 31,
      2009Fixed
      Income Securities
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,661
                                          
                                          
                                          $
                                          (391
                                          )
                                          
                                          $
                                          1,661
                                          
                                          
                                          $
                                          (391
                                          )Equity
      Securities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          313
                                          
                                          
                                          
                                          (137
                                          )
                                          
                                          
                                          313
                                          
                                          
                                          
                                          (137
                                          )$
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,974
                                          
                                          
                                          $
                                          (528
                                          )
                                          
                                          $
                                          1,974
                                          
                                          
                                          $
                                          (528
                                          )April 30,
      2009Fixed
      Income Securities
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          2,268
                                          
                                          
                                          $
                                          (803
                                          )
                                          
                                          $
                                          2,268
                                          
                                          
                                          $
                                          (803
                                          )Equity
      Securities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          358
                                          
                                          
                                          
                                          (92
                                          )
                                          
                                          
                                          358
                                          
                                          
                                          
                                          (92
                                          )$
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          2,626
                                          
                                          
                                          $
                                          (895
                                          )
                                          
                                          $
                                          2,626
                                          
                                          
                                          $
                                          (895
                                          )
  The
Company regularly reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment.  The Company
does not believe that its investments in marketable securities with unrealized
losses at July 31, 2009 are other-than-temporary due to market volatility of the
security’s fair value, analysts’ expectations and the Company’s ability to hold
the securities for a period of time sufficient to allow for any anticipated
recoveries in market value.
  During
each of the three month periods ended July 31, 2009 and 2008, the Company did
not sell or redeem any available-for-sale securities. Accordingly, there were no
realized gains or losses included in the determination of net income (loss) for
those periods.
  Maturities
of fixed income securities classified as available-for-sale at July 31, 2009 are
as follows, at cost (in thousands):
 Current
                          
                          $
                          -Due
      after one year through five years
                          
                          
                          8,136Due
      after five years through ten years
                          
                          
                          2,029$
                          10,165
 FAS 157
establishes a framework for measuring fair value.  That framework
provides a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).  The three levels of the
fair value hierarchy under FAS 157 are described below:
  Level
      1
              Inputs
      to the valuation methodology are unadjusted quoted prices for identical
      assets or liabilities in active markets that the Company has the ability
      to access.
  Level
      2
              Inputs
      to the valuation methodology
include:
 -
      Quoted prices for similar assets or liabilities in active
      markets;
 -
      Quoted prices for identical or similar assets or liabilities in inactive
      markets
 -
      Inputs other than quoted prices that are observable for the asset or
      liability;
 -
      Inputs that are derived principally from or corroborated by observable
      market data by correlation or other
means.
  Level
      3
              Inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.
  The
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.  Valuation techniques used need to maximize
the use of observable inputs and minimize the use of unobservable
inputs.  All of the Company’s investments in marketable securities are
Level 1 assets.
  9 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 NOTE I -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  In August
2009, the FASB issued the Codification update No. 2009-05 “Fair Value
Measurements and Disclosures” (“ASU 2009-05”).  The amendment is to
subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair
value measurement of liabilities.  The purpose of this amendment is to
reduce ambiguity in financial reporting when measuring fair value of
liabilities.  The guidance in the update is effective for the Company
during the interim period ending October 31, 2009. The Company is currently
evaluating the impact to its financial reporting process of complying with this
amendment.
  In June
2009, the FASB approved the “FASB Accounting Standards Codification”
(“Codification”) as the single source of authoritative nongovernmental U.S. GAAP
to be launched on July 1, 2009.  The Codification does not change
current U.S. GAAP, but is intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature related to a particular
topic in one place.  All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered nonauthoritative.  The Codification is
effective for interim and annual periods ending after September 15,
2009.  The Codification is effective for the Company during the
interim period ending October 31, 2009 and will not have an impact on the
financial condition or results of operations.  The Company is
currently evaluating the impact to its financial reporting process of providing
Codification references in its public filings.
  In June
2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“FAS 167”), which modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated.  FAS 167 clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance.  FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity.  FAS 167 also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement.  FAS 167 is effective for
fiscal years beginning after November 15, 2009 and is effective for the Company
on May 1, 2010.  The Company is currently evaluating the impact that
the adoption of FAS 167 will have on the financial condition, results of
operations, and disclosures.
  In June
2009, the FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140” (“FAS 166”), which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets.  FAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures.  FAS 166 is
effective for fiscal years beginning after November 15, 2009.  FAS 166
is effective for the Company on May 1, 2010.  The Company does not
expect the adoption of FAS 166 will have a material impact on its financial
condition, results of operations, and disclosures.
  In May
2009, the FASB issued FAS No. 165, “Subsequent Events” (“FAS 165”), which
provides guidance to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  FAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected.  FAS 165 is effective for interim and annual periods ending
after June 15, 2009, and accordingly, the Company adopted this standard during
the three months ended July 31, 2009.  The adoption of FAS 165 did not
have a material impact on the financial condition, results of operations, and
disclosures of the Company.
  In April
2009, the FASB issued FASB Staff Position FAS 157-4, Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed, (“FSP
FAS 157-4”)  FSP FAS 157-4 provides guidelines for making
fair value measurements more consistent with the principles presented in
FAS 157.  FSP FAS 157-4 provides additional authoritative
guidance in determining whether a market is active or inactive, and whether a
transaction is distressed, is applicable to all assets and liabilities (i.e.
financial and nonfinancial) and will require enhanced
disclosures.  This FASB Staff Position is effective for periods ending
after June 15, 2009. The Company’s adoption of this FASB Staff Position did
not impact its financial position, results of operation, or cash
flows.
  10 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 In April
2009, the FASB issued FASB Staff Position FAS 115-2, and FAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments, (“FSP FAS 115-2 and
FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provide additional
guidance to provide greater clarity about the credit and noncredit component of
an other-than-temporary impairment event and to more effectively communicate
when an other-than-temporary impairment event has occurred.  This FSP
applies to debt securities.  The Company adopted this FASB Staff
Position during the quarter ended July 31, 2009.  Such adoption did
not have a material effect on its financial position, results of operation, or
cash flows.
  In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, (“FSP FAS 107-1 and APB
28-1”).  FSP FAS 107-1 and APB 28-1, amends FASB Statement
No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about
fair value of financial instruments in interim as well as in annual financial
statements.  This FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements.  The
effective date for this FASB Staff Position is for interim reporting periods
ending after June 15, 2009 thus, the Company adopted the FASB Staff Position in
the quarter ended July 31, 2009.  Such adoption did not have a
material effect on the Company’s financial position, results of operation, or
cash flows but does require additional disclosures in the notes to its interim
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
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 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’s adoption of FAS 161 did not have a material
impact on its consolidated financial statements since the Company does not
engage in hedging activities or acquire derivative instruments.
  NOTE J –
SUBSEQUENT EVENTS
  In
accordance with current accounting standards, subsequent events to the filing
date of this Form 10-Q, September 14, 2009, have been evaluated for disclosure
or recognition and the Company concluded that no subsequent events have occurred
that would require recognition or disclosure in the condensed consolidated
financial statements.
  NOTE K –
TREASURY STOCK TRANSACTIONS
  During
the three month period ended July 31, 2009, the Company made a contribution of
32,770 shares of its common stock held in treasury to the Company’s profit
sharing plan and trust under section 401(k) of the Internal Revenue
Code.  Such contribution is in accordance with the Company’s
discretionary match of employee voluntary contributions to this
plan.
  11 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
  Item
2
 Management’s Discussion and
Analysis of Financial Condition and Results of Operations
 
 “Safe 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, 2009
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.
  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 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 orders, revenue is recorded as units are delivered with the
related cost of sales 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 smaller
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 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.
  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.
  12 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
  Inventory
  In
accordance with industry practice, 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 increases for such estimated
reserves are reflected in cost of sales in the period the revision is
made.
  RESULTS
OF OPERATIONS
  The table
below sets forth for the respective periods of fiscal years 2010 and 2009 the
percentage of consolidated net revenues represented by certain items in the
Company’s consolidated statements of operations:
 Three
      months ended July 31,2009
                      
                      
                      2008Net
      RevenuesFEI-NY
                      
                      
                      56.8
                      %
                      
                      
                      67.7
                      %Gillam-FEI
                      
                      
                      19.9
                      
                      
                      
                      20.0FEI-Zyfer
                      
                      
                      34.1
                      
                      
                      
                      17.6Less
      Intersegment Revenues
                      
                      
                      (10.8
                      )
                      
                      
                      (5.3
                      )100.0
                      
                      
                      
                      100.0Cost
      of Revenues
                      
                      
                      65.4
                      
                      
                      
                      75.6Gross
      Margin
                      
                      
                      34.6
                      
                      
                      
                      24.4Selling
      and administrative expenses
                      
                      
                      20.6
                      
                      
                      
                      23.9Research
      and development expenses
                      
                      
                      8.7
                      
                      
                      
                      10.4Operating
      Income (Loss)
                      
                      
                      5.3
                      
                      
                      
                      (9.9
                      )Other
      income, net
                      
                      
                      -
                      
                      
                      
                      1.5Pretax
      Income (Loss)
                      
                      
                      5.3
                      
                      
                      
                      (8.4
                      )(Benefit)
      Provision for income taxes
                      
                      
                      -
                      
                      
                      
                      (2.5
                      )Net
      Income (Loss)
                      
                      
                      5.3
                      %
                      
                      
                      (5.9
                      )%
  (Note:
All dollar amounts in following tables are in thousands, except Net Sales which
are in millions)
 
 Net sales
                            
                            (in
      millions)Three months ended July 31,2009
                            
                            
                            2008
                            
                            
                            ChangeFEI-NY
                            
                            $
                            7.1
                            
                            
                            $
                            8.9
                            
                            
                            $
                            (1.8
                            )
                            
                            
                            (20
                            )%Gillam-FEI
                            
                            
                            2.5
                            
                            
                            
                            2.6
                            
                            
                            
                            (0.1
                            )
                            
                            
                            (6
                            )%FEI-Zyfer
                            
                            
                            4.2
                            
                            
                            
                            2.3
                            
                            
                            
                            1.9
                            
                            
                            
                            84
                            %Intersegment
      sales
                            
                            
                            (1.4
                            )
                            
                            
                            (0.7
                            )
                            
                            
                            (0.6
                            )$
                            12.4
                            
                            
                            $
                            13.1
                            
                            
                            $
                            (0.6
                            )
                            
                            
                            (5
                            )%
 
 The
decrease in revenues for the three month period ended July 31, 2009 compared to
the same period of fiscal year 2009, is due to a decrease in revenues from
commercial satellite payload programs recorded in the FEI-NY segment and lower
non-core revenues from the Gillam-FEI segment.  Revenue for the
Company’s telecommunication market area increased year-over-year as continuing
decreases in revenue from wireless telecommunications customers, generally
recorded in the FEI-NY segment, were more than offset by increased revenue from
wireline telecommunication customers in both the U.S. and
Europe.  Sales of the Company’s new US5G productline for the U.S.
domestic wireline market are generated by the FEI-Zyfer segment where the sales
and customer-support functions are located.  Revenues from non-space
U.S. Government customers, which are recorded in the FEI-NY and FEI-Zyfer
segments, increased by 9% over the prior year primarily due to additional
revenues from the Company’s low-g oscillators.  During fiscal year
2010, the Company expects revenues from U.S. Government programs to continue at
current levels while revenues from commercial satellite programs are uncertain
due to economic conditions and the availability of funding for commercial
projects.
  13 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
    Gross
margin
 Three months ended July 31,2009
                            
                            
                            2008
                            
                            
                            Change$
                            4,301
                            
                            
                            $
                            3,191
                            
                            
                            $
                            1,110
                            
                            
                            
                            35
                            %GM
      Rate
                            
                            
                            34.6
                            %
                            
                            
                            24.4
                            %
 
 The
increase in gross margin for the three months ended July 31, 2009, is due to a
different mix of product revenues.  In the first quarter of fiscal
year 2010, the largest satellite programs on which the Company is working are
performed under cost-plus-fee contracts which effectively assure that the
Company will recognize positive gross margin on these programs.  In
the fiscal year 2009 period, the Company incurred higher levels of engineering
and manufacturing costs on certain large satellite payload programs which
significantly reduced the gross margin realized in the quarter.  These
large programs were completed during fiscal year 2009.  The current
quarter’s gross margin rate of 34.6% reflects a sequential improvement from the
7% rate recorded in the fourth quarter of fiscal year 2009 or the 30% rate that
results from the exclusion of an inventory writedown in that
period.  At current revenue levels, the Company anticipates that its
fiscal year 2010 gross margin rate will be comparable to that of the current
period but will be significantly improved over the prior year.
  Selling and administrative
expenses
  Three months ended July 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      Change$
                                      2,567
                                      
                                      
                                      $
                                      3,116
                                      
                                      
                                      $
                                      (549
                                      )
                                      
                                      
                                      (18
                                      )%
  For the
three months ended July 31, 2009 and 2008, selling and administrative expenses
were 20.6% and 23.9%, respectively, of consolidated revenues.  The
Company’s target for such expenses is not to exceed 20% of
revenues.  The decrease in expenses in the fiscal year 2010 period
compared to fiscal year 2009 is largely attributable to declines in personnel
costs through a reduction in force, reduced professional fees, and lower
deferred compensation expense.  In addition, fiscal year 2010 expenses
from the Gillam-FEI segment benefited from the 13% decline in the value of the
Euro to the U.S. dollar compared to the same period of fiscal year
2009.  In subsequent quarters of fiscal year 2010, the Company expects
selling and administrative expenses to be incurred at approximately the same
rate in both dollars and as a percentage of revenues.
  Research and development
expense
  Three months ended July 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  Change$
                                  1,075
                                  
                                  
                                  $
                                  1,365
                                  
                                  
                                  $
                                  (290
                                  )
                                  
                                  
                                  (21
                                  )%
 
 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.  In the fiscal year 2010 period, a
portion of the Company’s development resources were engaged on certain large
cost-plus-fee satellite payload programs.  As a consequence, some of
the Company’s development expenditures were customer-funded thus reducing the
level of internal research and development spending.  The Company
retains a proprietary interest in any products or technologies which result from
the customer-funded efforts.  Research and development spending for
the quarters ended July 31, 2009 and 2008, were 8.7% and 10.4% of revenues,
respectively.  The Company targets research and development spending
at approximately 10% of sales, but the rate of spending can increase or decrease
from quarter to quarter as new projects are identified and others are
concluded.  The Company will continue to devote significant resources
to develop new products, enhance existing products and implement efficient
manufacturing processes, including its efforts applied to certain cost-plus-fee
satellite payload programs.  In fiscal 2010, the Company anticipates
that internal research and development spending will be less than 10% of
revenues.  Internally generated cash and cash reserves are adequate to
fund these internal development efforts.
  14 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
  Operating Profit
(Loss)
 Three months ended July
  31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      Change$
                                      659
                                      
                                      
                                      $
                                      (1,290
                                      )
                                      
                                      $
                                      1,949
                                      
                                      NM
 
 The
improved gross margin and lower operating expenses in the fiscal year 2010
period enabled the Company to record an operating profit equal to 5.3% of
revenues.  Sequentially, the operating profit for the period ended
July 31, 2009, represents a $1.1 million improvement from the quarter ended
April 30, 2009, excluding the $2.9 million inventory writedown from that
period.  The Company anticipates that at the current level of business
and having implemented certain cost savings, that it can sustain operating
profits at this level.  The Company will strive to improve on these
results by gaining additional business through increased bookings on its current
product lines and expanding its product offerings through its research and
development efforts.  The Company anticipates that it will generate an
operating profit for the full fiscal year 2010.
  Other income
(expense)
 Three months ended July 31,2009
                              
                              
                              2008
                              
                              
                              ChangeInvestment
      income
                              
                              $
                              128
                              
                              
                              $
                              158
                              
                              
                              $
                              (
      30
                              )
                              
                              
                              (19
                              )%Equity
      (loss) income
                              
                              
                              (49
                              )
                              
                              
                              37
                              
                              
                              
                              (86
                              )
                              
                              NMInterest
      expense
                              
                              
                              (44
                              )
                              
                              
                              (84
                              )
                              
                              
                              40
                              
                              
                              
                              48
                              %Other
      income, net
                              
                              
                              (40
                              )
                              
                              
                              81
                              
                              
                              
                              (121
                              )
                              
                              
                              (149
                              )%$
                              (
      5
                              )
                              
                              $
                              192
                              
                              
                              $
                              (
      197
                              )
                              
                              
                              (103
                              )%
 
 Investment
income is derived primarily from the Company’s holdings of marketable
securities.  Earnings on these securities may vary based on
fluctuating interest rate levels and the timing of purchases or sales of the
securities.
  The
equity (loss) or income in the fiscal year 2010 and 2009 periods represent the
Company’s share of the quarterly income or (loss) recorded by Elcom Technologies
in which the Company owns a 25% interest.
  The
decrease in interest expense for the three month period ended July 31, 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
three month period ended July 31, 2008.
  Under the
provisions of sale and leaseback accounting, a portion of the capital gain
realized on a fiscal year 2005 real estate transaction was deferred and
recognized in income over the initial lease term.  Under the caption
“Other income, net” the Company recognized deferred gain of $88,000 for the
three months ended July 31, 2008.  Since the gain was fully amortized
during fiscal year 2009, comparable income was not recorded in the quarter ended
July 31, 2009.    In the fiscal year 2010 period, other
expense included royalty expense and foreign currency exchange losses at the
Company’s overseas subsidiaries.  Other insignificant income and
expense items are also recorded under this caption.
  Net Income
(Loss)
 Three months ended July 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  Change$
                                  654
                                  
                                  
                                  $
                                  (773
                                  )
                                  
                                  $
                                  1,427
                                  
                                  
                                  
                                  185
                                  %
 
 Net
income for the three months ended July 31, 2009, resulted from the improved
gross margin and reduced operating expenses as discussed above.  The
fiscal year 2009 results were negatively impacted by the higher engineering
costs on certain satellite payload programs which were completed during that
fiscal year.  The Company expects to realize improved gross and
operating margins in the subsequent quarters of fiscal year 2010 and anticipates
that it will report a profit for the full year.
  15 of
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
  Income
Taxes
  During
the quarter ended July 31, 2009, the Company recorded an income tax provision of
approximately $160,000, or approximately 25% of pre-tax income.  This
provision was completely offset by a reduction in the valuation allowance on
deferred tax assets that was established in prior years.  As of July
31, 2009, the valuation allowance is approximately $8.4 million and may continue
to be reduced as the Company realizes pre-tax profits in future
periods.
  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, 2009, the Company’s European
subsidiaries had available net operating loss carryforwards of approximately
$1.1 million, which will offset future taxable income.  The domestic
U.S. tax loss carryforward, which expires in 2028, is approximately $3.0 million
and the tax loss carryforward for state income tax purposes is approximately
$7.3 million.
  LIQUIDITY
AND CAPITAL RESOURCES
  The
Company’s balance sheet continues to reflect a strong working capital position
of $50 million at July 31, 2009, which is comparable to $48 million in working
capital at April 30, 2009.  Included in working capital at July 31,
2009 is $16.0 million of cash, cash equivalents and marketable securities which
are offset by $1.1 million in borrowings under the Company’s bank line of
credit.  The Company’s current ratio at July 31, 2009 is 6.95 to 1
similar to that at April 30, 2009.
  For the
three months ended July 31, 2009, the Company generated $1.2 million in cash
from operating activities compared to $2.1 million used by operations in the
comparable fiscal year 2009 period.  The primary source of cash in the
fiscal year 2010 period was profitable operations.  During the quarter
ended July 31, 2009, the Company incurred over $1.0 million of non-cash
operating expenses, such as depreciation and amortization and accruals for
employee benefit programs.  These expenses are comparable to prior
years.  In the three month period ended July 31, 2008, the decrease in
operating cash flow was due to operating losses and the growth in accounts
receivable and inventory.  For the balance of fiscal year 2010, the
Company expects to generate positive cash flow from operating
activities.
  Net cash
used in investing activities for the three months ended July 31, 2009, was
$175,000 compared to cash used by investing activities of $6.7 million for the
same period of fiscal year 2009.  In the fiscal year 2010 period,
investing activities consisted solely of acquisition of fixed
assets.  During the comparable fiscal year 2009 period, the Company
invested $6.6 million in marketable securities and acquired additional fixed
assets for $111,000.  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 2010 are expected to be in the range of $1.0
million to $1.5 million.  Internally generated cash is adequate to
acquire this level of capital equipment.
  Net cash
used in financing activities for the three months ended July 31, 2009, was
$70,000 compared to $1.3 million provided by financing activities during the
comparable fiscal year 2009 period.  The fiscal year 2010 activity
consisted solely of payments against the Company’s capital lease
obligation.  During the first quarter of fiscal year 2009, the Company
borrowed $1.5 million against its line of credit, made principle payments of
$52,000 against a long-term capital lease and reacquired capital stock for
treasury in the approximate amount of $100,000.  The Company has
available a $7.4 million line of credit with the financial institution which
also manages a substantial portion of its investment in marketable
securities.  The line is secured by the investments and has no
maturity date so long as the Company maintains its investments with the
financial institution.  At July 31, 2009, the Company had borrowings
under the line of approximately $1.1 million.
  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.  As of July 31, 2009, the
Company has repurchased approximately $4 million of its common stock out of the
$5 million authorization.
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
  The
Company will continue to expend resources to develop and improve products for
space applications, guidance and targeting systems, and communication systems
which management believes will result in future growth and continued
profitability.  During fiscal year 2010, 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 invest in more efficient
product designs and manufacturing procedures.  Where possible, the
Company will secure partial customer funding for such development efforts but is
targeting to spend its own funds at a rate less than 10% of revenues to achieve
its development goals.  Internally generated cash will be adequate to
fund these development efforts.
  As of
July 31, 2009, the Company's consolidated backlog amounted to approximately $31
million.  Approximately 70% of this backlog is expected to be realized
in the next twelve months.  Included in the backlog at July 31, 2009
is approximately $9 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.  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.
  
  Item
4T.
  Controls and
Procedures
  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”)) 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 their evaluation, the Company’s chief executive
officer and chief financial officer have concluded that, as of July 31, 2009,
the Company’s disclosure controls and procedures were not effective for the
reasons discussed below, to ensure that information relating to the Company,
including its consolidated subsidiaries, required to be included in its reports
that it filed or submitted under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
  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.
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  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 (Continued)
  Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of July 31, 2009.  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, 2009.  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 its internal controls within the prescribed timeframe.  As a
result, as of July 31, 2009, 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 in
part, will continue to establish policies and procedures to provide for the
necessary documentation and testing of such internal controls during the current
fiscal year.  During fiscal year 2010, 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.
  In
addition, due to the Company’s small size and lack of resources and staffing,
the Chief Financial Officer is actively involved in the preparation of the
financial statements and therefore, cannot provide an independent review and
quality assurance function within the accounting and financial reporting
group.  The limited number of accounting personnel results in an
inability to have independent review and approval by the Chief Financial Officer
of financial accounting entries.  There is a risk that a material
misstatement of the financial statements could be caused, or at least not be
detected in a timely manner, due to this limitation.  The Company
addressed this material weakness by engaging third-party tax accounting advisors
who identified the need to adjust the fiscal year 2008 deferred tax and income
tax receivable balances.  The Company also hired a new controller and
is creating processes whereby personnel in its Accounting Department (other than
the Chief Financial Officer) will create analysis and original accounting
entries, which will subsequently be reviewed and approved by the Chief Financial
Officer.  The Company expects that compliance with such measures will
remediate this material weakness.
 Changes in Internal Control
Over Financial Reporting. There were no changes in the Company’s internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended July 31, 2009 to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
  PART
II
  ITEMS 1,
1A, 2, 3, 4 and 5 are omitted because they are not applicable.
  ITEM 6 -
Exhibits
  31.1
      -
                Certification
      by the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
  31.2
      -
                Certification
      by the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
  32.1
      -
                Certification
      by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
  32.2
      -
                Certification
      by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
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 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934 the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 FREQUENCY
      ELECTRONICS, INC.(Registrant)Date:
      September 14, 2009
                  BY
                  /s/  Alan
      MillerAlan
      MillerChief
      Financial Officerand
      Treasurer
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