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 October 31, 2008
 
 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
  Large
accelerated filer  ̈Accelerated filer  ̈Non-accelerated filer  ̈Smaller Reporting Company x
  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
December 10, 2008 – 8,073,016
  
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 INDEX
 
 Page
      No.Part
      I.  Financial Information:Item
      1 - Financial Statements:Condensed
      Consolidated Balance Sheets -
                                  October
      31, 2008 and April 30, 2008
                                3Condensed
      Consolidated Statements of Operations
                                  Six
      Months Ended October 31, 2008 and 2007
                                4Condensed
      Consolidated Statements of Operations
                                  Three
      Months Ended October 31, 2008 and 2007
                                5Condensed
      Consolidated Statements of Cash Flows
                                  Six
      Months Ended October 31, 2008 and 2007
                                6Notes
      to Condensed Consolidated Financial Statements
                                7-11Item
      2 - Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                11-16Item
      4T- Controls and Procedures
                                17-18Part
      II.  Other Information:Items
      1, 1A, 2, 3 and 5 are omitted because they are not
    applicableItem
      4 - Submission of Matters to a Vote of Security Holders
                                18Item
      6 - Exhibits
                                18Signatures
                                19Exhibits
                                20-23
  2 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
  Condensed
Consolidated Balance Sheets
  
 
 October 31,
                  
                  
                  April 30,2008
                  
                  
                  2008(UNAUDITED)
                  
                  
                  (AUDITED)(NOTE
      A)(In thousands except share data)ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  3,886
                  
                  
                  $
                  11,029Marketable
      securities
                  
                  
                  9,420
                  
                  
                  
                  4,414Accounts
      receivable, net of allowance for doubtful accounts of $185 at October 31
      and April 30, 2008
                  
                  
                  13,488
                  
                  
                  
                  10,271Costs
      and estimated earnings in excess of billings
                  
                  
                  4,307
                  
                  
                  
                  9,556Inventories
                  
                  
                  29,486
                  
                  
                  
                  30,218Deferred
      income taxes
                  
                  
                  4,193
                  
                  
                  
                  3,974Income
      taxes receivable
                  
                  
                  827
                  
                  
                  
                  151Prepaid
      expenses and other
                  
                  
                  1,183
                  
                  
                  
                  1,371Total
      current assets
                  
                  
                  66,790
                  
                  
                  
                  70,984Property,
      plant and equipment, at cost, less accumulated depreciation and
      amortization
                  
                  
                  8,663
                  
                  
                  
                  9,531Deferred
      income taxes
                  
                  
                  3,023
                  
                  
                  
                  2,990Goodwill
      and other intangible assets, net
                  
                  
                  311
                  
                  
                  
                  405Cash
      surrender value of life insurance and cash held in trust
                  
                  
                  7,923
                  
                  
                  
                  7,671Investments
      in and loans receivable from affiliates
                  
                  
                  4,208
                  
                  
                  
                  4,522Other
      assets
                  
                  
                  817
                  
                  
                  
                  817Total
      assets
                  
                  $
                  91,735
                  
                  
                  $
                  96,920LIABILITIES
      AND STOCKHOLDERS’ EQUITY:Current
      liabilities:Short-term
      credit obligations
                  
                  $
                  5,796
                  
                  
                  $
                  5,168Accounts
      payable – trade
                  
                  
                  1,575
                  
                  
                  
                  2,215Accrued
      liabilities and other
                  
                  
                  4,135
                  
                  
                  
                  4,694Total
      current liabilities
                  
                  
                  11,506
                  
                  
                  
                  12,077Lease
      obligation – noncurrent
                  
                  
                  799
                  
                  
                  
                  911Deferred
      compensation
                  
                  
                  9,719
                  
                  
                  
                  9,467Deferred
      gain and other liabilities
                  
                  
                  624
                  
                  
                  
                  855Total
      liabilities
                  
                  
                  22,648
                  
                  
                  
                  23,310Stockholders’
      equity:Preferred
      stock  - $1.00 par value
                  
                  
                  -
                  
                  
                  
                  -Common
      stock  -  $1.00 par value
                  
                  
                  9,164
                  
                  
                  
                  9,164Additional
      paid-in capital
                  
                  
                  48,671
                  
                  
                  
                  48,213Retained
      earnings
                  
                  
                  11,892
                  
                  
                  
                  13,55869,727
                  
                  
                  
                  70,935Common
      stock reacquired and held in treasury -at cost, 1,047,999 shares at
      October 31, 2008 and 427,366 shares at April 30, 2008
                  
                  
                  (5,014
                  )
                  
                  
                  (2,175
                  )Accumulated
      other comprehensive income
                  
                  
                  4,374
                  
                  
                  
                  4,850Total
      stockholders' equity
                  
                  
                  69,087
                  
                  
                  
                  73,610Total
      liabilities and stockholders' equity
                  
                  $
                  91,735
                  
                  
                  $
                  96,920
 
 See
accompanying notes to condensed consolidated financial
statements.
  3 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Condensed
Consolidated Statements of Operations
 
 Six
Months Ended October 31,
 (Unaudited)
 
 2008
                  
                  
                  2007(In thousands except per share data)Revenues
                  
                  $
                  27,089
                  
                  
                  $
                  33,051Cost
      of revenues
                  
                  
                  21,183
                  
                  
                  
                  23,110Gross
      margin
                  
                  
                  5,906
                  
                  
                  
                  9,941Selling
      and administrative expenses
                  
                  
                  5,951
                  
                  
                  
                  6,371Research
      and development expense
                  
                  
                  2,239
                  
                  
                  
                  3,986Operating
      loss
                  
                  
                  (2,284
                  )
                  
                  
                  (416
                  )Other
      income (expense):Investment
      income
                  
                  
                  367
                  
                  
                  
                  3,763Equity
      loss
                  
                  
                  (308
                  )
                  
                  
                  (145
                  )Interest
      expense
                  
                  
                  (193
                  )
                  
                  
                  (291
                  )Other
      income, net
                  
                  
                  75
                  
                  
                  
                  82(Loss)
      Income before (benefit) provision for income taxes
                  
                  
                  (2,343
                  )
                  
                  
                  2,993(Benefit)
      Provision for income taxes
                  
                  
                  (677
                  )
                  
                  
                  1,204Net
      (loss) income
                  
                  $
                  (1,666
                  )
                  
                  $
                  1,789Net
      (loss) income per common shareBasic
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.21Diluted
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.20Weighted
      average shares outstandingBasic
                  
                  
                  8,523,187
                  
                  
                  
                  8,697,080Diluted
                  
                  
                  8,523,187
                  
                  
                  
                  8,783,792
 
 See
accompanying notes to consolidated condensed financial
statements.
  4 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Condensed
Consolidated Statements of Operations
 
 Three
Months Ended October 31,
 (Unaudited)
 
 2008
                  
                  
                  2007(In thousands except per share data)Revenues
                  
                  $
                  14,026
                  
                  
                  $
                  17,494Cost
      of revenues
                  
                  
                  11,311
                  
                  
                  
                  12,024Gross
      margin
                  
                  
                  2,715
                  
                  
                  
                  5,470Selling
      and administrative expenses
                  
                  
                  2,835
                  
                  
                  
                  3,285Research
      and development expense
                  
                  
                  874
                  
                  
                  
                  1,809Operating
      (loss) profit
                  
                  
                  (994
                  )
                  
                  
                  376Other
      income (expense):Investment
      income
                  
                  
                  209
                  
                  
                  
                  520Equity
      (loss) income
                  
                  
                  (345
                  )
                  
                  
                  (65
                  )Interest
      expense
                  
                  
                  (110
                  )
                  
                  
                  (160
                  )Other
      income, net
                  
                  
                  (6
                  )
                  
                  
                  82(Loss)
      Income before (benefit) provision for income taxes
                  
                  
                  (1,246
                  )
                  
                  
                  753(Benefit)
      Provision for income taxes
                  
                  
                  (352
                  )
                  
                  
                  344Net
      (loss) income
                  
                  $
                  (894
                  )
                  
                  $
                  409Net
      (loss) income per common shareBasic
                  
                  $
                  (0.11
                  )
                  
                  $
                  0.05Diluted
                  
                  $
                  (0.11
                  )
                  
                  $
                  0.05Weighted
      average shares outstandingBasic
                  
                  
                  8,304,288
                  
                  
                  
                  8,699,133Diluted
                  
                  
                  8,304,288
                  
                  
                  
                  8,783,992
 
 See
accompanying notes to condensed consolidated financial
statements.
  5 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Condensed
Consolidated Statements of Cash Flows
 
 Six
Months Ended October 31,
 (Unaudited)
  2008
                  
                  
                  2007(In
      thousands)Cash
      flows from operating activities:Net
      (loss) income
                  
                  $
                  (1,666
                  )
                  
                  $
                  1,789Non-cash
      (income) charges to earnings, net
                  
                  
                  2,552
                  
                  
                  
                  (821
                  )Net
      changes in operating assets and liabilities
                  
                  
                  (420
                  )
                  
                  
                  (3,553
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  466
                  
                  
                  
                  (2,585
                  )Cash
      flows from investing activities:Proceeds
      from sale of marketable securities and investments
                  
                  
                  1,036
                  
                  
                  
                  7,161Purchase
      of marketable securities
                  
                  
                  (6,594
                  )
                  
                  
                  (174
                  )Purchase
      of fixed assets
                  
                  
                  (293
                  )
                  
                  
                  (1,297
                  )Net
      cash (used in) provided by investing activities
                  
                  
                  (5,851
                  )
                  
                  
                  5,690Cash
      flows from financing activities:Proceeds
      from short-term credit obligations
                  
                  
                  1,500
                  
                  
                  
                  3,500Debt
      payments
                  
                  
                  (1,106
                  )
                  
                  
                  -Payment
      of cash dividend
                  
                  
                  -
                  
                  
                  
                  (869
                  )Proceeds
      from stock option exercises
                  
                  
                  -
                  
                  
                  
                  81Purchase
      of stock for treasury
                  
                  
                  (2,974
                  )
                  
                  
                  (233
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (2,580
                  )
                  
                  
                  2,479Net
      (decrease) increase in cash and cash equivalents before effect of exchange
      rate changes
                  
                  
                  (7,965
                  )
                  
                  
                  5,584Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  822
                  
                  
                  
                  746Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (7,143
                  )
                  
                  
                  6,330Cash
      and cash equivalents at beginning of period
                  
                  
                  11,029
                  
                  
                  
                  1,336Cash
      and cash equivalents at end of period
                  
                  $
                  3,886
                  
                  
                  $
                  7,666Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                  
                  $
                  159
                  
                  
                  $
                  133Income
      Taxes
                  
                  
                  -
                  
                  
                  $
                  425
 
 See
accompanying notes to condensed consolidated financial
statements.
  6 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 October 31, 2008 and the results of its
operations and cash flows for the six and three months ended October 31, 2008
and 2007.  The April 30, 2008 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, 2008 Annual Report to Stockholders
on Form 10-K.  The results of operations for such interim periods are
not necessarily indicative of the operating results for the full fiscal
year.
  NOTE B -
EARNINGS PER SHARE
 
 Reconciliation
of the weighted average shares outstanding for basic and diluted Earnings Per
Share are as follows:
 
 Six months
                      
                      
                      Three monthsPeriods ended October 31,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Basic
      EPS Shares outstanding (weighted average)
                      
                      
                      8,523,187
                      
                      
                      
                      8,697,080
                      
                      
                      
                      8,304,288
                      
                      
                      
                      8,699,133Effect
      of Dilutive Securities
                      
                      
                      ***
                      
                      
                      
                      86,712
                      
                      
                      
                      ***
                      
                      
                      
                      84,859Diluted
      EPS Shares outstanding
                      
                      
                      8,523,187
                      
                      
                      
                      8,783,792
                      
                      
                      
                      8,304,288
                      
                      
                      
                      8,783,992
 
 ***
                Dilutive
      securities are excluded for the six and three-month periods ended October
      31, 2008 since the inclusion of such shares would be antidilutive due to
      the net loss for the periods 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 were:
  Six months
              
              
              Three monthsPeriods ended October 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Outstanding
      Options excluded
              
              
              1,155,094
              
              
              
              949,425
              
              
              
              1,155,094
              
              
              
              952,425
  NOTE C –
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
  At
October 31, 2008 and April 30, 2008 costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis were approximately $4,307,000 and $9,556,000,
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.  During the six and
three months ended October 31, 2008, the revenue recognized under percentage of
completion contracts was $9.6 million and $4.8 million,
respectively.  For the same periods of fiscal year 2008, the Company
recognized percentage of completion revenue of $14.8 million and $8.3 million,
respectively.
  7 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
  NOTE D -
INVENTORIES
  Inventories,
which are reported net of reserves of $6,740,000 and $6,206,000 at October 31,
2008 and April 30, 2008, respectively, consist of the following:
  October 31, 2008
                  
                  
                  April 30, 2008(In
      thousands)Raw
      materials and Component parts
                  
                  $
                  14,071
                  
                  
                  $
                  12,523Work
      in progress
                  
                  
                  12,071
                  
                  
                  
                  13,938Finished
      Goods
                  
                  
                  3,344
                  
                  
                  
                  3,757$
                  29,486
                  
                  
                  $
                  30,218
  As of
October 31, 2008 and April 30, 2008, approximately $22.0 million and $22.9
million, respectively, of total inventory is located in the United States,
approximately $6.1 million and $5.8 million, respectively, is located in Belgium
and $1.4 million and $1.5 million, respectively, is located in
China.
  NOTE E –
COMPREHENSIVE INCOME
  For the
six months ended October 31, 2008 and 2007, comprehensive income (loss) is
composed of (in thousands):
  Six months ended October 31,2008
              
              
              2007Net
      (loss) income
              
              $
              (1,666
              )
              
              $
              1,789Foreign
      currency translation adjustment
              
              
              (134
              )
              
              
              1,510Change
      in valuation allowance on marketable securities
              
              
              (570
              )
              
              
              (114
              )Plus
      deferred tax effect of change in valuation allowance
              
              
              228
              
              
              
              46Comprehensive
      (loss) income
              
              $
              (2,142
              )
              
              $
              3,231
  NOTE F –
TREASURY STOCK TRANSACTIONS
  On
September 11, 2008, the Company announced that it had acquired 615,000 shares of
its outstanding common stock in a block transaction with what had been its
largest institutional shareholder.  The Company paid approximately
$2.6 million for these shares.  Coupled with other purchases of common
stock during the six month period ended October 31, 2008, the Company acquired a
total of 677,651 shares at an average price per share of
$4.39.  Subsequent to October 31, 2008, the Company acquired an
additional 43,000 shares at an average price per share of $2.85.  With
these purchases, the Company has acquired approximately $4 million of its common
stock out of the total authorization of $5 million.  Offsetting the
treasury stock purchases, the Company contributed 57,018 shares to the profit
sharing plan and trust under section 401(k) of the Internal Revenue Code for the
benefit of the Company’s employees.
  NOTE G –
SEGMENT INFORMATION
  The
Company operates under three reportable segments:
  (1)
              FEI-NY
      – consists principally of precision time and frequency control products
      used in three principal markets: communication satellites (both commercial
      and U.S. Government-funded); terrestrial cellular telephone or other
      ground-based telecommunication stations and other components and systems
      for the U.S. military.
 (2)
              Gillam-FEI
      - the Company’s Belgian subsidiary primarily sells wireline
      synchronization and network management
systems.
 (3)
              FEI-Zyfer
      - the products of the Company’s subsidiary incorporate Global Positioning
      System (GPS) technologies into systems and subsystems for secure
      communications, both government and commercial, and other locator
      applications.
  The
FEI-NY segment also includes the operations of the Company’s wholly-owned
subsidiary, FEI-Asia, which functions primarily as a manufacturing facility for
the FEI-NY segment.
  8 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 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):
 
 Six months
                  
                  
                  Three monthsPeriods ended October 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenues:FEI-NY
                  
                  $
                  18,633
                  
                  
                  $
                  25,372
                  
                  
                  $
                  9,788
                  
                  
                  $
                  13,607Gillam-FEI
                  
                  
                  5,301
                  
                  
                  
                  4,749
                  
                  
                  
                  2,683
                  
                  
                  
                  2,461FEI-Zyfer
                  
                  
                  4,127
                  
                  
                  
                  4,291
                  
                  
                  
                  1,824
                  
                  
                  
                  2,269less
      intersegment revenues
                  
                  
                  (972
                  )
                  
                  
                  (1,361
                  )
                  
                  
                  (269
                  )
                  
                  
                  (843
                  )Consolidated
      revenues
                  
                  $
                  27,089
                  
                  
                  $
                  33,051
                  
                  
                  $
                  14,026
                  
                  
                  $
                  17,494Operating
      (loss) profit:FEI-NY
                  
                  $
                  (1,780
                  )
                  
                  $
                  (46
                  )
                  
                  $
                  (552
                  )
                  
                  $
                  495Gillam-FEI
                  
                  
                  (10
                  )
                  
                  
                  (187
                  )
                  
                  
                  45
                  
                  
                  
                  (44
                  )FEI-Zyfer
                  
                  
                  (282
                  )
                  
                  
                  93
                  
                  
                  
                  (356
                  )
                  
                  
                  90Corporate
                  
                  
                  (212
                  )
                  
                  
                  (276
                  )
                  
                  
                  (131
                  )
                  
                  
                  (165
                  )Consolidated
      operating (loss) profit
                  
                  $
                  (2,284
                  )
                  
                  $
                  (416
                  )
                  
                  $
                  (994
                  )
                  
                  $
                  376
  October 31, 2008
                      
                      
                      April 30, 2008Identifiable
      assets:FEI-NY
                      
                      $
                      50,817
                      
                      
                      $
                      54,522Gillam-FEI
                      
                      
                      18,019
                      
                      
                      
                      18,611FEI-Zyfer
                      
                      
                      6,132
                      
                      
                      
                      6,538less
      intercompany balances
                      
                      
                      (17,097
                      )
                      
                      
                      (17,786
                      )Corporate
                      
                      
                      33,864
                      
                      
                      
                      35,035Consolidated
      Identifiable Assets
                      
                      $
                      91,735
                      
                      
                      $
                      96,920
 
 NOTE H –
RELATED PARTY TRANSACTIONS
  The
Company has an equity interest in two strategically important companies: Elcom
Technologies, Inc. (“Elcom”) and Morion Inc. (“Morion”).  During the
six and three month periods ended October 31, 2008 and 2007, 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:
  Six months
                      
                      
                      Three monthsPeriods ended October 31,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007(in
      thousands)Purchases
      from:Elcom
                      
                      $
                      113
                      
                      
                      $
                      394
                      
                      
                      $
                      38
                      
                      
                      $
                      135Morion
                      
                      
                      469
                      
                      
                      
                      369
                      
                      
                      
                      179
                      
                      
                      
                      177Sales
      to:Elcom
                      
                      $
                      25
                      
                      
                      $
                      -
                      
                      
                      $
                      11
                      
                      
                      $
                      -Morion
                      
                      
                      50
                      
                      
                      
                      114
                      
                      
                      
                      32
                      
                      
                      
                      13Interest
      on Elcom note receivable
                      
                      $
                      38
                      
                      
                      $
                      61
                      
                      
                      $
                      19
                      
                      
                      $
                      30
  9 of
19
  FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES
 
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)
 
 During
the second quarter of fiscal 2009, the Company repurchased from Elcom 29,651
shares of the Company’s outstanding common stock at an aggregate cost of
approximately $150,000.  The amount paid was at the market value of
the Company’s common stock on the date of purchase.
  NOTE I -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements.”  (“FAS 157”)  This statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles (“GAAP”) and expands disclosures about fair value
measurements.  FAS 157 does not require any new fair value
measurements but simplifies and codifies related guidance.  The
Company adopted FAS 157 in fiscal year 2009.  Such adoption did not
have a material impact on the Company’s financial statements.
  During
calendar year 2008, the FASB issued FASB Staff Positions (“FSP FAS”) 157-1,
157-2, and 157-3.  FSP FAS 157-1 amends FAS 157 to exclude FAS No. 13,
“Accounting for Leases”, and its related interpretive accounting pronouncements
that address leasing transactions, FSP FAS 157-2 delays the effective date of
the application of FAS 157 to fiscal years beginning after November 15, 2008 for
all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis, and
FSP FAS 157-3 clarifies how the fair value of a financial asset is determined
when the market for that financial asset is inactive.
  In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS No.
115” (“FAS 159”).  The new statement allows entities to choose, at
specified election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair
value.  If a company elects the fair value option for an eligible
item, changes in that item’s fair value in subsequent reporting periods must be
recognized in current earnings.  FAS 159 is effective for fiscal years
beginning after November 15, 2007.  The adoption of FAS 159 in fiscal
year 2009 had no impact on the Company’s financial statements since the Company
elected not to measure any financial assets or liabilities at fair value other
than those for which previous pronouncements required it to do so.
  In
December 2007, the FASB issued Statements No. 141(R), “Business Combinations”,
and No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.”  Effective for fiscal years beginning after December 15,
2008, these statements revise and converge internationally the accounting for
business combinations and the reporting of noncontrolling interests in
consolidated financial statements.  The adoption of these statements
will change the Company’s accounting treatment for business combinations on a
prospective basis.
  In March
2008, the FASB issued Statement No.161, Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133 (“FAS
161”).  FAS 161 requires enhanced qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.  FAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the impact of FAS 161 on
its consolidated financial statements although it does not anticipate that the
statement will have a material impact since the Company has not historically
engaged in hedging activities or acquired derivative instruments.
  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.
  10 of
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ELECTRONICS, INC. and SUBSIDIARIES





Notes to
Condensed Consolidated Financial Statements


(Unaudited)





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




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










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




Revenue
Recognition




Revenues
under 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
revenues 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.


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(Continued)




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




For
customer orders in the Company’s Gillam-FEI and FEI-Zyfer segments or
nonlong-term contracts or orders in the FEI-NY segment, revenues 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.




Inventory




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




RESULTS
OF OPERATIONS




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





Six months
                
                
                Three monthsPeriods ended October 31,2008
                
                
                2007
                
                
                2008
                
                
                2007RevenuesFEI-NY
                
                
                68.8
                %
                
                
                76.8
                %
                
                
                69.8
                %
                
                
                77.8
                %Gillam-FEI
                
                
                19.6
                
                
                
                14.4
                
                
                
                19.1
                
                
                
                14.0FEI-Zyfer
                
                
                15.2
                
                
                
                13.0
                
                
                
                13.0
                
                
                
                13.0Less
      intersegment revenues
                
                
                (3.6
                )
                
                
                (4.2
                )
                
                
                (1.9
                )
                
                
                (4.8
                )100.0
                
                
                
                100.0
                
                
                
                100.0
                
                
                
                100.0Cost
      of revenues
                
                
                78.2
                
                
                
                69.9
                
                
                
                80.6
                
                
                
                68.7Gross
      Margin
                
                
                21.8
                
                
                
                30.1
                
                
                
                19.4
                
                
                
                31.3Selling
      and administrative expenses
                
                
                21.9
                
                
                
                19.3
                
                
                
                20.2
                
                
                
                18.8Research
      and development expenses
                
                
                8.3
                
                
                
                12.1
                
                
                
                6.2
                
                
                
                10.4Operating
      (Loss) Profit
                
                
                (8.4
                )
                
                
                (1.3
                )
                
                
                (7.0
                )
                
                
                2.1Other
      income (expense), net
                
                
                (0.2
                )
                
                
                10.3
                
                
                
                (1.8
                )
                
                
                2.2Pretax
      (Loss) Income
                
                
                (8.6
                )
                
                
                9.0
                
                
                
                (8.8
                )
                
                
                4.3(Benefit)
      Provision for income taxes
                
                
                (2.5
                )
                
                
                3.6
                
                
                
                (2.5
                )
                
                
                2.0Net
      (Loss) Income
                
                
                (6.1
                )%
                
                
                5.4
                %
                
                
                (6.3
                )%
                
                
                2.3
                %


12 of
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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES


(Continued)




(Note:
All dollar amounts in following tables are in thousands, except Revenues which
are in millions)




Revenues





(in millions)Six months
                                        
                                        
                                        Three monthsPeriods ended October 31,Segment
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        Change
                                        
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        ChangeFEI-NY
                                        
                                        $
                                        18.6
                                        
                                        
                                        $
                                        25.4
                                        
                                        
                                        $
                                        (6.8
                                        )
                                        
                                        
                                        (27
                                        )%
                                        
                                        $
                                        9.8
                                        
                                        
                                        $
                                        13.6
                                        
                                        
                                        $
                                        (3.8
                                        )
                                        
                                        
                                        (28
                                        )%Gillam-FEI
                                        
                                        
                                        5.3
                                        
                                        
                                        
                                        4.7
                                        
                                        
                                        
                                        0.6
                                        
                                        
                                        
                                        12
                                        %
                                        
                                        
                                        2.7
                                        
                                        
                                        
                                        2.5
                                        
                                        
                                        
                                        0.2
                                        
                                        
                                        
                                        9
                                        %FEI-Zyfer
                                        
                                        
                                        4.1
                                        
                                        
                                        
                                        4.3
                                        
                                        
                                        
                                        (0.2
                                        )
                                        
                                        
                                        (4
                                        )%
                                        
                                        
                                        1.8
                                        
                                        
                                        
                                        2.2
                                        
                                        
                                        
                                        (0.4
                                        )
                                        
                                        
                                        (20
                                        )%Intersegment
      revenues
                                        
                                        
                                        (0.9
                                        )
                                        
                                        
                                        (1.4
                                        )
                                        
                                        
                                        0.5
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (0.3
                                        )
                                        
                                        
                                        (0.8
                                        )
                                        
                                        
                                        0.5$
                                        27.1
                                        
                                        
                                        $
                                        33.0
                                        
                                        
                                        $
                                        (5.9
                                        )
                                        
                                        
                                        (18
                                        )%
                                        
                                        $
                                        14.0
                                        
                                        
                                        $
                                        17.5
                                        
                                        
                                        $
                                        (3.5
                                        )
                                        
                                        
                                        (20
                                        )%




The
decrease in revenues for the six and three month periods ended October 31, 2008
compared to the same periods of fiscal year 2008, was primarily the result of
lower revenues from commercial satellite payload programs recorded in the FEI-NY
segment.  Satellite revenues were reduced as a consequence of higher
than anticipated levels of engineering and manufacturing costs which were
incurred in the fourth quarter of fiscal year 2008 and carried over into the
fiscal year 2009 periods.  These additional costs reduced the expected
gross margins of these programs on which revenue is recognized on the percentage
of completion basis.  Revenues from telecommunication customers which
are recorded in each of the Company’s operating segments and revenues from
non-space U.S. Government customers which are recorded in the FEI-NY and
FEI-Zyfer segments, were essentially flat year over year.  During the
remainder of fiscal year 2009, the Company expects revenues from U.S. Government
satellite programs to increase from current levels as a result of recent
contract awards and expectations for additional contract awards during this
fiscal year.  However, commercial satellite revenue is expected to
continue to decline as operators deal with tight credit
conditions.  Telecommunication infrastructure revenues and sales to
non-space U.S. Government programs are expected to increase over the balance of
fiscal year 2009.




Gross
margin





Six months
                      
                      
                      Three monthsPeriods ended October 31,2008
                      
                      
                      2007
                      
                      
                      Change
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      Change$
                      5,906
                      
                      
                      $
                      9,941
                      
                      
                      $
                      (4,035
                      )
                      
                      
                      (41
                      )%
                      
                      $
                      2,715
                      
                      
                      $
                      5,470
                      
                      
                      $
                      (2,755
                      )
                      
                      
                      (50
                      )%GM
      Rate
                      
                      
                      21.8
                      %
                      
                      
                      30.1
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      19.4
                      %
                      
                      
                      31.3
                      %




The 41%
and 50% decreases in gross margin for the six and three months ended October 31,
2008, respectively, is due primarily to lower revenues and higher levels of
engineering and manufacturing costs on certain satellite payload programs that
the Company began to experience in late fiscal year 2008.  The gross
margin rates of 21.8% and 19.4% for the six and three-month periods ended
October 31, 2008, respectively, also reflect the impact of recording higher
reserves for slow moving inventory.  Such reserve increases reduced
gross margins by approximately 2% and 3.5%, respectively.  With the
completion of the challenging satellite programs in fiscal year 2009, the
Company anticipates that its gross margin rate will improve.




Selling and administrative
expenses




Six months
                                
                                
                                Three monthsPeriods ended October 31,2008
                                
                                
                                2007
                                
                                
                                Change
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                Change$
                                5,951
                                
                                
                                $
                                6,371
                                
                                
                                $
                                (420
                                )
                                
                                
                                (7
                                )%
                                
                                $
                                2,835
                                
                                
                                $
                                3,285
                                
                                
                                $
                                (450
                                )
                                
                                
                                (14
                                )%




For the
six and three months ended October 31, 2008, selling and administrative expenses
were 21.9% and 20.2%, respectively, of consolidated revenues.  This is
compared to 19.3% and 18.8%, respectively, for the same periods of fiscal year
2008.  The Company’s target for such expenses is not to exceed 20% of
revenues.  In the fiscal year 2009 periods, this ratio was not
achieved due to a lower level of revenues and increases in professional fees and
certain marketing expenses.  These increases were offset by decreases
in personnel costs including reduced incentive compensation and decreased
employee benefits resulting from a lower headcount.  In subsequent
quarters of fiscal year 2009, the Company
expects selling and administrative expenses to be incurred at 20% or less of
revenues both by controlling costs as well as increasing
revenues.


13 of
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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES


(Continued)




Research and development
expense




Six months
                              
                              
                              Three monthsPeriods ended October 31,2008
                              
                              
                              2007
                              
                              
                              Change
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              Change$
                              2,239
                              
                              
                              $
                              3,986
                              
                              
                              $
                              (1,747
                              )
                              
                              
                              (44
                              )%
                              
                              $
                              874
                              
                              
                              $
                              1,809
                              
                              
                              $
                              (935
                              )
                              
                              
                              (52
                              )%




Research
and development expenditures represent investments that keep the Company’s
products at the leading edge of time and frequency technology and enhance
competitiveness for future revenues.  Research and development
spending for the six and three-month periods ended October 31, 2008, was 8.3%
and 6.2% of revenues, respectively, compared to 12.1% and 10.4% of revenues for
the same periods
of fiscal year 2008, respectively.  The decreased spending in fiscal
year 2009 is a result of many of the Company’s development resources being
applied to certain cost-plus-fee satellite payload programs.  As a
consequence, some of the Company’s development expenditures will be
customer-funded and the costs will appear in cost of revenues, thus reducing the
level of internal research and development spending.  In the six and
three-month periods ended October 31, 2007, the Company incurred exceptional
levels of engineering spending and development work on its satellite payload
products.  This effort abated throughout fiscal year
2008.  The Company targets research and development spending at
approximately 10% of revenues, but the rate of spending can increase or decrease
from quarter to quarter as new projects are identified and others are
concluded.  The Company will continue to devote significant resources
to develop new products, enhance existing products and implement efficient
manufacturing processes.  Internally generated cash and cash reserves
are adequate to fund these development efforts.




Operating
Loss





Six months
                            
                            
                            Three monthsPeriods ended October 31,2008
                            
                            
                            2007
                            
                            
                            Change
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            Change$
                            (2,284
                            )
                            
                            $
                            (416
                            )
                            
                            $
                            (1,868
                            )
                            
                            
                            (449
                            )%
                            
                            $
                            (994
                            )
                            
                            $
                            376
                            
                            
                            $
                            (1,370
                            )
                            NM




Lower
revenues, the continuing level of engineering and manufacturing effort related
to satellite payload programs and recording a higher level of inventory reserves
resulted in operating losses for the six and three-month periods ended October
31, 2008, compared to the same periods of fiscal year 2008.  The
Company anticipates that as the gross margin rate improves and as revenues
increase from current levels, that it will generate an operating profit for the
second half of fiscal year 2009.




Other income
(expense)





Six months
                
                
                Three monthsPeriods ended October 31,2008
                
                
                2007
                
                
                Change
                
                
                2008
                
                
                2007
                
                
                ChangeInvestment
      income
                
                $
                367
                
                
                $
                3,763
                
                
                $
                (3,396
                )
                
                
                (90
                )%
                
                $
                209
                
                
                $
                520
                
                
                $
                (311
                )
                
                
                (60
                )%Equity
      (loss)
                
                
                (308
                )
                
                
                (145
                )
                
                
                (163
                )
                
                
                (112
                )%
                
                
                (345
                )
                
                
                (65
                )
                
                
                (280
                )
                
                
                (431
                )%Interest
      expense
                
                
                (193
                )
                
                
                (291
                )
                
                
                98
                
                
                
                34
                %
                
                
                (110
                )
                
                
                (160
                )
                
                
                50
                
                
                
                31
                %Other
      income, net
                
                
                75
                
                
                
                82
                
                
                
                (7
                )
                
                
                (9
                )%
                
                
                (6
                )
                
                
                82
                
                
                
                (88
                )
                
                
                (107
                )%$
                ( 59
                )
                
                $
                3,409
                
                
                $
                (3,468
                )
                
                
                (102
                )%
                
                $
                (252
                )
                
                $
                377
                
                
                $
                (629
                )
                
                
                (167
                )%




During
the six months ended October 31, 2007, the Company reduced its investment in
Morion, Inc. from 36.6% to 8% by selling shares to a Russian government
majority-owned bank.  The Company received proceeds of approximately
$5.8 million and realized a book gain of approximately $3.0
million.  Such gain was included in investment income for the first
quarter of fiscal year 2008.  Comparable gains were not recorded
during the fiscal year 2009 periods.  In addition, investment income
was reduced in the fiscal year 2009 period due to a lower level of marketable
securities than in the same periods of the prior year.




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


14 of
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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES


(Continued)




The
decrease in interest expense for the six and three month periods ended October
31, 2008, resulted from both a decrease in borrowings under the Company’s line
of credit as well as a lower rate of interest charged on such borrowings
compared to the same periods ended October 31, 2007.




Under the
provisions of sale and leaseback accounting, a portion of the capital gain
realized on a fiscal year 2005 real estate transaction is deferred and
recognized in income over the initial lease term.  Under the caption
“Other income, net” the Company recognized deferred gain of $177,000 and $88,000
for the six and three months ended October 31, 2008 and 2007,
respectively.  These gains were partially offset by certain
nonrecurring expenses at the FEI-NY and Gillam-FEI segments, including certain
foreign currency exchange losses, settlement of European insurance claims and
business interruption costs.  Other insignificant income and expense
items are also recorded under this caption.




Net (Loss)
income





Six months
                            
                            Three monthsPeriods ended October 31,2008
                            
                            
                            2007
                            
                            
                            Change
                            
                            2008
                            
                            
                            2007
                            
                            
                            Change$
                            (1,666
                            )
                            
                            $
                            1,789
                            
                            
                            $
                            (3,455
                            )
                            NM
                            
                            $
                            (894
                            )
                            
                            $
                            409
                            
                            
                            $
                            (1,303
                            )
                            NM




Net loss
for the six and three month periods ended October 31, 2008, resulted from the
decrease in revenues, the higher engineering and production costs on certain
satellite programs and increases to inventory reserves as discussed
above.  The fiscal year 2008 results were positively impacted by the
investment gain recorded on the sale of a portion of the Company’s investment in
Morion.  The Company expects to realize improved gross and operating
margins in the remaining quarters of fiscal year 2009 and anticipates that it
will report a profit for the second half of the year.




Income
Taxes




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




LIQUIDITY
AND CAPITAL RESOURCES




The
Company’s balance sheet continues to reflect a strong working capital position
of $55 million at October 31, 2008, which is compared to working capital of $59
million at April 30, 2008.  Included in working capital at October 31,
2008 is $13.3 million of cash, cash equivalents and marketable securities which
are offset by $5.6 million in borrowings under its bank line of
credit.  The Company’s current ratio at October 31, 2008 is 5.8 to
1.




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


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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES


(Continued)


Net cash
used in investing activities for the six months ended October 31, 2008, was $5.9
million compared to cash provided by investing activities of $5.7 million for
the same period of fiscal year 2008.  During the fiscal year 2009
period, the Company invested $5.6 million in marketable securities, net of $1.0
million in proceeds from the sale of certain marketable securities, and acquired
additional fixed assets
for $293,000.  In the prior fiscal year, the Company received net
proceeds of $5.6 million from the sale of a portion of its investment in Morion
and the net proceeds from the redemption and purchase of marketable securities
for $1.3 million.  This cash inflow was partially offset by fixed
asset acquisitions of $1.3 million.  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 2009
are expected to aggregate approximately $2.0 million.  Internally
generated cash is adequate to acquire this level of capital
equipment.




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




The
Company has been authorized by its Board of Directors to repurchase up to $5
million worth of shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments
to purchase additional shares in the future.  Subsequent to the end of
the current quarter, the Company acquired approximately 43,000 shares at an
average price of $2.85.  Including these purchases, the Company has
repurchased approximately $4 million of its common stock out of the $5 million
authorization.




The
Company will continue to expend resources to develop and improve products for
space applications, guidance and targeting systems, wireless networks and
wireline communication systems which management believes will result in future
growth and continued profitability.  During fiscal year 2009, the
Company intends to make investments in more efficient product designs, automatic
test equipment, employee training and improved manufacturing
processes.  For the current fiscal year and for the foreseeable
future, the Company has been awarded several cost-plus-fee development contracts
for satellite payloads.  Such customer-funded programs will enable the
Company to conduct important development activities and the Company will be
reimbursed by its customers for its efforts.  Thus, the Company
expects to spend its own funds at a lower rate than it has historically to
achieve its development goals.  Internally generated cash will be
adequate to fund these internal research and development efforts.




As of
October 31, 2008, the Company's consolidated backlog amounted to approximately
$36 million.  Approximately 75% of this backlog is expected to be
realized in the next twelve months.  Included in the backlog at
October 31, 2008 is approximately $7.3 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.







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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES


(Continued)




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 October 31, 2008,
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.




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




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




Financial
Reporting


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




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.


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ELECTRONICS, INC. and SUBSIDIARIES


(Continued)




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 insufficient segregation of duties.  During
fiscal year 2009, the Company plans to remediate this material weakness by
engaging third-party accounting advisors and by 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.




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 ending October 31, 2008 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 and 5 are omitted because they are not applicable.





ITEM
4  Submission of Matters to a Vote of Security Holders




On October 7, 2008, at the Annual
Meeting of Stockholders, the following matters were approved by the shareholders
of the Company:




1.
            Election
      of the following six directors:




DIRECTOR
                    
                    FOR
                    
                    
                    WITHHELD
                    
                    
                    BROKER NON-VOTESJoseph
      P. Franklin
                    
                    
                    5,345,939
                    
                    
                    
                    2,676,708
                    
                    
                    
                    0Martin
      B. Bloch
                    
                    
                    5,422,403
                    
                    
                    
                    2,600,244
                    
                    
                    
                    0Joel
      Girsky
                    
                    
                    6,486,644
                    
                    
                    
                    1,536,003
                    
                    
                    
                    0E.
      Donald Shapiro
                    
                    
                    7,456,138
                    
                    
                    
                    566,509
                    
                    
                    
                    0S.
      Robert Foley, Jr.
                    
                    
                    7,425,696
                    
                    
                    
                    596,951
                    
                    
                    
                    0Richard
      Schwartz
                    
                    
                    7,463,111
                    
                    
                    
                    559,536
                    
                    
                    
                    0





2.
            Ratification
      of the appointment of Eisner LLP as independent auditors for fiscal year
      2009.  The results of the voting were as
  follows:




FOR
                  
                  
                  AGAINST
                  
                  
                  ABSTAIN
                  
                  
                  BROKER NON-VOTES7,901,578
                  
                  
                  
                  119,131
                  
                  
                  
                  1,938
                  
                  
                  
                  0





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:
      December 15, 2008
                        BY
                        /s/ Alan MillerAlan
      MillerChief
      Financial Officerand
      Treasurer


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