FREQUENCY ELECTRONICS INC (FEIM) FY 2026 MD&A

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 Annual Report on Form 10-K 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, the risks associated with reliance on key customers, including the U.S. government, the Company’s use of
estimates when accounting for contracts, actions by significant customers or competitors, competitive factors, new products and
technological changes, continued acceptance of the Company’s products in the marketplace, dependence upon third-party vendors,
product prices and raw material costs, the Company’s ability to attract and retain key employees, general domestic and
international economic conditions, health epidemics and pandemics, external disruptions to the Company’s facilities or supply
chain, the Company’s operations in a highly regulated industry, the outcome of any litigation and arbitration proceedings,
cybersecurity attacks, noncompliance with any of the covenants in the Credit Agreement, volatility in the Company’s stock
price, including due to the relatively low trading volume of its common stock, and failure to maintain an effective system of
internal controls over financial reporting. The factors listed above are not exhaustive. Other sections of this Form 10-K
include additional factors that could materially and adversely impact the Company’s business, financial condition and results
of operations.  Moreover, the Company operates in a very competitive and rapidly changing environment.  New factors emerge
from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business,
financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors
should not rely on forward-looking statements as a prediction of actual results.  Any or all of the forward-looking statements
contained in this Form 10-K and any other public statement made by the Company or its management may turn out to be incorrect.
The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.

Critical
Accounting Estimates

The
Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The Company believes
its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes and the valuation
of inventories. Each of these areas requires the Company to make use of reasonable estimates, including estimating the cost to complete
a contract, the realizable value of its inventories 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
for most contracts are reported in operating results over time using 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 estimating
additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs
and status of the contract. The effect of any change in the estimated gross margin rate for a contract is reflected in revenues in the
period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which
they become determinable.

Significant
judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost.
The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected
costs for material and labor.

Income
Taxes

On
July 4, 2025, President Trump signed H.R.1, the One Big Beautiful Bill Act (“OBBBA”) into law. In accordance with U.S. GAAP,
the Company accounted for the tax effects of changes in tax law in the period of enactment during the first quarter of fiscal year 2026.
The OBBBA made changes to the U.S. tax code, including, but not limited to: (1) allowing taxpayers to fully deduct domestic research
expenditures for tax years beginning after December 31, 2024, (2) provides a catch-up relief provision for taxpayers to accelerate deductions
for unamortized domestic research expenditures, (3) provides a permanent provision for 100% bonus depreciation deductions for most tangible
personal property with a recovery period of 20 years or less, acquired and placed in service after January 19, 2025, and (4) for tax
years beginning after December 31, 2024, restores Adjusted Taxable Income by adding back amortization and depreciation to calculate the
limitation on interest deductions (effectively returning to EBITDA). The enactment of the OBBBA did not have a material impact on our
provision or effective tax rate as of April 30, 2026. We continue to evaluate the OBBBA and its requirements, as well as its application
to our business and its impact on cash taxes and our effective tax rate.

Our
income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best
estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated
income tax expense.

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Deferred
income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements, which will result in taxable or deductible amounts in the future. Accounting for income taxes requires that a
valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be
realized. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all
positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning
strategies, and results of recent operations. In circumstances where there is sufficient negative evidence indicating that the
deferred tax assets will not be realizable, we establish a valuation allowance.

The
Company maintains a valuation allowance of approximately $1.4 million against certain deferred tax assets including state tax
credits and capital loss carryforwards because the realization of these tax attributes requires sufficient taxable income be sourced
to the respective state jurisdiction and capital gain income is required to utilize capital losses. The Company will continue to
evaluate the realizability of its deferred tax assets quarterly. Any further increases or decreases in the valuation allowance could
have an unfavorable or favorable impact on the Company’s income tax provision and net income in the period in which such
determination is made. As of April 30, 2026, the deferred tax asset is recorded at its more-likely-than-not realizable
amount.

Tax
benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position
will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold,
the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate
settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing
circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as
considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular
tax matter, the Company believes its liability for unrecognized tax benefits is adequate.

RESULTS
OF OPERATIONS

Consolidated
Results

The
table below sets forth for the fiscal years ended April 30, 2026 and 2025, the percentage of consolidated net sales represented by certain
items in the Company’s consolidated statements of operations:

Revenues

For
the fiscal year ended April 30, 2026 revenue decreased by approximately $6.6 million, or 9%, compared to the prior fiscal year.
Fiscal 2026 was a year of digestion from a revenue standpoint, as the Company pulled forward some revenue into last year’s
Fiscal 2025. As a result of the shutdown of the FEI-Elcom manufacturing business, the Company sacrificed some near-term revenue in
the fourth quarter. By doing so, the Company believes it is the right long-term decision to better align its capital and growth
potential as it focuses on the much larger addressable markets it is starting to sell into: alternative position, navigation and
timing (ALT-PNT) solutions; quantum sensing, including magnetometers; space defense and exploration; and, proliferated satellite
programs.

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Satellite
program revenues for Government end-use were 31% and 53% of total revenues for fiscal years 2026 and 2025, respectively. Satellite program
revenues for commercial end-use were 6% of total revenue for both fiscal years 2026 and 2025.

Revenues
on satellite program contracts are recorded in the FEI-NY segment and are recognized primarily under the percentage-of-completion (“POC”)
method. Revenues from non-space U.S. Government/DOW customers increased by approximately $11.5 million, or 43.2%, in fiscal year 2026
compared to fiscal year 2025. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 60%
and 38% of consolidated revenues for fiscal years 2026 and 2025, respectively. Other commercial and industrial sales accounted for approximately
3% of consolidated revenues for both fiscal years 2026 and 2025. Sales in the other commercial and industrial sales area were $2.1 million
and $2.4 million for the fiscal year ended April 30, 2026 and the fiscal year ended April 30, 2025, respectively.

Gross
Profit

For the fiscal year ended
April 30, 2026, the gross profit and gross profit percentage decreased as a result of several factors. The Company invested significantly
in the business during Fiscal 2026 in order to better prepare for the anticipated strong growth ahead. The majority of this investment
was focused on hiring engineering talent in advance of the large ramp-up in production and revenue that is expected, based in part on
the historically high existing backlog. This had near-term dampening effects on gross margin, as engineering costs flowed through the
manufacturing overhead portion of our cost of revenues, raising this expense before the generation of revenue. Another meaningful investment
was a business process improvement investment, which should allow the Company to improve turnaround time; these expenses flowed through
overhead and had a similar impact on gross margins. With the orders and demand coming in, the Company believes it is a prudent long-term
decision to be ready for that business and to super-serve customers, who increasingly want more work done more quickly. Additionally, the
Company has increased the internal focus on the largest and most profitable market opportunities, and de-emphasized or discontinued products
with lower growth potential and lower margin profiles that have historically been part of the business. Specifically, the Company chose
to restructure FEI-Elcom effective April 30, 2026. The Company believes FEI-Elcom did not have the growth or margin potential of the Company’s
core space and defense markets, nor those of the much larger addressable markets the Company is starting to sell into: alternative position,
navigation and timing (ALT-PNT) solutions; quantum sensing, including magnetometers and Rydberg sensors; space defense and exploration;
and, proliferated satellite programs. The FEI-Elcom restructuring included a $3.8 million inventory write-down, a non-cash charge which
flowed through cost of revenues further depressed gross margins for this reported period, but which, we believe is not reflective of ongoing
business trends. The Company had several non-recurring charges that flowed through operating expenses this quarter, the majority of which
was a non-cash charge for an accrual related to a one-time change in employee sick/paid-time-off policies. Most of this charge flowed
through cost of revenues, impacting gross margins, and the balance flowed through selling and administrative expenses.

Selling
and Administrative Expenses

In fiscal years ended April
30, 2026 and 2025, selling and administrative expenses (“SG&A”) were 24% and 18% of consolidated revenues, respectively.
Both SG&A expenses in total and as a percentage of revenue increased in fiscal year 2026, as compared to the prior fiscal year. As
mentioned above, there were also significant investments in the future and one-time charges that were included in SG&A. The largest
and most important is the opening of the Colorado facility and all the associated costs. The Company believes this facility will be a
key contributor to the future growth of the Company. Additional expenses were recorded for the restructuring of FEI-Elcom. The majority
of the remaining increase was non-recuring charges related to a change in sick/paid-time off policies and legal expenses related to the
various items the Company has instituted for the future growth of the Company. Going forward, the Company expects to demonstrate operating
leverage on its SG&A expenses as revenue increases.

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Research
and Development Expenses

As a percentage of consolidated
revenue, R&D expense for the fiscal years ended April 30, 2026 and 2025 were 10% and 9%, respectively. The Company funded R&D
as a percentage of consolidated revenue was slightly higher in fiscal year 2026 as compared to the previous fiscal year, partially because
the previous fiscal year R&D expenditures were lower than planned and some of the expenses were subsequently captured in fiscal year
2026. The increase in R&D expense as a percentage of consolidated revenue, also reflects the Company’s commitment to maintaining
its technical excellence. The Company expects future R&D investment to be in line with, or even potentially above, historical spending,
but the Company expects to demonstrate operating leverage on its R&D expenses as revenue increases.

The
funds received in connection with customer funded R&D appear in revenues and the associated expenses are included in cost of revenues
and are not included in the table above. The Company believes that internally generated cash and cash reserves are adequate to fund its
future R&D activity.

Operating
(loss) income

For the fiscal year ended
April 30, 2026, the Company recorded an operating loss of $3.0 million compared to an operating income of $11.7 million in the prior fiscal
year. As mentioned in the revenue, gross profit, and SG&A sections above, the Company’s fiscal 2026 was a critically important
year for the future of the Company. Going forward the Company expects to demonstrate significant operating leverage as revenue increases.

Other
Income, net

The
change from the prior fiscal year was mainly caused by a gain on the sale of the Company’s available-for sale marketable securities
and a loss on investment due to the restructuring of FEI-Elcom. Additionally, interest expense was approximately 16% lower in fiscal
year 2026, as compared to the prior fiscal year.

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Income
Tax Benefit

For
the fiscal year ended April 30, 2026, the Company recorded an income tax benefit of $2.0 million. For the fiscal year ended April 30,
2025, the Company recorded an income tax benefit of $11.5 million.

The Company’s effective
tax rate of 69.0% for fiscal year 2026 differs from the statutory rate primarily due to state income taxes, tax credits and the tax effects
of stock-based compensation windfall benefits recognized during the fiscal year partially offset by an Internal Revenue Code Section 162(m)
limitation on compensation deductions.

As
of April 30, 2026, the Company has U.S. federal net operating losses of $10.9 million of which $1.7 million begins to expire in fiscal
year 2027 through fiscal year 2031. The U.S. federal net operating losses of $10.9 million includes $1.7 million which is subject to
an annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $9.2 million have an
indefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.7 million expires in fiscal years 2028. U.S. federal
R&D credits of $0.8 million begin to expire in fiscal year 2038 through fiscal year 2046. The Company also has state net operating
loss carryforwards, and state tax credits that expire in various years and amounts.

LIQUIDITY
AND CAPITAL RESOURCES

Net
cash provided by operations was $1.3 million in fiscal year 2026 compared to net cash used in operations of $1.4 million in fiscal year
2025. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $27.0 million at April
30, 2026 as compared to $29.7 million at April 30, 2025.  Included in working capital at April 30, 2026 was $1.6 million consisting
of cash and cash equivalents.  The Company’s current ratio was 2.3 to 1 at both April 30, 2026 and at April 30, 2025.

During fiscal years 2026 and
2025, the Company incurred $9.3 million and $3.9 million, respectively, in non-cash charges to earnings, including adjustments relating
to amortization of ROU assets, loss provision accrual, deferred tax assets, depreciation and amortization expense, inventory adjustments,
warranty and accounts receivable reserves and certain employee benefit plan expenses, including accounting for stock-based compensation.
During fiscal year 2026, cash provided by operations was mainly due to increases in deferred tax assets, accounts payable, accrued liabilities,
and decreases in inventory, which were partially offset by a decrease in contract liabilities and an increase in the net loss. During
fiscal year 2025, cash used in operations was mainly due to increases in net income, mainly in the U.S. Government/DOW Satellite market,
and deferred tax assets primarily due to the reduction of the valuation allowance, partially offset by a decrease in contract liabilities
and contract assets.

Net
cash used in investing activities for the fiscal year ended April 30, 2026 was $2.9 million compared to $1.8 million used in investing
activities for the fiscal year ended April 30, 2025 all relating to purchases of capital expenditures.

Net
cash used in financing activities for the fiscal year ended April 30, 2026 was $1.6 million, all related to purchase of treasury stock.
Net cash used in financing activities for the fiscal year ended April 30, 2025 was $9.9 million, of which $9.6 million was related to
a special cash dividend payment of $1.00 per share of common stock paid on August 29, 2024.

The
Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting
systems, and communication systems that management believes will result in future growth and profitability. The Company anticipates securing
additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and
identification of new opportunities.  The Company expects internally generated cash will be adequate to fund these R&D efforts.
The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in
connection with such acquisitions.

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During fiscal year 2026, as in fiscal year 2025, the impact of inflation
on the Company’s business was an increase in costs for materials and services. The Company believes inflation may continue to impact
expenses in fiscal year 2027 and future years.

As
of April 30, 2026, the Company had retained earnings of $2.8 million. The Company believes that its cash, as of April 30, 2026, cash
flows from operations, and borrowings available under the Credit Agreement (as defined below) will provide sufficient liquidity to meet
its operating needs in the normal course of business in both the short-term (next twelve months from the date of issuance of these consolidated
financial statements) and in the long-term (beyond the next twelve months).

On
June 12, 2026, the Company entered into a senior, secured revolving credit facility with JPMorgan Chase Bank, N.A., as the lender (the
“Credit Agreement”). The Credit Agreement provides for a three-year revolving credit facility of $10.0 million, of which
up to $5.0 million is available for the issuance of letters of credit. The Credit Agreement provides that the Company may, at its option,
increase the aggregate amount of the revolving credit facility in an amount up to $10.0 million, subject to certain customary conditions
and on the terms set forth in the Credit Agreement. There can be no assurance that additional funding will become available. Commitments
under the revolving credit facility are subject to a commitment fee of 0.35% per annum on the daily amount of the undrawn portion of
the revolving credit facility. The Company’s obligations under the Credit Agreement are guaranteed by FEI-Zyfer, Inc., a wholly-owned
subsidiary of the Company. The revolving credit facility matures on June 12, 2029. For more information regarding the Credit Agreement,
see Note 7 to the Consolidated Financial Statements.

RECENT
ACCOUNTING PRONOUNCEMENTS

In
December 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2023-09, “Income Taxes (Topic 740):
Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 is intended to enhance the transparency and decision
usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily
through changes to the rate reconciliation and income taxes paid information. Early adoption is permitted. A public entity can apply
the amendments in ASU 2023-09 prospectively or retrospectively to all annual periods beginning after December 15, 2024. The guidance
was adopted by the Company prospectively for the year ended April 30, 2026, and the Company, accordingly, made the required changes in
its income tax related disclosure (Refer to “Note 12. Income Taxes”). The adoption of ASU 2023-09 did not have any material
impact on the Company’s audited consolidated financial statements.

In
November 2024, the FASB issued ASU No. 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation
Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU requires entities to disclose certain expenses,
including purchases of inventory, employee compensation, depreciation, and intangible asset amortization, by caption. Additionally, entities
must provide a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
The amendments are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after
December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact this standard will have on the consolidated
financial statements.

In
December 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow Scope Improvements, an amendment of the FASB Accounting
Standards Codification. The amendments in this ASU primarily provide clarification on interim reporting requirements and enhanced disclosure
requirements. The amendments also include a disclosure principle to disclose all events since the end of the last annual reporting period
that have a material impact on the Company. The ASU is effective for fiscal years beginning after December 15, 2027, and all interim
reporting periods within applicable annual periods, with early adoption permitted. The Company is currently evaluating the effect that
this standard will have on its consolidated financial statements and related disclosures.

OTHER
MATTERS

The
financial information reported herein is not necessarily indicative of future operating results or of the future financial condition
of the Company.