BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED

July 31,

2008

2007

(unaudited)

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

318,384

$

231,839

Adjustments to reconcile net income (loss) to net cash provided by

(used in) operations -

Depreciation

41,458

37,160

Changes in assets and liabilities:

Accounts receivable

317,562

218,298

Contracts in process

-

(350,684)

Inventories

(265,312)

476,288

Prepaid expenses and other current assets

(5,490,951)

(407)

Accounts payable

232,728

(69,258)

Customer deposits

260,594

(513,020)

Accrued liabilities

(187,147)

105,102

--------------

--------------

Cash provided by (used in) operating activities

(4,772,684)

135,318

--------------

--------------

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures - Property, Plant & Equipment

(367,106)

(22,666)

--------------

-------------

Cash provided by (used in) investing activities

(367,106)

(22,666)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings under promissory notes, net

4,935,647

(507,211)

Repayments of long-term debt

(200,198)

185,047

--------------

--------------

Cash provided by (used in) financing activities

4,735,449

(322,164)

--------------

--------------

NET INCREASE (DECREASE) IN CASH

(404,341)

(209,512)

CASH, beginning of period

2,969,715

1,789,169

--------------

--------------

CASH, end of period

$

2,565,374

$

1,579,657

========

========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid

$

208,743

$

132,639

Income taxes paid

284,748

15,747

The accompanying notes are an integral part of these financial statements.

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the annual report on Form 10-K dated April 30, 2008. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended July 31, 2008 are not indicative of the results of operations that may be expected for the year ending April 30, 2009.

Certain reclassifications within the condensed financial statement captions have been made to maintain consistency in presentation between years.

2. Advances for Gaming Developments: We are advancing funds for the establishment of gaming. These funds have been capitalized in accordance with Statements of Financial Accounting Standards (SFAS) 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects." Such standard requires costs associated with the acquisition, development, and construction of real estate and real estate-related projects to be capitalized as part of that project.

Our advances represent costs to be reimbursed upon approval of gaming in several locations. We have agreements in place which require payments to be made to us for the respective projects upon opening of Indian gaming facilities. Once gaming facilities have gained proper approvals, we plan to enter into a note receivable arrangement with the Tribe to secure reimbursement of advanced funds for that particular project.

We have advanced and invested a total of $5,232,191 at July 31, 2008 and $5,153,174 at April 30, 2008 in gaming developments. We have reserves of $3,425,640, at July 31, 2008 and $3,346,623 at April 30, 2008. We believe that our advances for gaming developments will be totally reimbursed as casinos are opened. We believe it is necessary to establish reserves against the advances because all of the proposed casinos are involved in legal and governmental actions whose outcome is not certain nor is there any time frame for resolution. The reserve amount is an estimate of the value we would receive if a casino was not opened and we were forced to liquidate the assets that we have acquired with our advances. These assets were intended to be used with casinos and consist of the purchase of land and land improvements related to the development of Gaming facilities. We believe that these tracts could be developed and sold for residential and commercial use to recover our advances if the gaming enterprises do not open.

In fiscal year 2008 we added a reserve of approximately $434,000 for the proposed Dodge City gaming developments. We had an additional reserve of approximately $79,000 in the quarter ending July 31, 2008. We review quarterly the amount of any increase in reserves based on our determination of the fair value of assets acquired by our advances for gaming developments.

3. Entertainment Development: We had land development purchases totaling $360,744 and expenses of approximately $206,829 during the three months ending July 31, 2008. Net borrowings at July 31, 2008 towards the purchase of land were $1,370,837.

4. Earnings Per Share: Earnings per common share are based on the weighted average number of common shares outstanding during the year. Stock options have been considered in the dilutive earnings per share calculation.

5. Research and Development: We invested in research and development activities. The amount invested in the three months ended July 31, 2008 and 2007 was approximately $1,061,000 and $569,500 respectively. We charge to operations research and development costs. The amount charged in the three months ended July 31, 2008 and 2007 was approximately $620,000 and $545,600 respectively.

7. Subsequent Events: We have signed real estate contracts for the sale of three homes in Junction City, Kansas since July 31, 2008. We expect these contracts to close during the second quarter of fiscal year 2009.

Butler National Service Corporation, a wholly owned subsidiary of Butler National Corporation, signed an Amended and Restated Limited Liability Company agreement in connection with a Butler National affiliate providing services in connection with the State of Kansas' ownership and operation of a proposed Lottery Gaming Facility in Dodge City, Kansas.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RISK FACTORS

The information set forth below includes "forward-looking" information and is subject to Risk Factors as outlined in the Private Securities Litigation Reform Act of 1995. The Risk Factors listed under Item 1A of our Form 10-K and the Cautionary Statements, filed by us as Exhibit 99 to our Form 10-K, are incorporated herein by reference and you are specifically referred to such Risk Factors and Cautionary Statements for a discussion of factors which could affect our operations and forward-looking statements contained herein.

RESULTS OF OPERATIONS

FIRST QUARTER FISCAL 2009 COMPARED TO FIRST QUARTER FISCAL 2008

Our sales for the three months ended July 31, 2008 were $5,204,122, an increase of 10.6% from the three months ended July 31, 2007 with sales of $4,707,328. Our operating profit for the three months ended July 31, 2008 was $656,050, compared to $410,225 for the three months ended July 31, 2007, an increase of 60%.

Discussion of the specific changes by operation at each business segment follows:

Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft increased 81.9% from $1,894,679 in the first three months of fiscal year 2008 to $3,447,130 in the current three months of fiscal 2009. The modifications segment had an operating profit of $774,867 in the three months ended July 31, 2008, compared to a profit of $112,972 in the three months ended July 31, 2007. Avcon RVSM sales decreased by approximately $35,936. Revenues generated from other modification services increased $1,211,388 in the three months ended July 31, 2008.

During the past few years we have seen a significant increase in aircraft camera modification. Several custom engineering projects and aircraft modifications have also attributed to our increase in sales. As the economy grows aircraft owners may elect to update, modify, and purchase business aircraft. A shift to business aircraft ownership positively impacts our aircraft modification revenues. Although we cannot anticipate the future we must always consider the negative impact of items such as the September 11, 2001event, increases in fuel prices, and general economic downturns.

Aircraft Acquisitions and Sales: There was no activity in the three months ended July 31, 2008 or in the three months ended July 31, 2007. We acquired no aircraft during the three months ended July 31, 2008. Management expects this business segment to have increased sales in the next year. FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.

Avionics: Sales from Avionics decreased 45.7%, from $1,659,311 in the three months ended July 31, 2007, to $871,249 in the three months ended July 31, 2008. Operating profits decreased from $516,259 for the three months ended July 31, 2007 to a loss of $41,106 for the three months ended July 31, 2008. The decrease in operating profit is related to additional material cost, material spoilage, additional labor requirements and rework labor costs on a major build-to-print contract. This contract was started in fiscal 2007 and is expected to be completed during the next quarter with less of an impact on operating profit. Management expects this business segment to increase in the future due to additions of new fuel system protection devices like the TSD, GFI, and other classic aviation defense products.

Services - SCADA Systems and Monitoring Services: Revenue decreased from $471,610 for the three months ended July 31, 2007 to $381,059 for the three months ended July 31, 2008, a decrease of 19.2%. During the three months ended July 31, 2008 we maintained a relatively level volume of long-term contracts with municipalities. We had decreased revenues due to budget cuts faced by the municipalities resulting from the decrease in property taxes in the State of Florida. We anticipate the revenues from additional lift station rehabilitations to resume and generate additional revenue over the next four years. Revenue fluctuates due to the introduction of new products and services and the related installations of these types of products. Our contracts with our two largest customers have been renewed through fiscal 2009.


Gaming: Revenues from management services related to gaming increased 13.9% from $351,277 for the three months ended July 31, 2007 compared to $400,089 for the three months ended July 31, 2008. Sales continue to have stability due to the addition of Class III casino gaming in Oklahoma.

Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, on site contract management of gaming establishments, flight, and engineering services. Management consulting and professional fees, including sales related to completed projects, were $119,747 for the three months ended July 31, 2008 and $330,451 for three months ended July 31, 2007, a decrease of 68.3%. Sales related to construction projects were approximately $168,000 at July 31, 2007 and zero at July 31, 2008.

Selling, General and Administrative (SG&A): Expenses were $1,085,144, 20.8% of revenues, for the three months ended July 31, 2008 compared to 23.6% of revenues for the three months ending July 31, 2007. Business overhead expenses were decreased overall due to a reduction in cost towards our Kansas entertainment endeavors.

Other Income (Expense): Other interest increased from $132,639 in the three months ended July 31, 2007 to $231,036 for the three months ended July 31, 2008.

Earnings: Our operating profit for the three months ended July 31, 2008 was $656,050, compared to $410,225 for the three months ended July 31, 2007, an increase of 60%. Our net income for the prior three months period ended July 31, 2007 was $231,839. Our net income for the current three months ended July 31, 2008 was $318,384.

Employees: We employed 92 at July 31, 2008 and 88 at July 31, 2007.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in 2009 and beyond.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Part I Item 3:

Quantitative and Qualitative Disclosures about Market Risk.

None.

Part I Item 4:

Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

No change in the Company's internal control over financial reporting occurred during the fiscal quarter ended July 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.
OTHER INFORMATION

Item 1

Legal Proceedings
Butler National Corporation and its wholly-owned subsidiary Butler National, Inc., filed a Complaint against General Electric subsidiaries GE Infrastructure, Inc. and GE-Aviation Division formerly known as GE Aircraft Engines, Best Jet Engines, Inc., Global Turbine Support, L.L.C. and others in the United States District Court for the Eastern District of Texas related to the design and parts for the jet engines that were overhauled for a company airplane and are not working properly.   The Companies have pled damages in excess of one million dollars.  The company is not able to reliably predict the outcome of the litigation at this time.

Item 1A.

Risk Factors
There are no material changes to the risk factors disclosed under Item 1A of our Form 10-K.

Item 2

Unregistered Shares of Equity Securities and Use of Proceeds
None

Item 3

Defaults Upon Senior Securities
None

Item 4

Submission of Matters to Vote of Security Holders
None

Item 5

Other Information
None

Item 6

Exhibits

Articles of Incorporation, as amended and restated are incorporated by reference to Exhibit 3.1 of our Form DEF 14A filed on December 26, 2001.

Bylaws, as amended, are incorporated by reference to Exhibit 3.2 of our Form DEF 14A filed on December 15, 2003.

31.1

Certificate of Chief Executive Officer

31.2

Certificate of Chief Financial Officer

Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to
Section 906 of the Sarbanes-Oxley Act of 2002.

99

Exhibit Number 99
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, are incorporated by reference to Exhibit 99 of the Form 10-K for the fiscal year ended April 30, 2008.