BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT

SIX MONTHS ENDED

October 31,

2008

2007

(unaudited)

(unaudited)

REVENUES

Aircraft / Modifications

$

5,698,049

$

4,399,214

Avionics / Defense

1,305,966

2,601,091

Management / Professional Services

2,255,881

1,941,056

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

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

Net Revenues

9,259,896

8,941,361

COST OF SALES

Aircraft / Modifications

4,462,329

3,604,725

Avionics / Defense

1,000,907

1,294,767

Management / Professional Services

1,150,656

925,016

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

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

Total Cost of Sales

6,613,892

5,824,508

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

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

GROSS PROFIT

2,646,004

3,116,853

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

1,994,932

2,371,442

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

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

OPERATING INCOME

651,072

745,411

OTHER INCOME (EXPENSE)

Interest expense

(272,259)

(256,790)

Other

2,475

3,500

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

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

Other expense

(269,784)

(253,290)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

381,288

492,121

PROVISION FOR INCOME TAXES

(109,105)

(72,997)

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

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

NET INCOME (LOSS)

$

272,183

$

419,124

========

========

BASIC EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

54,769,682

58,812,469

========

========

DILUTED EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

54,852,002

53,812,469

========

========

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 six months ended October 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 $5,153,174 at October 31, 2008 and $5,153,174 at April 30, 2008 in gaming developments. We have reserves of $3,346,623, at October 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 net 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 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 approximately $1,027,000 and expenses of approximately $104,517 during the six months ending October 31, 2008.

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 six months ended October 31, 2008 and 2007 was approximately $2,012,375 and $1,373,000 respectively.

7. Subsequent Events: Butler National Service Corporation, a wholly owned subsidiary of Butler National Corporation, was approved on December 5, 2008 by the Kansas Racing and Gaming Commission as the developer and manager of a casino in the Southwest Gaming Zone located in Dodge City, Kansas.

Butler National Service Corporation, a wholly owned subsidiary of Butler National Corporation entered into an agreement with BCH Development, L.C., a Topeka, Kansas based development company to immediately begin construction of Phase I of the Boot Hill Casino and Resort.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

YEAR TO DATE OCTOBER 31, 2008 COMPARED TO YEAR TO DATE OCTOBER 31, 2007

Our sales for the six months ended October 31, 2008 were $9,259,896, an increase of 4% from the six months ended October 31, 2007 with sales of $8,941,361. Our operating profit for the six months ended October 31, 2008 was $651,072, compared to $745,411 for the six months ended October 31, 2007, a decrease of 13%.

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

Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft increased 29.5% from $4,399,214 in the first six months of fiscal year 2008 to $5,698,049 in the current six months of fiscal 2009. The modifications segment had an operating profit of $520,072 in the six months ended October 31, 2008, compared to a profit of $148,865 in the six months ended October 31, 2007. Avcon RVSM sales decreased by approximately $668,000. Revenues generated from other modification services increased by approximately $1,966,000 in the six months ended October 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 six months ended October 31, 2007 or in the six months ended October 31, 2008. We acquired no aircraft during the six months ended October 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 50%, from $2,601,091 in the six months ended October 31, 2007, to $1,305,966 in the six months ended October 31, 2008. Operating profits decreased from $488,540 for the six months ended October 31, 2007 to an operating loss of $299,374 for the six months ended October 31, 2008. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is approximately $1,500,000.

Services - SCADA Systems and Monitoring Services: Revenue increased from $848,412 for the six months ended October 31, 2007 to $940,068 for the six months ended October 31, 2008, an increase of 11%. During the six months ended October 31, 2008 we maintained a relatively level volume of long-term contracts with municipalities. Revenues from additional lift station rehabilitations resumed and will 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 decreased 7.0% from $715,597 for the six months ended October 31, 2007 compared to $665,690 for the six months ended October 31, 2008. Sales continue to remain relatively steady due to the addition of Class III casino gaming in Oklahoma.

Avionics: Sales were $434,718 for the three months ended October 31, 2008 compared to $941,781 in the comparable period of the preceding year, a decrease of 54%. Operating loss for the three months ended October 31, 2008 was $151,768 compared to an operating profit of $137,281 for the three months ended October 31, 2007. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is $1,500,000.

Services - SCADA Systems and Monitoring Services: Revenue increased from $376,802 for the three months ended October 31, 2007 to $559,009 for the three months ended October 31, 2008, an increase of 48%. During the three months ended October 31, 2008 we maintained a relatively level volume of long-term contracts with municipalities. Revenue fluctuates due to the introduction of new products and services and the related installations of these products. Our contract with one of our largest customers has been renewed through fiscal 2009. We had an operating profit of $22,567 in Monitoring Services for the three months ended October 31, 2008, compared to $14,148 for the three months ended October 31, 2007.

Gaming: Revenues from management services related to gaming decreased for the three months ended October 31, 2008, from $364,319 for the quarter ending October 31, 2007 to $265,601.

Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, and on site contract management of gaming establishments and engineering services. Flight and engineering services are also provided. Management consulting and professional fees were $113,506 for the three months ended October 31, 2008 and $46,595 for the three months ended October 31, 2007, an increase of 144%. Sales related to construction projects were $432,020 for the quarter ending October 31, 2008 and there were no construction sales for the quarter ending October 31, 2007.

Other Income (Expense): Interest expense decreased from $124,151 in the three months ended October 31, 2007 to $41,223 for the three months ended October 31, 2008. Corporate tax expense decreased by $27,250 in the three months ended October 31, 2008.

Earnings: Our net income for the prior three months period ended October 31, 2007 was $187,285. Our net loss for the current three months ended October 31, 2008 was $46,202.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

None.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Report, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2008. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2008.

Changes in Internal Control Over Financial Reporting

As of October 31, 2008 there were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In connection with the preparation of this Report, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our internal controls and procedures as of October 31, 2008. Based on that evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our internal controls and procedures were effective as of October 31, 2008.

PART II.
OTHER INFORMATION

Item 1

Legal Proceedings
On May 12, 2008, 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 Sales 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 pursuant to Exchange Act Rule 13a-14(a).

31.2

Certificate of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).

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

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.