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, 2007. 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, 2007 are not indicative of the results of operations that may be expected for the year ending April 30, 2008.

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

2. Advances for Indian Gaming Developments: We are advancing funds for the establishment of Indian 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 to the tribes for gaming developments are capitalized. These advances represent costs to be reimbursed upon approval of Indian gaming in several locations. We have agreements in place which require payments of advances to be made to us 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. Reserves have been recorded for advances for the Indian gaming development costs when we are unable to determine whether reimbursement from the Tribes will occur.

We have advanced and invested a total of $4,718,991 in Indian gaming developments. We have reserves of $2,912,440, at July 31, 2007 and April 30, 2007. Based on the information available to us we believe that our advances for Indian gaming developments will be totally reimbursed as casinos are opened. Due to the fact that 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 we believe it is necessary to establish reserves against the advances. The reserve amount is an estimate of the value we would receive if a Tribal casino was not opened and we were forced to liquidate the assets that we have acquired with our advances. The assets are intended to be used with Tribal casinos and consist of the purchase of land, land improvements, professional design fees, and other consulting and legal costs related to the development of Indian gaming facilities. The land purchases are located adjacent to residential developments. We believe that these tracts could be developed and sold for residential and commercial use to recover advances if the gaming enterprises do not open.

3. Earnings Per Share: Earnings per common share is 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.

4. Research and Development: We charge to operations research and development costs. The amount charged in the three months ended July 31, 2007 and 2006 was approximately $569,519 and $498,631 respectively.

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 2008 COMPARED TO FIRST QUARTER FISCAL 2007

Our sales for the three months ended July 31, 2007 were $4,707,328, an increase of 53% from the three months ended July 31, 2006 with sales of $3,076,062. We experienced a 531% increase in earnings before taxes from the first quarter of 2006 to the first quarter of 2007. Our operating profit for the three months ended July 31, 2007 was $410,225, compared to $163,905 for the three months ended July 31, 2006, an increase of 150%.

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

Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft decreased 7.2% from $2,041,446 in the first three months of fiscal year 2007 to $1,894,679 in the current three months of fiscal 2008. The modifications segment had an operating profit of $112,972 in the three months ended July 31, 2007, compared to a profit of $309,584 in the three months ended July 31, 2006. Avcon RVSM sales increased by approximately $234,982. Revenues generated from other modification services decreased $381,748 in the three months ended July 31, 2007.

We believe we will sell and install approximately an additional 25 to 50 Lear 20 & 30 series RVSM kits during the next two years. In addition to the RVSM sales, we expect to experience some increase in our base modification 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 9-11 event, increases in fuel prices and general economic downturns.

Aircraft Acquisitions and Sales: There was no activity in the three months ended July 31, 2006 or in the three months ended July 31, 2007. We acquired no aircraft during the three months ended July 31, 2007. 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 increased 711%, from $204,595 in the three months ended July 31, 2006, to $1,659,311 in the three months ended July 31, 2007. This increase is directly related to sales of defense products. Operating profits increased from a loss of $163,497 for the three months ended July 31, 2006 to a profit of $516,259 for the three months ended July 31, 2007. The increase in operating profit is related to an increase in sales in the first quarter. Management expects this business segment to significantly increase in future years due to the addition of new fuel system protection devices like the TSD, GFI, and other classic aviation defense products.

Services - SCADA Systems and Monitoring Services: Revenue increased from $399,849 for the three months ended July 31, 2006 to $471,610 for the three months ended July 31, 2007, an increase of 17.9%. During the three months ended July 31, 2007 we maintained a relatively level volume of long-term contracts with municipalities. We had increased revenue due to a significant contract for the rehabilitation of city lift stations. We anticipate the revenues from additional lift station rehabilitations to continue for the next few 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 2008.

Gaming: Revenues from management services related to gaming decreased 2.5% from $360,409 for the three months ended July 31, 2006 compared to $351,277 for the three months ended July 31, 2007. This decrease was due to a flood that occurred in Oklahoma which caused the Stables to be shut down for seven days.

During the three months ended July 31, 2007 we expensed approximately $170,000 for the development of Gaming in Kansas compared to approximately $57,000 for the three months ended July 31, 2006 an increase of 200%. We expect these increased costs to continue for the remainder of the year.

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 fiscal 2008 and beyond.

We do not, as of July 31, 2007, have any material commitments for other capital expenditures other than the terms of the Indian Gaming Management Agreements should any additional casinos materialize. We will need additional funds to complete our planned Indian gaming opportunities. We will use current cash available as well as additional funds, for the start up and construction of gaming facilities. We anticipate initially obtaining these funds from internally generated working capital and borrowings.

Analysis and Discussion of Cash Flow

During the first quarter of fiscal year 2008 our cash position decreased by $209,512 and can be attributed to the following. Cash provided by operating activities improved by $135,318. During the first quarter fiscal 2008 we reported net income of $231,839. Adjustments to net income provided by operations consisted of a non-cash deduction for depreciation of $37,160. Cash used for operating activities resulted in a reduction of accounts receivable of $218,298. Inventories were reduced by $476,288. We used funds for real-estate projects under construction of $350,684. We have reduced our build up of inventory for the avionics and aircraft modification divisions but continue to have approximately six months of additional inventory for the defense product components and RVSM components. Lead-time for the components is dictated by the market place resulting in the build up of inventory to support sales and avoid halting production because of material shortages. We believe our inventory will be realized in the normal course of business. Prepaid expenses and accounts payable used $69,665. Our defense customers decreased deposits with us resulting in a change of $513,000 during the first quarter fiscal 2008.

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.

PART II.
OTHER INFORMATION

Item 1

Legal Proceedings
None

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, 2007.