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Article by DailyStocks_admin    (03-31-08 07:16 AM)

Filed with the SEC from Mar 20 to Mar 26:

RF Monolithics (RFMI)
Doucet Capital wants the company to explore strategic alternatives, because it believes that the shares are undervalued. Doucet may also talk with Dallas-based RF Monolithics about possible changes to its board and management. Doucet Capital has reported ownership of 475,743 shares (5.06%).

BUSINESS OVERVIEW

Results of Operations

Net Revenues. For the three months ended September 30, 2007, net revenues decreased 11% to $65.2 million from $73.5 million for the same period in the prior year. For the nine months ended September 30, 2007, net revenues decreased 9% to $193.4 million from $211.8 million for the same period in the prior year. These decreases were due to decreases in standard products revenues and other products revenues.

Standard products revenues for the three months ended September 30, 2007 decreased 10% to $59.5 million from $66.5 million for the same period in the prior year. For the nine months ended September 30, 2007, standard products revenues decreased 10% to $177.7 million from $198.4 million for the same period in the prior year. These decreases resulted primarily from decreased unit shipments of standard products to the computer products, telecommunications, networking and high speed communications end markets, which were partially offset by increase unit shipments to the industrial end market.

Other products, which consist primarily of custom and foundry products revenues and revenues from the license of patents, for the three months ended September 30, 2007 decreased 19% to $5.7 million from $7.0 million for the same period in the prior year. This decrease resulted primarily from a $2.9 million sale of intellectual property included in 2006 , which was partially offset by increased foundry product shipments. For the nine months ended September 30, 2007, other products revenues increased 17% to $15.7 million from $13.4 million for the same period in the prior year. This increase resulted primarily from increased unit shipments of foundry products, which was partially offset by a $2.9 million sale of intellectual property included in 2006.

Customer demand for semiconductors can change quickly and unexpectedly. The Company’s revenue levels have been highly dependent on the amount of new orders that are received for which product is requested to be delivered to the customer within the same quarter. Within the semiconductor industry these orders that are booked and shipped within the quarter are called “turns fill” orders. When the turns fill level exceeds approximately 35% of quarterly revenue, it makes it very difficult to predict near term revenues and income. Because of the long cycle time to build its products, the Company’s lack of visibility into demand when turns fill is high makes it difficult to predict what product to build to match future demand. During 2006, the Company averaged approximately 50% to 55% turns fill per quarter. During the first nine months of 2007, turns fill rate for OEM and stocking representatives remained in the 55% to 60% range.

As noted in Item 1A “Risk Factors” and above in the overview section of this “Management's Discussion and Analysis of Financial Condition and Results of Operations”, a trend has developed over the last five years whereby customers in the semiconductor supply chain have worked to minimize the amount of inventory of semiconductors they hold. As a consequence, customers are generally providing less order backlog to the Company and other semiconductor suppliers, and relying on short lead times to buffer their build schedules. Shorter lead times reduce visibility into end demand and increase the reliance on turns fill orders. To deal with these market forces while maintaining reliable service levels, the Company and other semiconductor suppliers are carrying higher relative levels of inventory compared with historical averages prior to 2001. The reluctance of customers to provide order backlog, combined with short lead times and the uncertain growth rate of the world economy, make it difficult to precisely predict future levels of sales and profitability.

International sales represented 66% and 68% of net revenues for the three months ended September 30, 2007 and 2006, respectively. On a dollar basis, international sales decreased 14% to $43.1 million for the three months ended September 30, 2007 from $50.3 million for the comparable period in 2006. For the nine months ended September 30, 2007 and 2006, international sales represented 68% and 71% of net revenues, respectively. For the nine months ended September 30, 2007 international sales decreased 13% to $130.5 million from $149.8 million for the comparable period in 2006. These decreases resulted primarily from decreased shipments of standard products to the networking communications and computer products end markets, primarily in Asia.

The trend for the Company’s customers to move their electronics manufacturing to Asian countries has brought increased pricing pressure for Micrel and other semiconductor manufacturers. Asian based manufacturers are typically more concerned about cost and less concerned about the capability of the integrated circuits they purchase. This can make it more difficult for United States based companies to differentiate themselves except by price. The increased concentration of electronics procurement and manufacturing in the Asia Pacific region has led, and may continue to lead, to continued price pressure for the Company’s products in the future.

Share-Based Compensation . Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective transition method. The Company's results of operations for the three month periods ended September 30, 2007 and 2006 include $1.4 million and $2.0 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. For the nine month periods ended September 30, 2007 and 2006, the Company's results of operations include $4.3 million and $7.0 million, respectively, of non-cash expense related to the fair value of share-based compensation awards (see Note 3 of Notes to Condensed Consolidated Financial Statements.)

Gross Profit . Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The Company's gross margin decreased to 57.5% for the three months ended September 30, 2007 from 58.6% for the comparable period in 2006. For the nine months ended September 30, 2007, the Company's gross margin decreased to 57.5% from 58.2% for the comparable period in 2006. These decreases in gross margin resulted primarily from decreased manufacturing capacity utilization and the inclusion of, in 2006, $2.9 million in net revenues for sale of intellectual property, which is partially offset by a $714,000 charge to cost of revenues related to the settlement of a patent dispute.

Research and Development Expenses. Research and development expenses as a percentage of net revenues represented 21.0% and 17.8%, for the three months ended September 30, 2007 and 2006, respectively. On a dollar basis, research and development expenses increased $609,000 or 5% to $13.7 million for the three months ended September 30, 2007 from $13.1 million for the comparable period in 2006. For the nine months ended September 30, 2007 and 2006, research and development expenses as a percentage of net revenues represented 21.3% and 18.6%, respectively. On a dollar basis, research and development expenses increased $1.9 million or 5% to $41.1 million for the nine months ended September 30, 2007 from $39.3 million for the comparable period in 2006. These increases were primarily due to increased staffing costs combined with increased prototype fabrication costs. The Company believes that the development and introduction of new products is critical to its future success and expects to continue its investment in research and development activities in the future.

Selling, General and Administrative Expenses. As a percentage of net revenues, selling, general and administrative expenses represented 16.7% and 16.2% for the three months ended September 30, 2007 and 2006, respectively. On a dollar basis, selling, general and administrative expenses decreased $1.0 million or 8% to $10.9 million for the three months ended September 30, 2007 from $11.9 million for the comparable period in 2006. For the nine months ended September 30, 2007 and 2006, as a percentage of net revenues, selling, general and administrative expenses represented 17.7% and 17.8%, respectively. On a dollar basis, selling, general and administrative expenses decreased $3.4 million or 9% to $34.1 million for the nine months ended September 30, 2007 from $37.5 million for the comparable period in 2006. These decreases were primarily due to decreased outside legal expenses.

Other Income (Expense) . Other income (expense) reflects interest income from investments in short-term investment grade securities and money market funds and other non-operating income, offset by interest expense incurred on term notes and accrued interest related to the settlement of certain previously provided for litigation liabilities. For the nine months ended September 30, 2007, other income includes $15.5 million in non-operating income resulting from the settlement of litigation (see Note 12 of Notes to Condensed Consolidated Financial Statements).

Provision for Income Taxes. The income tax provision for the three and nine months ended September 30, 2007, as a percentage of income before taxes, was 35.1% and 35.9%, respectively, decreasing from 39.9% and 40.4% for the comparable periods in the prior year. These decreases resulted from decreased non-deductible share-based compensation expense combined with increased tax benefits from the federal research and development credit and federal qualified production activity deductions. The income tax provision for such interim periods differs from taxes computed at the federal statutory rate primarily due to the effect of non-deductible share-based compensation expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.


Liquidity and Capital Resources

Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. Principal sources of liquidity at September 30, 2007, consisted of cash and short-term investments of $115.6 million and a $6 million revolving line of credit from a commercial bank (see Note 8 of Notes to Condensed Consolidated Financial Statements).

The Company generated $47.6 million in cash flows from operating activities for the nine months ended September 30, 2007, primarily attributable to net income of $35.9 million plus additions for non-cash activities of $20.9 million (consisting primarily of $13.5 million in depreciation and amortization, $4.3 million in share-based compensation expense and a $2.1 million decrease in deferred tax assets) combined with a $5.2 million increase in income taxes payable and a $3.7 million decrease in inventories, which was partially offset by a $10.9 million decrease in other current liabilities, resulting primarily from the payment of a legal judgment, $1.9 million decrease in accounts payable combined with a $3.4 million increase in accounts receivable and a $2.4 million increase in income taxes receivable.

For the nine months ended September 30, 2006, the Company generated $39.7 million in cash flows from operating activities, primarily attributable to net income of $29.5 million plus additions for non-cash activities of $19.4 million (consisting primarily of $12.8 million in depreciation and amortization, $7.0 million in share-based compensation expense) combined with a $7.3 million increase in deferred income on shipments to distributors, which was partially offset by a $6.5 million increase in inventories combined with a $4.9 million decrease in income taxes payable and a $2.6 million decrease in accounts payable.

The Company used $18.3 million of cash in investing activities during the nine months ended September 30, 2007, comprised of $13.9 million in purchases of property, plant and equipment and $7.0 million in net purchases of short-term investments which was partially offset by a $2.6 million decease in restricted cash.

For the nine months ended September 30, 2006, the Company generated $20.9 million of cash from investing activities, comprised of $36.4 million in proceeds from net sales of short-term investments which was partially offset by $11.3 million in purchases of property, plant and equipment, $1.6 million in purchases of intangible assets and $2.6 million increase in restricted cash.

The Company used $28.1 million of cash in financing activities during the nine months ended September 30, 2007 primarily for the repurchase of $34.4 million of the Company's common stock and $4.7 million for the payment of cash dividends, which was partially offset by $10.9 million in proceeds from the exercise of employee stock awards.

For the nine months ended September 30, 2006, the Company used $55.2 million of cash in financing activities during the nine months ended September 30, 2006 primarily for the repurchase of $58.0 million of the Company's common stock, which was partially offset by $2.7 million in proceeds from employee stock transactions.

The Company currently intends to spend approximately $18 million to $23 million to purchase capital equipment and make facility improvements during the next 12 months primarily for wafer fabrication and product testing and additional research and development related software and equipment. The Company is currently authorized by its Board of Directors to repurchase an additional $65.6 million of its common stock through December 31, 2008. In addition, on October 22, 2007, the Company's Board of Directors declared a $0.03 per common share cash dividend, payable November 20, 2007 to shareholders of record on November 5, 2007. The cash dividend payout by the Company on November 20 2007 is expected to be approximately $2.3 million. Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. The Company believes that its cash flows from operations, existing cash balances and short-term investments, and its credit facility will be sufficient to meet its cash requirements for the next 12 months. In the longer term, the Company believes future cash requirements will continue to be met by its cash from operations, credit arrangements and future debt or equity financings as required.

stringent customer performance requirements. The unique features of RFM solutions provide flexible solutions to system designers defining tomorrow’s emerging applications in various market segments.

Markets and Applications

We focus on specific market opportunities where our Wireless Solutions and Wireless Components technologies address application requirements. Our products are primarily incorporated into application designs in five markets: industrial, automotive, consumer, medical and telecommunications.

Industrial

The industrial market includes applications such as automated meter reading, or AMR, monitoring including oil and gas applications, process control, security systems, active RF identification, or RFID, tags, bar code reading devices, and custom data link equipment. We believe that the industrial market for wireless module products has enormous growth potential. In published reports (Harbor Research, 2006), it was estimated that the total market for wireless personal network devices (WPAN) in the industrial segment would grow from approximately $25 million in 2007 to approximately $800 million by 2011. The same study estimated the total market for all WPAN devices at $1.8 billion in 2011. For years we have been a leader in providing energy-efficient Virtual Wire™ Short-range Radio products for the AMR market. Our Wireless Solutions Group is committed to developing a lead position in device networking and asset management markets. Our strategy emphasizes solutions over specific technologies. It is our belief that the diversity of applications and application requirements and the market’s immaturity make it very uncertain which, if any, of the technologies will establish itself as the industry standard. To contend with this, our plan is to offer the market a broad range of device networking technologies and the expertise to apply them to specific applications. As the market matures and some technologies dominate others, we will adjust our product offerings to match the market’s needs. While there are many opportunities for device networking, our Wireless Solutions radio modules and Virtual Wire™ Short-range Radio products are focused primarily, though not exclusively, on industrial applications. We have entered into contracts for custom networks and systems with customers such as Cooper Bussmann. We also sell low-power components and filters into this market, primarily for security applications.

Automotive

The automotive industry utilizes SAW-based components in transmitter and receiver designs for remote keyless entry, tire pressure monitoring and satellite radio applications. Satellite radio currently has approximately 15 million subscribers and published reports predict that by 2010 there will be as many as 25 million subscribers. From a technological standpoint, the digital modulation used in satellite radio systems is more efficient than traditional analog AM or FM and achieves near CD quality audio.

Automotive electronic applications continue to grow with the ongoing drive toward smaller size, reduced cost and improved system performance. Our low-power components, Virtual Wire™ Short-range Radio products and filters meet many of the requirements of this automotive market. This market is characterized by fierce competition due to commodity pricing by competitors.

Consumer

The consumer market for our products includes aftermarket satellite radio products. Although market acceptance has slowed for some of these due to competitive offerings, we believe that there is growth potential for other consumer products using our technology such as electronic gaming, electronic toys, home security, internet appliances, sports, garage doors, cable TV and a wide variety of other wireless applications. Low-power components, Virtual Wire™ Short-range Radio products, Wireless Solutions radio modules and filters may be designed into these and many other consumer applications.

Medical

Emerging standards such as Medical Implant Communications Systems, or MICS, and Wireless Medical Telemetry Systems, or WMTS, have created opportunities for wireless applications in the medical marketplace. These standards are for wireless communication devices outside the body as well as implanted. Our Virtual Wire™ Short-range Radio and Wireless Solutions radio module products are well suited for these applications. Low power consumption and high reliability are critical for device-implanted applications such as insulin pumps, pacemakers and defibrillators. Radio module products are used in medical telemetry applications including real-time wireless EKG monitors, where high transmission reliability and data rate are essential. Our products are only used in data acquisition mode and not in a life-critical function of the device.

Telecommunications

We believe that a number of dynamics within the telecommunication and wireless communications market are opening new applications for SAW technology. The deployment of digital cellular telephone standards, such as Global System for Mobile Communications, or GSM, Code Division Multiple Access, or CDMA, Enhanced Digital Global Evolution, or EDGE, Wideband Code Division Multiple Access, or WCDMA, and Time Division Synchronous Code Division Multiple Access, or TD-SCDMA, has been initiated worldwide and in particular China. All of these digital cellular telephone standards entail digital modulation, which requires SAW filters that minimize distortion and conform to international cellular telephone standards. RFM’s focus is in providing intermediate filters for the base station infrastructures of this growing market.

Other markets, such as wireless internet access (for example, WiFi) and emerging broadband multimedia (for example, WiMax) will continue to use SAW-based filter and frequency control products. We believe that as broadband wireless communication systems demand more performance to support internet requirements, bandwidth will become the key element that allows information to flow efficiently. This will create a requirement to minimize systems noise present in broadband wireless communication and provide clean timing to maximize throughput around the system’s backbone, which can be met with our filter and frequency control products.

Analog communications, internet infrastructure, high-end computer work station and military applications also create markets for SAW-based frequency control products. Timing integrity and elimination of system noise in circuits are critical for these applications.

Our Wireless Solutions Business

Module Products and Enterprise Asset Management Software and Services

Our Wireless Solutions business is focused on the potential $8 billion embedded modules market. We believe the key to capturing this market will be the ability to provide a wide variety of products, protocol firmware, software and design services to select and deliver optimum solutions for a given customer’s application.

We have developed both proprietary and custom radio modules that address this market and have started shipping initial quantities of these products. Besides a variety of radio products, we use several communication protocol systems to manage point-to-point, point-to-multipoint or mesh wireless sensor networks. We also provide gateway and network bridge products to connect different network types. We are now in position to offer the broadest ranges of radios, modules and protocols in the industry.

To our knowledge, no one else combines such a broad line of radio offerings with a value added software application. To help customers take full advantage of the wealth of new data provided by low-power radio systems, Aleier provides enterprise level software for tracking assets and managing workflows related to those assets. Aleier has traditionally been very strong in the state and municipal government, higher education, and federal government sectors. It is our plan to extend the product development and marketing activities of Aleier to support Condition Based Maintenance which will allow it to penetrate the industrial market as well.

Virtual Wire™ Short-range Radio and RFIC Products

Our hybrid transmitter, receiver and transceiver modules are the primary products included in Virtual Wire™ Short-range Radio products. Our transceiver module, based on our patented Amplifier Sequenced Hybrid, or ASH, technology, offers two-way data communication in a single small module, with performance identical to the separate transmitter and receiver modules, at a lower total cost. Inside the Virtual Wire™ product is a custom RFIC. We have introduced our third generation of these products, which adds features such as longer range and multi-channel capability. All of these products feature small size, very low power consumption, and excellent RF performance, and provide the system designer flexibility and fast time-to-market for emerging applications. The ASH receiver’s architecture provides exceptional performance with extremely low harmonic radiation and exceptional resistance to electromagnetic interference, which have resulted in our customer’s products receiving international standards certification.

The Virtual Wire™ Short-range Radio product offerings also include complete transceiver design and development kits that provide system designers having minimal RF experience the ability to easily incorporate wireless data transfer into their designs. We also provide software protocols for key applications. The markets for Virtual Wire™ Short-range Radio products include remote bar code data entry, AMR, point of sale terminals, medical monitoring systems, home automation, consumer sports, data link equipment and wireless thermostats.

We have introduced several varieties of RFICs to complement the Virtual Wire™ product family for our customers. We are working with several chip manufacturers to gain access to and in some cases jointly develop additional products. These chips include transmitter, receiver and transceiver versions to assist customers and provide additional radio alternatives in building their own circuits.

Our Wireless Components Business

Filters

We pioneered the development of several SAW technologies related to the implementation of high performance band-pass filters having low insertion loss. Our filter products are primarily intended for emerging satellite radio, Global Positioning Systems, or GPS, and various telecommunications applications such as TD-SCDMA, Personal Handy-phone System, or PHS, and WiMax. Our products are well suited for satellite radio and the base station infrastructure of these applications. We have focused on intermediate frequency SAW filters based on new SAW structures that provide the best performance. However, we also offer a variety of RF filters.

Our SAW filters are designed to operate at a frequency range of 50 MHz to 2.4 GHz. We face a threat of direct conversion technology and other competitor alternatives that do not operate in the frequency range suitable for SAW filters. Such alternative technologies may negatively affect our ability to penetrate new filter applications.

Frequency Control Modules

Our frequency control modules consist of frequency source products for both analog and digital applications. These products provide added value to the SAW components we manufacture. Each module incorporates one or more discrete SAW devices with standard and custom integrated circuits and passive components. Specialized SAW devices are incorporated in voltage-controlled sources to allow frequency variability along with very low phase noise for both analog and digital applications.

Our high-frequency clock modules are used in high-bandwidth, high-performance computer systems. Our “Diff Sine” clocks allow network applications to realize improved performance by providing a highly stable frequency source, which results in very low timing variations from one cycle to the next (commonly referred to as “jitter”) and good symmetry across each cycle. We produce commercial fixed-frequency and voltage-controlled SAW oscillators. These products are supplied in surface mount or leaded metal packages and are used in applications such as microwave radios, and precision instrumentation. We have a line of oscillators that uses our patented technology to serve the Optical Dense Wave Division market. These products are targeted for customers in the optical network market, including high-speed routers and the OC768 backbone system.

Low-power Components

Our resonators are used in low-power wireless transmitter and receiver applications, including automotive remote keyless entry and tire pressure monitoring systems, wireless security systems and consumer toys. Our coupled-resonator filters are well suited for radio frequency filter applications, such as the receiver portion of remote keyless entry systems, and input and output filters for other products manufactured by us.

We offer low-power components in both three-lead metal packages, or TO-39 and a variety of surface mount packages. We offer a variety of smaller surface mount package styles for these products. The market for low-power components is intensely competitive and subject to price erosion, rapid technological change and product obsolescence.

Manufacturing

We have had and continue to have contractual relationships with a manufacturer in Taiwan and China (Tai-Saw Technology Co., Ltd.), a manufacturer in the Philippines (Infiniti Solutions (Phil.) Inc.) and a manufacturer in Japan (Morioka Seiko Instruments Inc., a subsidiary of Seiko Instruments, Inc.). Each of these organizations offers a variety of packaging capabilities, including hermetic packaging, which are essential to the manufacture of SAW devices. Each one also possesses an understanding of the unique aspects of SAW component assembly and testing. Module products can also be built by these manufacturers.

Our Cirronet subsidiary uses three contract manufacturers located in Duluth, Georgia, to manufacture very low to medium volumes of a variety of printed circuit board assemblies, wireless modules and complete radios. All three of these contract manufacturers are ISO 9001 certified and employ highly skilled personnel, and industry standard equipment to manufacture our products. We also have established relationships with two offshore contract manufacturers, one located in Taiwan (Gigatek) and one located in mainland China (ATX), to manufacture high volumes of wireless modules and radios. Both ATX in China, and Gigatek in Taiwan, are ISO 9001 certified. Both have similar manufacturing equipment and highly skilled personnel. In all cases, redundant manufacturing capability exists among these sources. Additionally, we are beginning to utilize one of our existing contract manufacturers in the Philippines (ISPL) to manufacture low to medium volume Cirronet standard radio products and custom wireless modules. We expect to synergistically benefit through our long-standing, existing manufacturing relationship with ISPL.

Our offshore manufacturing arrangements have created additional logistical complexities. However, we are working to reduce these complexities, and have developed the capability to ship directly to our customers from offshore locations to reduce our lead times. We believe that we offer competitive lead times to our customers.

Cirronet also maintains a small assembly operation in-house in Duluth to handle low volume, quick-turn orders, product upgrades and repairs requested by customers, and support new product development. The facility there is ISO 9001 certified.

We are in the process of phasing out our manufacturing operations in Dallas, Texas, which includes quartz wafer/die fabrication for our component products and Virtual Wire™ radios, as well as frequency control modules and our pilot assembly line. This is a result of our strategy to move to a fabless business model in which we rely completely on outside contractors to manufacture our products. This transition will be completed in fiscal year 2008. We have had years of favorable experience with the existing contractors that gives us confidence that our manufacturing needs will be met. We believe our processes for selecting and managing these contractors will be adequate to maintain adequate supply for our customers. We have agreements with these contractors that call for lengthy notice periods before the relationship can be terminated by the manufacturer, so we believe we will be able to transition manufacturing capability to new contractors should that be necessary or desirable.

The manufacturing of our products is a highly complex and precise process that is sensitive to a wide variety of factors. This is especially true for our wireless components. For these products, the level of contaminants in the manufacturing environment, variations in the materials used and the performance of manufacturing personnel and production equipment are all important factors. Each of the devices we manufacture (or that is manufactured on our behalf) is subject to contamination until it is enclosed or sealed within its final package. Therefore, for our wireless component products, all operations, prior to enclosure, are performed in controlled clean-room environments.

The manufacturing process for our Cirronet brand wireless modules and radio products, while demanding, is not as critical as the process used to manufacture our Wireless Component products. Most of the manufacturing process centers on printed circuit assembly using Surface Mount Technology and equipment. Industry accepted design and assembly techniques are used to minimize manufacturing risks. Testing is unique to our products, so we supply test sets, procedures and in-house developed software to our contract manufacturers to enable them to test the products prior to delivery.

In the past, we have occasionally experienced temporary product shipment delays and lower-than-expected production yields. Similar events could occur in the future. Certain acts of God or events of a political nature could also temporarily delay product shipment. We occasionally have experienced sudden increases in demand, which have put pressure on our manufacturing facilities or our contract manufacturers to rapidly increase capacity. Capacity currently exists to meet any reasonably anticipated potential demand within a short time. We will continue to be aggressive in securing increased manufacturing capacity through offshore manufacturing alliances. We will increasingly rely on our contract manufacturers to stock necessary raw materials and wafer materials. As a result, we may occasionally experience temporary shipment delays due to the unavailability of these parts in the face of rapidly increasing customer demands.

Source of Components/Labor

While we use standard components whenever possible, some components used in the SAW devices and modules are made to our specifications by specialized manufacturers. Certain other components used in our Wireless Solutions products are single sourced. For example, we and our contractors purchase several RF integrated circuits from Maxim Integrated Products and ceramic arrays from Kyocera America, Inc. We have experienced delays and quality control problems with certain of our single-source suppliers in the past.

Although we are attempting to obtain second-source suppliers, we think we will continue to be somewhat dependent upon single-source suppliers for the foreseeable future.

Quality

Our customers demand an ever-increasing level of quality in our products. We, as well as all of our offshore contractors, have achieved ISO 9001 certification. We have also been certified to the TS 16949 International Quality Standard, as have our Philippine and Taiwan based manufacturing contractors. Going forward, our products will be manufactured by TS 16949 approved facilities. When we have completed our transition to a fabless business model, we will rely on our manufacturing contractors for their quality certifications. In addition to continually improving the efficiency and effectiveness of our contractors operations, we strive to assure that the features and benefits of our products meet or exceed customer expectations for performance and reliability.

Sales and Marketing

We primarily distribute our products in the United States through manufacturers’ representatives managed by our area sales management team (internal sales force). Following the Cirronet and Aleier acquisitions, several changes were made to the sales representative and distribution sales channels that merged the existing RFM sales channels with those of the acquired entities.

We have authorized five, North American distributors (Avnet Inc., Richardson Electronics, Nu Horizons, Digi-Key and Mouser Electronics) to stock and sell all of our products. The authorized territories are as follows: Avnet Inc. and Richardson Electronics (North America and South America) NuHorizons (Global) Digi-Key (Global) Mouser Electronics (Global).

Aleier software and services are sold through a separate direct sales force. During fiscal year 2007 we entered a strategic alliance agreement with MACTEC Engineering and Consulting Inc, or MACTEC to jointly market certain complimentary software and services. We believe this alliance will help both companies increase sales significantly.

International sales are handled on a nonexclusive basis through manufacturers’ representatives, manufacturers’ representatives acting as distributors and direct sales. The changes in sales to Asia (increase in 2006 and decrease in 2007) primarily relate to changes that occurred in the satellite radio market – see the section below entitled Management Discussion and Analysis - sales trends for filter products . The increase in sales to U.S. and other North American customers that occurred in 2007 was primarily related to the two acquisitions.

Competition

Wireless Solutions

The markets for our Virtual Wire TM and RFIC products are very competitive and are characterized by price erosion, rapid technological change and product obsolescence. With these products, we compete with very large, vertically integrated, international companies, including Texas Instruments, Analog Devices, Infineon, and Maxim along with a larger community of niche suppliers including Nordic, Melexis, and Micrel. The large competitors have substantially greater financial, technical, sales, marketing, distribution and other resources, as well as broader product lines, than we do. Our competitors who have greater financial resources or broader product lines may also be able to engage in sustained price reductions in our markets to gain market share.

The market for radio modules targeting the wireless sensor network market is much less mature and is therefore highly fragmented among a large community of competitors, very few of whom are as large as we are. Due in part to its early stage of development, this market is undergoing rapid technological change but without the degree of price erosion experienced in our component business. Some of the more noteworthy competitors include Dust, Sensicast, Crossbow, and Digi International with its recent acquisition of Maxstream. Of these, we think we currently have the most comprehensive line of products targeting this market segment.

The market for our Aleier asset management solutions is undergoing a dramatic transition from the relatively mature CMMS market to a more comprehensive offering referred to as EAM. The CMMS market is populated by a large number of vendors of all sizes including notable large competitors such as MRO, recently purchased by IBM, Hansen, and Indus and new entrants Questra and Axeda. Through this transition, the market is expected to grow from approximately $3.5 billion today to over $30 billion in the next five years according to a report by Harbor Research. At this time, it is unclear how many and which of the existing vendors will attempt to transition to the EAM market, but it is reasonable to assume many of our larger competitors will do so. Although we believe our products stack up well against even the largest competitors in terms of quality and functionality, our large competitors have substantially greater financial, technical, sales, marketing, distribution and other resources, than we do.

Wireless Components

The markets for our Wireless Components products are intensely competitive and are characterized by price erosion, rapid technological change and product obsolescence. In most of the markets for our products, we compete with very large, vertically integrated, international companies, including AVX, EPCOS Electronic Parts and Components, Murata Manufacturing Co., and Triquint Semiconductor Inc. These competitors have substantially greater financial, technical, sales, marketing, distribution and other resources, as well as broader product lines, than we do. As a result, these competitors may be able to engage in sustained price reductions in our markets to gain market share.

We expect increased competition from existing competitors as well as competition from a number of companies that currently use SAW expertise largely for internal requirements. We are currently experiencing increased competition from companies that offer alternative solutions such as multi-purpose integrated circuits and phase locked loop technology, which combines a semiconductor with a traditional crystal. Additionally, competitors may duplicate our products, which would cause additional pressure on selling prices and which could adversely affect our market share.

General

We believe that our ability to compete in our target markets depends on factors both within and outside of our control. These factors include: (a) the timing and success of new product introductions by us and our competitors; (b) our ability to support decreases in selling prices through reduction in manufacturing cost of sales; (c) the pace at which our customers incorporate our products into their end products; and (d) other factors listed under the section below entitled Risk Factors .

Research and Development

Our research and development efforts are primarily aimed at creating new wireless systems, as well as proprietary and innovative SAW device structures and SAW-based hybrid modules that uniquely address market needs. Our recent development efforts are aimed at supporting the Wireless Solutions business and include the development of proprietary software in the form of embedded “firmware” used to control wireless communications modules and user interface programs used for wireless network diagnostic or system management purposes. The addition of Aleier extends our software development programs to include enterprise software systems, especially those designed for delivery over the internet.

While we cultivate internal expertise in software development areas, it is sometimes more economically efficient to license software from commercial developers in order to decrease time-to-market. This is particularly true for the special embedded programs that define the protocols used to organize wireless networks. We have initiated software development agreements with external contractors to provide network protocol “firmware” for our wireless modules. Similarly, we may license radio technology developed by an RF integrated circuit provider in order to accelerate product development schedules and expand the technical capabilities of our products. To this end we have entered negotiations for product licensing agreements with several RF integrated circuit suppliers.

An example of our research and development efforts is the work recently completed to develop modules for a wireless sensor network used in Cooper Bussmann’s innovative InVision™ Downtime Reduction System. This system reduces critical machine downtime and increases productivity in manufacturing environments by rapidly identifying open-circuit events caused by short-circuits and overloads. At the heart of the system is a custom wireless sensor network developed by RFM’s Cirronet subsidiary that includes battery-powered, intelligent fuse sensor modules reporting through a robust, self-healing, wireless mesh network. The network transmits notification of open-circuit events through an internet gateway to a web-based monitoring application that sends an urgent maintenance work order request. RFM’s R&D efforts included the design of the overall hybrid star/mesh wireless network, as well as all of the hardware and firmware up to the gateway.

We employ a number of highly qualified individuals in engineering and product and process development, including scientists, design engineers and technicians. World-class filter design capabilities are provided by our team of filter design employees and consultants located in Dallas, Texas and Moscow, Russia. Their state-of-the-art filter designs are transformed into highly manufacturable product configurations by our process engineering staff in Dallas, Texas. Our two acquisitions come with a number of highly qualified technical people, both in hardware and software development. Our Cirronet acquisition has an embedded module team. Our Aleier acquisition develops high level software applications, including interfacing with the internet.

Our research and development teams are responsible for new products and new processes from inception to the commencement of volume manufacturing. We believe that the efforts of these individuals help to ensure that our products provide an optimum system solution for the customer and are manufacturable at a competitive cost.

From time to time we have entered into agreements with customers to develop a product that is custom designed for the customer’s end product. In addition, we have participated in government-sponsored research and development programs. We treat sales derived from engineering design services as technology development sales and their associated costs are included in cost of sales. Costs related to these sales were included in our cost of sales during these years. We consider the development of new products essential to maintaining and increasing sales.

CEO BACKGROUND

David M. Kirk has served on our Board since November 1999. In November 1999, Mr. Kirk was also elected as our President and Chief Executive Officer. From May 1998 until November 1999, Mr. Kirk served as our Vice President, Marketing. Prior to joining us, Mr. Kirk served as Director of Marketing of Murata Electronics North America, Inc., an electronics component company, from June 1995 to May 1998. Mr. Kirk has a B.S.E.E. from Clemson University.

Michael R. Bernique has served on our Board since October 1997 and as Chairman of the Board since November 1999. Mr. Bernique also served as Chairman of the Board of TelOptica, Inc., a developer of software that helps companies design and optimize fiber-optic telecommunications networks, from January 2003 until July 2004. Prior to January 1, 2003, Mr. Bernique served as President and Chief Executive Officer of TelOptica, Inc. From 1999 to 2003, Mr. Bernique served as a director of CPS Technologies Corporation, a manufacturer of advanced metal-matrix composites and ceramic components. Mr. Bernique served as President of Satellite Data Networks Group for Next Level Systems, Inc., a telecommunications company, in 1996 and 1997. From 1993 to 1995, Mr. Bernique served as Sr. Vice President, North American Sales and Service at DSC Communications, or DSC, a telecommunications company, and from 1992 to 1993 he served as Vice President and General Manager of the Transmission Products Division of DSC.

Dean C. Campbell has served on our Board since May 1989. From 1982 to December 2000, Mr. Campbell was the Managing General Partner of Campbell Venture Management, a venture capital fund. From 1989 to 1999, Mr. Campbell served as a director of Texas Micro Inc. (formerly known as Sequoia Systems), a manufacturer of ruggedized systems, acquired by RadiSys Corporation, a designer and manufacturer of embedded computer solutions, in August 1999. From 1989 to 1998, Mr. Campbell served as a director of Telco Systems, Inc., a manufacturer of telecommunications devices.

William L. Eversole joined our Board in February 2006. He is President and Chief Executive Officer of Bandspeed, Inc., a provider of combined silicon-software enterprise Wi-Fi solutions. Prior to joining Bandspeed, Mr. Eversole served as President and Chief Operating Officer of Quellan, Inc., a semiconductor company that develops high-speed integrated circuits for communications equipment. Prior to joining Quellan, Inc., he was with Texas Instruments from 1973 to 2002, where he rose from design engineer to become general manager of the Worldwide DSL Business in the Broadband Communications Group. Mr. Eversole has a B.S.E.E. from the University of Tennessee and Masters and Doctorate degrees in electrical engineering from Southern Methodist University.

Francis J. Hughes, Jr. has served on our Board since 1983. Mr. Hughes joined American Research & Development, a private venture capital firm, in January 1982, became Chief Operating Officer in November 1990 and President in June 1992. Mr. Hughes also serves as a director of CPS Technologies Corporation, a manufacturer of advanced metal-matrix composites and ceramic components. He has been a general partner of four American Research & Development venture capital funds, as well as a general partner of Hospitality Technology Funds, L.P. He is also a partner of Egan-Managed Capital, a private venture capital firm which he co-founded in 1997. He served as Chairman of the Board of Texas Micro Inc. (formerly known as Sequoia Systems), a manufacturer of ruggedized computers, acquired by RadiSys Corporation, a designer and manufacturer of embedded computer solutions, in August 1999.

COMPENSATION

Base Salaries

Base salaries are intended to create a secure base of cash consideration for executives. We believe that base salaries must be competitive with those offered by our peer group to be effective.

The Committee normally considers the scope of job responsibilities, individual contributions, labor market conditions, peer group data and our overall annual budget guidelines for merit and performance increases. The relative weight given to each factor varies with each position and individual and is within the sole discretion of the Committee. The Committee’s objective is to deliver base compensation levels for each Named Executive Officer at or near the median for the comparable position of the peer group.

With respect to fiscal year 2007, after the Committee considered the implications of integrating two acquisitions and restructuring the Company, it determined it was not in the best interest of the Company or the stockholders to authorize either selective or broad-based salary adjustments. See the discussion above under “Effect of Company Performance on Compensation Decisions in Fiscal Year 2007.” Since salary adjustments based on merit were not considered in fiscal year 2007, the Committee did not consider individual performances as part of their evaluation of overall performance for the year. The Committee, however, approved a $20,000 salary increase and a 10,000 RSU award for Mr. Andrulis when he was promoted to Senior Vice President and Group Manager on May 1, 2007. Due to the scope of the strategic marketing efforts required by the combining of RFM, Aleier, and Cirronet products and services, it was determined that a focal point needed to exist in order to fully capitalize on synergies of the combined companies. The Committee determined that Mr. Andrulis, who previously served as the

Company’s Vice President of Marketing, was the best candidate for the position because of his knowledge of the markets served, the products and services offered, and his strategic planning capability. As a result, he was promoted to the position of Senior Vice President and Group Manager, Wireless Solutions with the increase in salary and stock bonus mentioned above.

Incentive Awards

The Committee believes that executive performance may be maximized through a system of incentive awards that promote the financial interests of the Company and its stockholders. Short-term (annual or quarterly) incentive awards payable in either cash or stock or a combination thereof are tied to the Company’s performance to motivate performance to meet short-term objectives, normally related to our annual operating plan or the financial guidance metrics that we provide to investors. These incentive awards are normally targeted at 40% of base salary.

In 2005, the Committee adopted the Omnibus Cash Incentive Plan of 2005, which provided for the structuring of , and establishment of standard terms and conditions for, cash incentives. In 2007, the Committee adopted an amendment to the Omnibus Cash Incentive Plan to also allow for stock awards using our 2006 Equity Incentive Plan, as described below under “Long-Term Equity Incentive Awards”. For all incentive opportunities, the award earned depends on the extent to which performance objectives are achieved. Each fiscal quarter, the Committee reviews and approves performance objectives. Objectives generally consist of operating, strategic and financial goals that are considered by the Company to be important to building stockholder value. The Committee retains the discretion to reduce, but not increase, payouts.

The Company has adopted an Internal Goals and Objectives Policy that establishes guidelines and requirements for goals and objectives used to develop annual and/or quarterly incentive bonus compensation goals for the Named Executive Officers. The guidelines and objectives are utilized by the Committee in establishing incentives for Named Executive Officers. The primary objective of the Internal Goals and Objectives Policy is to insure that all Internal Goals and Objectives established for the Named Executive Officers are “stretch” goals that are above and beyond the Company’s covenant requirements of its lending institution agreements and financial guidance and estimates provided publicly to stockholders and the investment community.

We believe that the targeted levels of performance are challenging and reflect desired above-market performance, and thus typically would not be achieved all of the time. In fact, targeted levels were only partially met in fiscal 2007. We also believe, at the time the performance goals were set, that performance at a level above the target level would be difficult but not impossible to achieve. The Committee recognizes that the likelihood of achievement in any given year may be different, and believes that the payout should be appropriate for the performance, regardless of how often achievement of the targeted level may happen.

The Committee has determined that Mr. Crawford will not participate in cash awards under the incentives established for other Named Executive Officers. The Committee has adopted a Sales Incentive Plan under which Mr. Crawford is compensated. The Committee feels the performance target for Mr. Crawford should be sales growth. The Committee administers the Sales Incentive Plan under criteria similar to those used for other Named Executive Officers. Mr. Crawford’s incentive target of 40% of base salary remained unchanged through out the year, since the Committee determined that meeting sales targets was a key part of the restructuring plan.

For the first and second quarters of fiscal 2007, the Committee established incentive targets based 80% on sales relative to the operating plan and 20% based on qualitative factors. The potential payout was an all cash incentive of 40% of base salary for the applicable quarter. A small payout was made in the first quarter based on attainment of qualitative factors. For the reasons described under “Effect of Company Performance on Compensation Decisions in Fiscal Year 2007”, no payout was made in the second quarter. The first quarter’s qualitative factors were primarily related to the successful integration of the two acquisitions the Company made in its first quarter. The Committee developed targets for each functional area of the Company, i.e. engineering, sales and general and administrative, and operations.

For the third and fourth quarters of fiscal 2007, quarterly cash and stock bonus award opportunities were determined directly from four objective performance-based measures: (a) sales relative to quarterly operating plan; (b) gross profit margin relative to quarterly operating plan; (c) operating cash flow relative to quarterly operating plan; and (d) non-GAAP earnings per share, or EPS, relative to the quarterly operating plan, calculated in the same manner as described in our quarterly news releases, eliminating acquisition related intangible expenses, restructuring costs, asset impairments and stock compensation. The Committee evaluated the relative components of these four factors on a quarterly basis, based on priorities at the time. The same criteria used for the Named Executive Officers in fiscal 2007 were used for all other executive employees for fiscal 2007.

The third and fourth quarter target bonus for each of the Named Executive Officers was a percentage of a fixed amount that he was eligible to earn under the objective bonus criteria discussed above. The higher level of responsibility of Mr. Kirk is reflected in a greater percentage of potential total performance-based cash compensation than the other Named Executive Officers. For three quarters, the performance-based quarterly cash compensation target was $3,000 for Mr. Kirk and $2,000 for each of the other Named Executive Officers, with the exception of Mr. Crawford, whose cash-incentive compensation is based entirely on sales performance. The targeted quarterly stock compensation was 1,500 RSUs for Mr. Kirk and 1,000 RSUs for the other Named Executive Officers. These performance-based RSUs vest upon attainment of the bonus criteria, discussed above.

We made the following quarterly adjustments to operating income for purposes of determining the performance-based cash bonus amounts: (i) we added back the non-cash share-based compensation expense incurred by our compliance with SFAS 123(R); (ii) we added back non-cash amortization of certain intangibles; and (iii) we added back non-cash asset impairment and severance costs.

No minimum bonus was guaranteed. The revenue growth rate and gross profit targets were equally weighted factors. The cash flow and EPS targets were also equally weighted but at a slightly lower percentage. If any of these factors was zero or negative, then the Committee evaluated whether or not any bonus would be earned or a reduced bonus would be earned. In fiscal year 2007, the Committee exercised this discretion and reduced cash bonus payments. The bonus compensation calculations are net of the impact of bonus payments themselves.

For fiscal year 2007, our compensation program was structured to provide each Named Executive Officer with the opportunity to earn, through a combination of base salary and bonus target awards, total cash compensation above the 50th percentile level of the peer group comparable position. For fiscal 2007, the total cash compensation earned by the Named Executive Officers as a group was below the peer group 50th percentile level for comparable positions because the targeted levels of performance for each of the four quarters of fiscal year 2007 were not achieved.

Long-Term Equity Incentive Awards .

We believe that substantial equity ownership provides important long-term incentives and encourages the Named Executive Officers to take actions favorable to the long-term interests of the Company and its stockholders. Accordingly, equity-based compensation makes up a portion of the overall compensation of the Named Executive Officers.

Annual or periodic stock grants, primarily in the form of RSUs, are intended to provide long-term incentives that coincide with the interests of stockholders. We typically make annual equity awards to Named Executive Officers through our 2006 Equity Incentive Plan. For the third and fourth quarters of fiscal 2007, we also linked the grant of awards to achievement of goals set pursuant to our Omnibus Incentive Plan.

The purpose of these awards is to serve as both a retention and incentive mechanism in order to create value for both the award recipient and the stockholders. Each Named Executive Officer has a portion of his potential financial net worth at risk because it is based on the Company’s future performance. Such awards are generally vested in four equal annual installments beginning on the first anniversary of the date of grant. In addition, awards have been made on vesting periods shorter than that if they are related to performance on specific projects or in lieu of salary increases. The amounts vary from year to year, but tend to be determined by overall company budgetary considerations. The cumulative effect of these awards is intended to provide the Named Executive Officers a potential increase in net worth tied to increases in stockholder value.

For fiscal 2007, long-term awards to Named Executive Officers were: 2,000 RSUs for Mr. Gemmell; 4,000 RSUs for Messrs. Barnes, Andrulis, and Crawford; and 8,000 RSUs for Mr. Kirk. These RSUs will vest over four years. Stock grants are budgeted like other expense items and tend to be similar in aggregate amount from year to year.

Employee Benefits

The Named Executive Officers receive the same employee benefits generally available to all of our employees, including health insurance, group life and disability insurance and participation in the 401(k) and employee stock purchase plans.

Perquisites

The Named Executive Officers do not receive any perquisites or personal benefits, as it has never been part of our culture to provide them. We believe that they are viewed by some of the stockholders and employees as being discriminatory in nature and, as such, we have historically taken the position that these compensation components are not necessary to implement the Company’s current compensation philosophy and structure.

Employment Agreements

During 2007, Mr. Robert Gemmell was the only Named Executive Officers party to an employment agreement with the Company. Mr. Gemmell was offered the agreement in connection with the acquisition of Cirronet, Inc. and the Committee’s belief that he was key to a successful integration of the acquisition. Mr. Gemmell’s agreement expired in September 2007, and was not renewed. It is generally our policy not to enter into an employment agreement with any of the Named Executive Officers. We believe that employment agreements are not currently necessary in order to attract and retain talented personnel. However, due to the ever-changing marketplace in which we vie for talent, this practice is regularly reviewed by the Committee to help ensure that we remain competitive in our industry and the Committee may determine that such arrangements may be in the Company’s best interest in the future.

Indemnification Agreements

We have entered into indemnity agreements with our Named Executive Officers and certain of our other officers and directors which provide, among other things, that we will indemnify the officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he may be required to pay in actions or proceedings to which he is or may be made a party by reason of his position as a director, officer or other agent, and otherwise to the full extent permitted under Delaware law and our Bylaws. We feel this offers some protection to the Named Executive Officer’s personal wealth from actions that are solely related to his position as an corporate officer and allows him to make decisions based solely on the best interests of the Company and its stockholders.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

We operate in two different environments in our two business groups. The Wireless Components business is characterized by a very competitive environment that has declining average selling prices and frequent product innovation. Arrayed against us are several large competitors who have superior financial and other resources. We have competed successfully for over 25 years by cultivating close customer relationships with a diverse group of customers in varied applications, markets and geographic locations. In contrast, our Wireless Solutions business is characterized as a developing market with only a generalized definition of products, services, markets and applications. Competition is not well defined and typically consists of much smaller competitors.

Our strengths include: (a) our ability to identify and capitalize on trends in a rapidly growing wireless marketplace; (b) our capability to develop products and services that have superior technical characteristics; (c) our expertise to assist our customers in incorporating our products into their applications; and (d) our demonstrated ability to manufacture high quality cost-effective products in volume with short lead times. Our manufacturing capabilities are greatly enhanced by our relationships with several domestic and offshore contractors.

Our base Wireless Components business has declined in sales due to decreased average selling prices in several intensely competitive markets and loss of market share to competing technologies. As a result, we have focused our product and market developments on products for our Wireless Solutions business which we feel offer a technical edge and have greater gross margin potential. A key factor in our sales performance is whether or not we develop and sell enough new products to offset the decline in selling price and unit volume of our older products. Overall economic conditions in the electronics industry, which has historically experienced extreme increases and decreases in demand within short periods of time, is another key factor that influences our sales performance. We believe our markets are currently in a period of stable to increasing overall demand, depending on the market involved. A key factor in our gross margin performance is whether or not we can reduce our costs (through innovation and increased volume) and improve our product mix towards higher margin products to offset expected declines in average selling prices. The Cirronet and Aleier acquisitions implement our strategy to grow sales with new products that have higher margin potential.

We have systematically increased our operating expenses to support our Wireless Solutions initiative and that has somewhat increased our sales breakeven point. Despite increased operating expenses, we have normally generated positive cash flows in recent periods. See the section below entitled Liquidity for discussion of cash flows for the current period. While we intend to continue some level of positive cash flows in future periods, the amount of positive cash flow may decrease or occasionally turn negative due to fluctuating revenues or the need for increased working capital to support increased sales or increased capital spending and other investments to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. We have listed below our most significant accounting policies and estimates, which we think are the most critical to fully understand and evaluate our reported financial results. Please keep the following policies and estimates in mind when reading the accompanying financial statements and related footnotes.

Trade Receivables

We perform credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts based upon historical experience and specific customer information. We maintain credit insurance on major foreign customer balances and have a relatively diversified customer base.

In fiscal year 2005, we recorded a charge of $135,000 due to the commencement of Chapter 11 proceedings by Delphi Corporation. In subsequent and previous years our losses were much smaller. However, there is no guarantee that we will continue to experience relatively low rates of loss in the future. A significant change in the liquidity or financial condition of a large customer or group of customers could have a material adverse effect on our ability to collect our receivables and we may incur losses as a result.

Inventories

We value inventory at the lower of the actual cost to purchase or manufacture the inventory (on a first-in, first-out basis) or the current estimated market value of the inventory. We use a standard cost system to estimate the actual costs of inventory and regularly review actual costs and the estimated market value of inventory to standard costs. Significant changes to our purchasing or manufacturing costs (either an increase or a decrease) could cause material changes to the valuation of our inventory when we adjust standard costs to reflect the change.

We estimate the market value of inventory based upon existing and forecasted demand for end products for the next twelve months and estimated amounts of inventory that would be consumed. We reduce the valuation of inventory items that are in excess supply compared to demand, items that have had limited usage over time, items that may no longer be usable due to product obsolescence and items that we decide to discontinue selling. We have a product rationalization process that involves key management personnel to identify and evaluate products and related inventory that fall into one or more of these categories.

In recent years we have written off significant amounts of inventory. In the current fiscal year, we wrote down $1.2 million in inventory related to our transition to a fabless business model. In fiscal year 2003, we wrote down $2.6 million of inventory to reflect changes that occurred in our marketing strategy to accelerate the migration of our products to smaller packages. This was done in response to an abrupt shift in market requirements toward smaller packages. Inventory write-downs in the other years presented were much smaller.

If the facts and circumstances require it, we may have to write down inventory again in future periods. The electronics industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could make such write-downs necessary. Also, estimates of future product demand may prove to be inaccurate, in which case the valuation adjustments for obsolete and slow moving inventory may be understated or overstated. If we change our estimate of future demand, we may have to increase or decrease our inventory valuation reserves for excess inventory, with a corresponding impact on cost of sales. We continually review our inventory valuations for all of these factors. However, significant changes in manufacturing costs, unanticipated changes in product demand or technological developments could have a significant impact on the value of inventory and reported operating results.

Goodwill and Other Intangible Assets

We have adopted Statement of Financial Accounting Standards, or SFAS, No. 142 “Goodwill and Other Intangible Assets”, or SFAS 142, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. We review goodwill and intangible assets with indefinite lives for impairment annually and upon occurrence of any event that indicates potential impairments. In accordance with SFAS 142, we perform an annual impairment review during the fourth quarter of each fiscal year. We conducted such a review at the end of fiscal year 2007 and determined that there was no impairment.

SFAS 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for potential impairment, while the second phase (if necessary) measures the impairment. Goodwill is potentially impaired if the net book value of a reporting unit exceeds its estimated fair value. In calculating the impairment charges, the fair value of the reporting unit is estimated using a discounted cash flow methodology. The significant assumptions used in these calculations include discount rates, estimated future growth rates and operating margins. A change in any of these assumptions could significantly impact the estimated fair value of the reporting unit. SFAS 142 also requires that the fair value of the purchased intangible assets with indefinite lives be estimated and compared to the carrying value. We estimate the fair value of these intangibles assets using an income approach. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144 “Accounting for Impairment of Long-Lived Assets”, we record impairment losses on long-lived assets when events and circumstances indicate that such assets are not recoverable and impaired such that the estimated fair value of the asset is less than its recorded amount. Conditions that would necessitate an impairment assessment include material adverse changes in operations (such as happened in our second quarter), significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

We review our long-lived assets and certain intangible assets for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows expected to be generated by that asset. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets estimated using discounted cash flows.

Deferred Income Taxes

In fiscal year 2001, we recorded a full asset valuation allowance against tax loss carryforwards and other tax benefits according to the SFAS 109 “Accounting for Income Taxes” guidelines. Since then we have generally not recorded significant net federal tax benefits or expenses, since they were offset by the valuation allowance. In the current year, however, we recorded a net deferred tax liability associated with our acquisitions. The only other exception to this was in fiscal year 2002 when a change in tax law allowed us to collect a significant tax refund, which was recorded in the period in which the change in tax law occurred. We may record relatively small amounts of tax expense in future periods related to alternative minimum income taxes due on either a state or federal level. We still retain a large amount of potential tax benefits for tax loss carryforwards and other factors, as explained in the notes to the financial statements. These benefits may be realized in future periods. As a result, we do not expect to record significant federal income tax expense related to operations in the near future.

Results of Operations

In this section we will discuss our financial statements. In doing this, we will make comparisons between the following periods, which we believe are relevant to understanding trends in our business:


•

The fiscal year ended August 31, 2007, referred to as current year or fiscal 2007, is compared to our fiscal year ended August 31, 2006, referred to as prior year or fiscal 2006. Fiscal 2006 is compared to our fiscal year ended August 31, 2005, referred to as fiscal 2005.


•

The three months ended August 31, 2007, referred to as current quarter or fourth quarter, compared to the three months ended August 31, 2006, referred to as comparable quarter of the prior year or prior year quarter, and the three months ended May 31, 2007, referred to as the previous quarter or third quarter.

Overall Sales Trends in Fiscal 2007 Compared to Fiscal 2006

Our total sales increased 4% in fiscal 2007 compared to fiscal 2006. Our two lines of business had very different trends. The Wireless Solutions group had an 86% increase in sales, primarily as a result of our two acquisitions at the beginning of the current fiscal year. The Wireless Components group had a 25% decline, primarily a result of older products which had a lower number of units shipped. This decrease in number of units sold was primarily due to decreased sales to automotive and satellite radio markets, due to reduced production rates of products for end customers in those markets.

Our strategy has been to grow our Wireless Solutions business to offset an expected decline in the Wireless Components business. We have focused our product and market development efforts on products with higher technical content, which allows them to be sold with higher gross margins. One of the biggest factors in determining what happens to total sales in the future will be whether or not the anticipated growth in Wireless Solutions sales will be greater than or less than the anticipated decline in sales for our Wireless Components business.

We compete in very price competitive markets (such as the automotive and satellite radio markets) in which customers require decreased prices over time to retain their business, particularly for products in the Wireless Components group. In addition, we understand that as new products ramp up in volume our customers expect economies of scale to result in lower pricing. As a result, two of our product lines experienced a decline in average selling prices in the range of 1% to 6% in the current year. Although the filter product line actually experienced a slight increase in average selling price, that was due to a shift in product mix within the product line, rather than any actual increases in selling prices to our customers. A decline in average selling prices adversely impacts gross margin, as well as sales. Therefore, offsetting this impact is an important part of our strategic plan. We have achieved significant market position in most of the markets on which we focus. However, we believe that price competition from much larger and better financed competitors represents a significant risk in maintaining our sales levels and gross margins, particularly in the automotive and consumer markets. For a discussion of strategies for sustaining gross profit, see the section below entitled Gross Profit .

Our sales success is highly dependent on the following factors: (1) our success in achieving increases in sales for Wireless Solutions products and services which have a higher technical content (2) achieving technological advances in our product design and manufacturing capabilities; (3) our ability to sell our products in a competitive marketplace that can be influenced by outside factors, such as economic and regulatory conditions; (4) competition from alternative technologies or from competitors duplicating our technologies; and (5) the impact of competitive pricing. These and other factors may adversely affect our ability to grow or even maintain our sales levels.

We have put forth considerable effort developing new products and services. However, the timing of any sales resulting from new products and services is dependent upon the customers’ product introduction and software implementation cycles. Sales to OEM customers are particularly dependant on the customers’ success in their market development program. It is difficult for us to predict when, or if, new products and services will have a significant impact on our sales.

We have experienced sudden increases in demand in the past which have put pressure on our manufacturing facilities and those of our offshore contractors to increase capacity to meet this demand. In addition, new products sometimes require different manufacturing processes than we currently possess. We now are participating in some service markets which are dependant on having the capability to provide the services our customers want. We may not be able to increase the manufacturing capacity of our assembly contractors, improve our manufacturing processes in a timely manner so as to take advantage of increased market demand or to increase our capability to provide services. Failure to do this could result in a material loss of potential sales.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

In this next section we will discuss our financial statements. In doing this, we will make comparisons between the following periods, which we believe are relevant to understanding trends in our business:


•

The three months ended November 30, 2007 (current quarter and current year-to-date period) of the fiscal year ending August 31, 2008, in comparison to the three months ended November 30, 2006 of the fiscal year ended August 31, 2007 (comparable quarter of the prior year and prior year-to-date period).


•

Certain comparisons with the three months ended August 31, 2007 (previous quarter) are provided where we believe it is useful to the understanding of trends.

The selected financial data for the periods presented may not be indicative of our future financial condition or results of operations.

Sales

Overall Sales Trends for the Current Quarter Compared to the Prior Year and Previous Quarter

Total sales increased 3% in the current quarter compared to the comparable quarter of the prior year and increased 10% from the previous quarter. The primary reason for the increase in both periods was an increase in the number of units sold, both for Wireless Solutions and Wireless Components products.

Wireless Solutions products sales increased 4% from the prior year and 10% from the previous quarter. This is consistent with our strategy to focus product and market development on those products, which are receiving increased market acceptance. For instance, sales for Cirronet and Aleier brand products increased 19% from the comparable quarter of the prior year. Most of these sales were from the Cirronet and Aleier products and services that were acquired at the beginning of the last fiscal year as part of our strategy to increase Wireless Solutions sales. For further information on these products see the section below entitled Cirronet and Aleier Brand Products .

The other major Wireless Solutions product category is Virtual Wire™ Short-range Radio products. These sales fluctuated both upward and downward in comparison to prior periods, primarily as a result of changes in production levels of major customers. Our primary customers for these products are contract manufacturers and distributors, who order product based upon production schedules requested by their customers, which have historically shown considerable volatility. Sales for these products decreased 8% from the comparable quarter of the prior year, primarily due to a decrease in average selling prices. The decrease in average selling prices resulted from a reduced number of units sold to relatively higher price medical applications resulting from decreases in production levels for customers. The decrease in medical application units shipped was offset by an increased number of units sold to other customers, but at lower average selling prices. In contrast, Virtual Wire™ Short-range Radio products sales increased 24% compared to the previous quarter due to an overall increase in number of units sold resulting from increases in production levels at several major customers, including automated meter reading and medical customers. For further information on these products, see the section below entitled Virtual Wire™ Short-range Radio products .

Wireless Components products sales increased 2% from the prior year and 9% from the previous quarter. The increase for Wireless Components products primarily related to economic recovery in some of the markets in which these products are used, particularly as filters for satellite radio and telecom applications, which have shown significant volatility in recent quarters. Sales of filter products were at the highest levels since fiscal year 2006, when satellite radio filter sales were at high levels for both automotive and consumer markets. For further information on filter products, see the section below entitled Filters .

Partially offsetting the increases in filter sales in comparison to the comparable quarter of the prior year was a 61% decrease in sales of frequency control modules which resulted from a similar reduction in the number of units sold. The telecom markets these products serve are subject to volatile changes due to varying economic conditions and production rates at several major contract manufacturers. These markets were at very high levels a year ago but we believe the current levels are more typical. Also offsetting the increases in sales for filter products was an ongoing reduction in sales for our older low-power components products as explained below in the section entitled Low Power Components .

Our strategy has been to grow our Wireless Solutions business to offset an expected decline in the Wireless Components business. We have focused our product and market development efforts on products with higher technical content, which allows them to be sold with higher gross margins. One of the biggest factors in determining what happens to total sales in the future will be whether or not the anticipated growth in Wireless Solutions sales will be greater than or less than the anticipated decline in sales for our Wireless Components business.

We compete in very price competitive markets (such as the automotive and satellite radio markets) in which customers require decreased prices over time to retain their business, particularly for products in the Wireless Components group. In addition, we understand that as new products ramp up in volume our customers expect economies of scale to result in lower pricing. As a result, two of our product lines experienced a decline in average selling prices in the range of 7% to 9% in the current quarter in comparison to the comparable quarter of the prior year. Although the filter product line actually experienced a slight increase in average selling price, that was primarily due to a shift in product mix within the product line, rather than any actual increases in selling prices to our customers. The other products were not significantly impacted by decreases in average selling prices.

We have achieved significant market position in most of the markets on which we focus. However, we believe that price competition from much larger and better financed competitors represents a significant risk in maintaining our sales levels and gross margins, particularly in the automotive and consumer markets. A decline in average selling prices adversely impacts gross margin, as well as sales. Therefore, offsetting this impact is an important part of our strategic plan. For a discussion of strategies for sustaining gross profit, see the section below entitled Gross Profit .

Our sales success is highly dependent on the following factors: (1) our success in achieving increases in sales for Wireless Solutions products and services which have a higher technical content (2) achieving technological advances in our product design and manufacturing capabilities; (3) our ability to sell our products in a competitive marketplace that can be influenced by outside factors, such as economic and regulatory conditions; (4) competition from alternative technologies or from competitors duplicating our technologies; and (5) the impact of competitive pricing. These and other factors may adversely affect our ability to grow or even maintain our sales levels.

We have put forth considerable effort developing new products and services. However, the timing of any sales resulting from new products and services is dependent upon the customers’ product introduction and software implementation cycles. Sales to OEM customers are particularly dependant on the customers’ success in their market development program. It is difficult for us to predict when, or if, new products will have a significant impact on our sales.

We have experienced sudden increases in demand in the past, which have put pressure on our manufacturing facilities and those of our offshore contractors to increase capacity to meet this demand. In addition, new products sometimes require different manufacturing processes than we currently possess. We now participate in some service markets which require that we have the capability to provide the services demanded. We may not be able to increase the manufacturing capacity of our assembly contractors, improve our manufacturing processes in a timely manner so as to take advantage of increased market demand or to increase our capability to provide services. Failure to do this could result in a material loss of potential sales.

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