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Article by DailyStocks_admin    (08-20-08 06:23 AM)

Filed with the SEC from Aug 11 to Aug 15:

RF Monolithics (RFMI)
Doucet Capital wants RF Monolithics to put itself up for sale. Doucet argues that RF's stock is "undervalued by a multiple of its current trading price." It also contends that management and officers "have been too slow to adjust to market conditions and make the changes necessary to right-size their business." Doucet Capital reported holding 457,572 shares (5%).

BUSINESS OVERVIEW

BUSINESS

RF Monolithics, Inc., or RFM, was organized in 1979 as a Texas corporation and converted to a Delaware corporation in 1994. We design, develop, manufacture and market a broad range of wireless products that are solutions-driven and technology-enabled. We have two lines of business–Wireless Solutions and Wireless Components.

Our Wireless Solutions business includes Virtual Wire™ Short-range Radios, Radio Frequency Integrated Circuits, or RFIC’s, module products, software and services. The products are various types of radios and the networks that manage and use these radios. Our goal is to provide customers with a comprehensive solution which includes a wide variety of alternative products and services for their wireless network applications. These product offerings were enhanced by two acquisitions that were consummated in fiscal year 2007. RFM acquired Cirronet, Inc., or Cirronet, and the business of Caver-Morehead Systems, Inc., (which was acquired by Aleier, Inc., or Aleier, a wholly-owned subsidiary of RFM). See the section below entitled Acquisitions at the end of Item 1 for additional information on these transactions. Miniature radios that are very short range and ultra low power are marketed under the RFM brand. Standard and custom OEM radio modules as well as packaged radio and network gateway products are marketed under the Cirronet brand. These products have longer range and increased data rates compared to older RFM products. Asset management platform software and end-applications are marketed under the Aleier brand.

Our Wireless Components business includes filters, frequency control modules and low-power components and is marketed under the RFM brand. Our goal is to provide simple, cost effective solutions that fit our customers’ specialty applications.

We focus our component and radio product development in the frequency range of 50 megahertz, or MHz, to 5.8 gigahertz, or GHz. We market our line of more than 500 radios, radio modules, resonators, filters, clocks and oscillators to distributors, electronic manufacturing service companies and original equipment manufacturers, or OEMs, world-wide. Our customers include Acal plc, Avnet/Memec Inc., Celestica Inc., Delphi Corporation, FAAC Electronics Limited, Flextronics International, GE, Guidant Cardiac Pacemakers, Inc., Holy Stone Enterprises, Pason Systems, Inc. and ZTE Corporation.


* Certain names or marks mentioned herein may be claimed as the property of others.

Advantages of Our Solutions

Our knowledge of various low power radio technologies, microprocessors, link and MESH protocols, antennas, and certification requirements help us meet specific customer requirements in the evolving Wireless Solutions marketplace. Our acquisition of Cirronet increases our offerings of radio systems, radio frequency, or RF, design, protocols, gateway technology, and product packaging. In particular, we have expertise in products utilizing leading industry technology including Zigbee™, 802.15.4, Bluetooth™, and WiFi. The Aleier acquisition added Enterprise Asset Management or EAM and Computerized Maintenance Management System, or CMMS, software, software implementation expertise and web delivery design capability.

The core technology we utilize for our Wireless Component business is surface acoustic wave, or SAW, technology. We believe that our SAW-based products, coupled with our RF design and manufacturing expertise, offer potential customers certain fundamental advantages over alternative technologies.

Our product offerings combine a complex mix of application assistance, design technology, wafer fabrication capability, hybrid assembly and packaging processes at primarily offshore locations to meet 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.

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.

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.

Accrued Medical Benefits

We largely self-insure the payment of medical benefits to our employees. Consequently we regularly estimate the value of unpaid benefits based upon historical trends and use that information to record our liability for benefits that have been incurred but not yet paid. We have stop loss insurance protection to cover the costs of medical claims over certain deductible amounts for any given plan year for an individual claimant or in the aggregate. However, medical claims may significantly and unexpectedly increase or decrease over a short period of time, in which case our liability for unpaid claims may no longer be accurate. This could cause us to either increase or decrease medical expense in a material way in the period in which the change occurred.

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. Overall Sales Trends in Fiscal 2006 Compared to Fiscal 2005

Our total sales increased 17% in fiscal 2006 compared to fiscal 2005. The primary reason for this was an increase in sales for three of our four product lines due to an increase in the number of units sold. This increase was the result of greater market acceptance of our fairly new products, particularly for the satellite radio application. Sales for the fourth product line (low-power components) decreased in line with trends seen in prior years, as explained below in the section entitled Product Line Sales Trends: Low-Power Components . We have anticipated this trend of lower sales of low power components products for some time. As a result, for several years we have focused our product and market development efforts on products with higher technical content, which allows them to be sold at higher average selling prices. We had considerable success in increasing sales for these higher-priced products in the current year. Sales increased more than 33% for these products, as we sold 64% more units, particularly filters for the satellite radio application which is discussed below.

We compete in very price competitive markets in which customers require decreased prices over time to retain their business. As a result, each of our product lines experienced a decline in average selling prices in the range of 2% to 15% in the current year. 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.

Product Line Sales Trends:

Wireless Solutions Group

Cirronet and Aleier Brand products

Sales for these products and services increased $12.8 million, primarily as a result of the acquisitions of Cirronet and Aleier. These acquisitions were a major part of our strategy to grow sales for our Wireless Systems products within our Wireless Solutions group. We had some sales of these products in fiscal 2006. This was reclassed from Virtual Wire™ Radio products to Cirronet and Aleier Brand. Many of the customers in this group are in what we are classifying as the industrial market to OEM customers, resulting in more sales to this market application.

In the past couple of years, we have invested considerable resources in product and marketing development to support our strategic plan for the Wireless Solutions business. Our Wireless Solutions business is focused on the potential $8 billion market for embedded modules and similar products. 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 and deliver the optimum solution for a given customer’s application.

To accelerate our efforts in this area, we acquired both Cirronet and Aleier in the first quarter. See Note 15 of the financial statements for the financial details. Cirronet provides longer range modules, as well as gateway and network bridge products to connect different network types to one another. With the Cirronet acquisition, we believe we are 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. The Aleier platform is web-architected and modularized for maximum flexibility in adapting it to specific customer requirements.

We have developed several FCC certified standard products and completed a great deal of work on custom development contracts for this market, which includes starting the production phase for the Cooper Bussmann InVision TM Downtime Reduction System. 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. Our sales force is now working with customers to design these products into their applications. In the current quarter, legacy RFM Wireless Systems sales are included in Cirronet and Aleier brand products, reflecting how these products are managed.

An important consideration was the increased potential gross margin these products and services offer because of their higher technical content. The increased sales for these products represented a significant improvement in product mix, contributing to increased gross margins. See the section below entitled Gross Profit for further discussion on this .

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Third Quarter Business Conditions & Our Response

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 softer overall demand. Uncertain current economic conditions materially reduce the predictability of future sales.

We have systematically increased our operating expenses to support our Wireless Solutions initiative and that has increased our sales breakeven point. While our Wireless Solutions strategy has resulted in an increase in sales of those products and had a favorable effect on our gross profit margins, we have not seen the increase in sales we expected. Economic conditions and other factors have caused some customers to delay or cancel programs in many of our targeted solutions markets. We note that other companies in the M2M space have encountered similar delays in the development of the market. Since we have aggressively built our capabilities to support an anticipated sales increase, we face an excess of expenses at current sales levels.

We took a major step towards reducing expense levels this quarter with the consolidation of our organization including centralizing many of our back-office functions, and we expect resulting gross savings to be approximately $1.7 million annually. Further, we recently completed an office space planning analysis and we are reducing office space requirements by approximately 40%, saving an additional $400,000 annually. While a portion of the savings may be applied to strategic growth investments, most will fall to our bottom line.

As may not be apparent from our consolidated results, we have two distinct offerings – a sizable, profitable hardware products offering, with positive cash flow which we know well and for which sales appear to have stabilized. We also have solutions offerings, which consist of software and services, for emerging markets, and the development of these markets appears to have been delayed by current economic conditions and other factors. This part of our business required, and continues to require, ongoing investment, and is not yet profitable. We are monitoring the markets for our solutions offerings carefully, and our ongoing level of investment in wireless solutions will be dictated by several near-term indicators Since we have a profitable hardware business to work with, we have the ability to match expense levels with expected revenue. We intend to take the actions required to “right-size” our business to return to profitability and significant positive operating cash flow at current sales levels, with a target of early calendar year 2009.

Despite increased operating expenses, we have often generated positive cash flows in recent periods. See the section below entitled Liquidity for discussion of cash flows for the current period. Our ability to return to positive cash flows is dependent on our success in “right sizing” our expense levels in relation to sales. In any case, 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

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, judgments and assumptions that we believe are reasonable based upon the information available. These estimates, judgments 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 described our most significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating reported financial results, in our Annual Report filed with the Securities and Exchange Commission on November 29, 2007 on Form 10-K. Those policies continue to be our most critical accounting policies for the period covered by this filing.

Results of Operations

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


•

The current quarter and current year-to-date period, each ended May 31, 2008, of the fiscal year ending August 31, 2008, in comparison to the comparable quarter of the prior year and prior year-to-date period, each ended May 31, 2007.


•

Certain comparisons with the three months ended February 29, 2008 (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.

The following table illustrates operating results for the four quarters of fiscal 2007 and the first three quarters of fiscal 2008 (in thousands, except percentage data). These figures will be used when discussing trends in the following section.

Sales

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

Total sales decreased 3% in the current quarter compared to the comparable quarter of the prior year and 9% from the previous quarter. The primary reason for the changes in both periods were corresponding changes in the number of units sold for most of our product lines. Sales did increase for two product lines (frequency control modules and filters) due to an increase in the number of units sold, but these increases were offset by decreases in other product lines, particularly for Wireless Solutions products and services.

The decrease in sales over the comparable quarter of the prior year was 11% for the Wireless Solutions business, while sales actually increased 4% for the Wireless Components businesses. For Wireless Solutions, most of the decrease was due to a decrease in the number of units sold of Virtual Wire™ Short-range Radio products, as production levels for a major contract manufacturer for an automatic meter reading (or “AMR”) application were at low levels. These products show considerable volatility due to fluctuating production rates of our customers that do not necessarily represent long term trends. Sales for Cirronet and Aleier products and services declined 9%, reflecting lower than expected sales for M2M and related products. For Wireless Components, the increase was due to an increase in the number of units sold for Frequency Control modules and filters, partially offset by a decrease in number of units sold for low-power components in automotive applications. The increases were due to higher production levels at several OEM customers, particularly for telecom applications in Asia and satellite radio applications. The decrease in the number of units sold for low-power components represents a long term trend for these products as customers convert to other technologies or lower priced suppliers. See the section below entitled Product Line Sales Trends for additional detail.

The decrease in sales from the previous quarter was primarily due to a 19% decrease in sales of Wireless Solutions products and services, partially offset by a 1% increase in sales of Wireless Components products. The decrease in sales for Wireless Solutions products was primarily due to a decrease in the number of units shipped of Virtual Wire™ Short-range Radio products and Cirronet brand module products. Both of these product lines were impacted by reduced sales to OEM customers who experienced reduced demand from end users. Sales for a consumer passenger vehicle tracking application declined, and sales increased for medical applications. Sales for Aleier services decreased as a major program for the city of Los Angeles was largely completed.

The increase in sales for Wireless Components products over the previous quarter was primarily due to an increase in the number of units of filter products shipped, particularly for the Chinese telecom market and a smaller increase in sales for the satellite radio market. Frequency control module sales increased due to an increase in the number of units sold to contract manufacturers for work station and optical network products resulting from increased production rates at those customers. There was also some recovery in filter sales from the previous quarter because of seasonal factors traditionally present in that period related to the reduced number of work days over the holidays. The increases in these two product lines were partially offset by a decrease in the number of units sold for low-power components in automotive applications. This decrease was because the second quarter had unusually high unit sales related to last time buys and customer requirements for older versions of products that are transitioning to new packages. Changes in sales in comparison to the previous quarter for the other product lines were relatively modest. See the section below entitled Product Line Sales Trends for additional detail.

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 product sales increase our customers expect economies of scale resulting in lower pricing. As a result, three of our higher-volume product lines (low-power components, Virtual Wire™ Short-range Radio products and filters) experienced a decline in average selling prices in the range of 3% to 13% in the current year in comparison to the prior year-to-date period. The other products were not significantly impacted by decreases in average selling prices.

We have achieved significant market position in 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 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 dependent 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 the manufacturing facilities of our contractors to increase capacity to meet this demand. In addition, new products sometimes require different manufacturing processes than those to which we currently have access. We now participate in some service markets for which we maintain a certain level of service readiness. We may not be able to increase the manufacturing capacity of our assembly contractors, 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.

Year-to-Date Sales Trends

Sales for the current year-to-date period increased approximately $2.0 million or 5% over the prior comparable year-to-date period. Wireless Solutions products and services increased $0.6 million or 3% and Wireless Components products increased $1.4 million or 6%. The increases were primarily due to an increase in the number of units sold for our volume products lines, although the unit increases were partially offset by a decrease in the average selling prices of some of these products, as mentioned in the previous section. Both of the categories of Wireless Solutions products (Virtual Wire™ Short-range Radio products and the Cirronet and Aleier brand products) had 3% increases in sales. This reflects our significant strategic investments in and efforts to increase sales for these products.

For Wireless Components products, the increase was due to an increase in the number of units sold of filters products, which increased sales by 17%. This increase was due to recovery in the satellite radio and telecom market for filters. This was partially offset by a decrease in the number of units sold for frequency control modules. Sales to the telecom markets served by these products are subject to volatile changes due to varying economic conditions and production rates at several major contract manufacturers. Unit sales in these markets were at very high levels in the last fiscal year but we believe the current year levels are more typical.

CONF CALL

Carol Bivings

Thank you, Michelle. Good afternoon and welcome to RF Monolithics Management conference call. In just a few moments I’ll introduce David Kirk, President and CEO of RFM who will provide a detailed discussion of our performance this quarter, Buddy Barnes, Chief Financial Officer and Jim Farley, Vice President and Controller are also with us today and will join David in answering any questions you might have at the end of our prepared remarks. Also present today is Michael Bernique, Chairman of the Board of RFM. If you don’t have a copy of today’s earnings release, it is available through Business Wire and one has been posted to our website at rfm.com, click on recent news on our home page.

Before we begin our call, I’d like to remind you that the information provided today by management in response to your questions and in their prepared remarks, only reflect management’s views as of today, March 20, 2008, and may contain forward-looking statements that involve risk. These forward-looking statements are made pursuant to the Safe-Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The risks are identified in today’s earnings release as well as in our SEC filings. We encourage you to review these documents.

Now I’d like to introduce David Kirk, President and CEO of RF Monolithics.

David Kirk

Thank you, Carol and good afternoon. Our second quarter sales performance was in line with our expectations going into the quarter. Our quarterly sales were up 16% over the same period last year. Our 40% gross profit margin was a 300 basis point sequential improvement and has continued on an upward trend as we execute against our strategic business plan. If you look at our last several quarters we have gone from 35 to 37 and to 40’% gross profit margin this quarter. The improvement reflects both the cost benefits of transitioning manufacturing offshore and a 50-50 product mix of our wireless solutions and wireless components. We reported a GAAP net loss of $0.01 per share, which compares to a net loss of $0.44 per share last year. Last years net income included $0.33 in expenses such as asset impairments and acquisition amortization, which we exclude from non-GAAP income.

On a non-GAAP basis we reported net income of $0.03 per share compared to an $0.11 loss per share last year. Our balance sheet remains strong with an adequate cash balance and a solid line of credit, which will provide us the liquidity necessary to continue to execute to our strategic business plan to penetrate the M2M marketplace.

Now I’ll discuss our sales performance in more detail. I’ll begin with our wireless solutions group; this includes modules, cell phone service, Virtual Wire and RFIC products. Sales for this group represented $7.1 million of our total quarterly sales. This was up 16% comparatively and down 5% sequentially. The majority of sales of this group of products are into the industrial, medical and government markets. Within this group, sales of our module, software and services offerings were up from the prior years second quarter and down from last quarters record levels. Applications for those quarters include medical telemetry, surveying instrumentation and industrial automation. We did see some softness in comparison to the previous quarter and a couple of industrial applications as some OEMs saw a decrease in demand from their end users. Virtual Wire sales were up 38% from second quarter last year and up 4% from last quarter. We saw greatly increased sales in the consumer market for a vehicle tracking security system application and a solid increase in the medical market. These increases more than offset lower sales in the industrial market for automated meter reading, which was particularly strong last quarter.

Included in this quarters wireless solutions sales is our first deployment of a comprehensive solution which includes hardware, software and fuel implementation. The application is energy management at a major theme park.

Next, our wireless component group: This includes low power components, filters and frequency control products. Sales for this group of 7.2 million were up 16% comparatively and down 18% from last quarter. The major markets for these products are automotive, telecom and consumer. Within this group, low power component sales increased 48% comparatively and were up 24% over last quarter. One of our primary markets for these products is automotive, for applications including remote keyless entry and tire pressure monitoring. Low power component sales were particularly high this quarter due to last-time buys and transition programs for newer versions of these products. Sales for low power components should return to more normal levels next quarter.

Filter sales were up 5% comparatively and down almost 34% sequentially, as we expected. The lower sales were primarily in two applications, which were particularly strong last quarter: Satellite radio sales into the automotive market and base station sales into the telecom market. While sales were down from last quarter, we believe this is the cyclical nature of these applications. These sales should increase over the next quarter with the recovery of the satellite radio market as well as an increased share of the China telecom market.

Our frequency control products were down comparatively and sequentially on lower sales in the telecom market for optical network infrastructure and high-end work stations. These sales can vary quite a bit due to delivery schedules for a few customers in niche telecom applications. We also expect these sales to increase in the next quarter. We believe the strength in these niche telecom applications will partially offset the economic pressure in some of our other markets.

Collectively our top five customers represented almost 34% of total sales, with almost half of sales into North American markets. Almost one of these customers represented 10% or more of the total quarterly sales this quarter.

Now I’ll go through some additional financial details.

Our gross profit margin for the quarter was 40%, a 300 basis point improvement from last quarter and 1000 basis point improvement from last years adjusted second quarter, after adjusting out the unusual charges impact in the margin last year. We have consistently been on track to the gross profit margin improvement we targeted a year ago. We have been able to achieve this 1000 basis point improvement and average gross profit margin since our restructuring plan was put in place a year ago. We have made sustained improvements towards our strategic goals. We are doing what we set out to do – that was to transform the company to become a major player in the M2M marketplace while maintaining our position as a leader in the component supplier.

Operating expenses for the quarter at 5.7 million were down somewhat from last quarter and up comparatively. The fluctuation is representative of restructuring expenses, which were high last year when we announced our move to a fabless business model and recognized 1.2 million in asset impairment related charges.

In the current quarter restructuring expenses, included the impact of approximately $275,000.00 in gain on sales of fixed assets, which caused the expense category to have a negative balance of $44,000.00.

Now looking at our quarterly net income; we reported a GAAP net loss of $102,000.00 or $0.01 per share, compared to a net loss of $4 million for the second quarter last year and a net income of $113,000.00 last quarter. On a non-GAAP basis, primarily excluding almost $400,000.00 of acquisition related expense, we would have reported a net income of $344,000.00 or $0.03 per share. Also on a non-GAAP basis, our year to date earnings were $0.10 per share.

Now addressing the balance sheet in comparison to our trailing fourth quarter; cash remained relatively flat at $1.2 million. Our accounts receivable remained at just over $9 million with DSO in the mid-fifties. Inventory decreased $300,000.00, as we worked to reduce the inventory put in place to support our transition to a fully outsourced operation. Our current liabilities reflect a reduction in accounts payable of just over $1 million. This resulted from lower purchases from our offshore contractors and our raw material suppliers and more than offsets on increase that had occurred in the prior quarter. This quarter we had negative operating cash flow of approximately $503,000.00, largely resulting from our reduction in accounts payable. Operating cash flow for the year is still positive at $512,000.00. Availability of our bank credit facility was $1.5 million at the end of the quarter.

Now I will comment on what we expect in the way of performance for our third quarter of 2008. We are cognizant of the fact that the current economic environment may have a negative impact on our continuing to make progress on our goals in the short term. A major uncertainty is the magnitude of the impact. Our first quarter bookings were a little soft, but we expected to see improved bookings after the December/January holidays and the Asian holidays in early February. The broken recovery was not as strong as expected. We also saw a slowing in the approval process for several large programs, which we believe is another economic barometer. With our strong presence in the automotive, industrial and consumer markets, it’s no surprise we are feeling the pinch of the tightening economy that many others are reporting. Therefore we have widened our guidance range.

While we expect our sales to be at least as strong as last years third quarter, we are providing guidance in a range between 12.8 and $14 million in sales. Our product mix may not be as favorable due to slowed approval process in some of our markets, including the government, which will impact wireless solutions and a boost from increased market share in the telecom, which will increase wireless component percentages. We will also incur some additional costs as we transition some of our customers to the newer versions of our low power components. This will put our gross profit margin in the 35 to 38% range. This will result in a non-GAAP loss per share of 2 to $0.08 range.

There will be some additional restructuring expenses in the next quarter as we begin the next phase of integration into a more focused M2M organization. Within the quarter we will launch a new website, we will implement plans that will optimize our facilities requirements and implement other operational efficiencies. While the negative impact of our progress is discouraging, we will continue to push forward with our M2M strategies by stepping up the pace and becoming even more aggressive in pursuit of our target markets. The first half of the year has confirmed for us that our business model we have put in place is viable and will produce the growth and profit improvements we intend it to provide our stake holders.

Before we open the call to take your questions, I’d like to recap. We had 16% year over year sales growth and a gross profit improvement of 300 basis points to 40%. Record sales of 30.5 million for the first six months of our fiscal year, and we continue the integration of our subsidiaries into an organization focused on the growing M2M marketplace. The next phase of the integration will include focus on improving operational efficiencies, optimizing resources and lodging a marketing campaign which puts RFM in position to deliver M2M.

That completes our prepared remarks. Thank you very much for your time today. We will now take questions.

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