RF MONOLITHICS INC /DE/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended August 31, 1998

Commission File No. 0-24414

RF MONOLITHICS, INC.
(Exact name of Registrant as specified in its charter)

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

DELAWARE 75-1638027
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)

4441 SIGMA ROAD, DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (972) 233-2903

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK .001 PAR VALUE
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of November 15, 1998, was $60,607,300. Shares of common stock held
by each officer and director and by each person who owns 5% or more of the
outstanding common stock of the Company have been excluded because such persons
may be deemed to be affiliates.

The number of shares outstanding of the Registrant's Common Stock was 5,712,307
as of November 15, 1998.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1999 Annual Meeting is incorporated
herein by reference into Part III of this Report.

RF MONOLITHICS, INC.
FORM 10-K
YEAR ENDED AUGUST 31, 1998

Table of Contents

Item
Number Page
- ------ ----
PART I.

1. Business.............................................................. 2

2. Facilities............................................................ 10

3. Legal Proceedings..................................................... 11

4. Submission of Matters to a Vote of Security Holders................... 11

PART II.

5. Market for Registrant's Common Stock and Related Stockholder Matters.. 11

6. Selected Financial Data............................................... 12

7. Management's Discussion and Analysis of Financial Condition
And Results of Operations............................................. 13

8. Financial Statements and Supplementary Data........................... 20

9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................. 20

PART III.

10. Directors and Executive Officers of the Registrant.................... 21

11. Executive Compensation................................................ 21

12. Security Ownership of Certain Beneficial Owners and Management........ 21

13. Certain Relationships and Related Transactions........................ 21

PART IV.

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 21

PART I.

Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, as well as in the sections entitled
"Legal Proceedings," "Selected Financial Data" and "Management's Discussion and
Analysis" in this report.

ITEM 1. BUSINESS

RF Monolithics, Inc. ("RFM" or the "Company") designs, develops,
manufactures and markets a broad range of radio frequency ("RF") component and
module products in four areas: low-power components, low-power Virtual Wire(R)
short-range radio devices, frequency control modules and filters. The Company's
products are based on surface acoustic wave ("SAW") technology and are
manufactured as discrete devices to perform specific functions and as integrated
modules to meet system performance requirements. The Company believes that its
SAW-based products, coupled with its RF design and manufacturing expertise,
offer electronics manufacturers certain fundamental advantages over alternative
technologies. As electronic applications ranging from automotive remote keyless
entry ("RKE") to digital cellular phones to computers migrate to higher
operating frequencies with tighter tolerances and more stringent performance
specifications, demand for RF modules and SAW discrete components is expected to
increase.

The Company focuses its product development in the frequency range of 200
megahertz ("MHz") to 2,400 MHz and above. The Company markets its line of more
than 500 resonators, filters, clocks, oscillators, transmitters and receivers to
original equipment manufacturers ("OEMs") world-wide, including Code-Alarm,
Inc., Delco Electronics, Linear Corporation, Nokia Telecommunications, Nortel
(Northern Telecom, Inc.), Siemens AG, and Silicon Graphics, Inc. The Company is
also strengthening its global distribution network.

BACKGROUND

The Company believes that a significant market opportunity for more
widespread adoption of SAW technology is emerging. As electronic applications
increase in speed and frequency, there will be an increasing demand for improved
performance and functionality, greater precision, reduced size, lower power
consumption and greater reliability. The Company believes that these dynamics
are creating frequency control opportunities that are not effectively addressed
by traditional RF approaches.

SAW technology based discrete components, modules and RF systems combine a
complex mix of software-controlled design rules, wafer fabrication, hybrid
assembly and packaging processes to meet stringent customer and governmental
compliance requirements. The earliest SAW applications were developed for high-
level military systems for electronic warfare and volume consumer products such
as TVs and VCRs. The unique features of SAW technology provide flexible
solutions to systems designers defining tomorrow's emerging applications across
multiple market segments.

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MARKETS AND APPLICATIONS

The Company focuses on specific market opportunities where the Company
believes that its SAW technology solutions coupled with its RF design expertise
address current and emerging market and application requirements. The Company
offers products in four areas: (1) low-power components; (2) low-power Virtual
Wire(R) short-range radio devices; (3) frequency control modules; and (4)
filters. These products are incorporated into application designs in five
primary markets: automotive, computer, consumer, industrial and
telecommunications.

AUTOMOTIVE:

The automotive industry utilizes SAW-based components in transmitter and
receiver designs for remote keyless entry (RKE) applications. Emerging
applications utilizing transmitter and receiver functions include the run flat
tire and immobilized theft-deterrent systems. Automotive electronic applications
continue to grow with the unending drive toward smaller size, reduced cost and
improved system performance as evidenced by some of the emerging multiplexing
design schemes. These market requirements are met by the Company's low-power
components and low-power Virtual Wire(R) short-range radio devices. This market
is subject to severe price competition.

COMPUTER:

The wireless market for two-way data communication offers opportunities for
the Company's new transceiver modules. The operating speed of computer products
is increasing in order to provide more widespread, faster access to and
manipulation of multimedia information and the more rapid design and analysis of
electronics, structural and industrial systems. Frequency control modules,
primarily clocks, are applied in computer systems to provide a precise, stable
frequency control source. The design and deployment of wireless local area
computer and data link networks is generating increasing demand in SAW filters.

CONSUMER:

Consumer market applications encompass a wide range of electronic designs.
Those utilizing SAW-based devices include the cable television industry,
wireless headphones and loudspeakers, wireless door chimes and home automation
applications. These consumer electronic applications may incorporate low-power
components, low-power Virtual Wire(R) short-range radio devices and filters.

INDUSTRIAL:

The industrial market includes applications such as security systems, meter
reading and bar code reading devices, medical systems and custom data link
equipment. Low-power components, low-power Virtual Wire(R) short-range radio
devices and filters may all be designed into industrial applications, depending
upon the customer's RF design expertise and time-to-market requirements.

TELECOMMUNICATIONS:

The Company believes that a number of dynamics within the
telecommunications market are opening new applications for SAW technology. The
deployment of digital cellular telephone systems, such as European Global System
for Mobile Communications (GSM) and Code Division Multiple Access (CDMA), has
been initiated worldwide. The digital modulation requires SAW filters that
minimize distortion and

3

conform to international cellular telephony standards. In addition, high-speed
Synchronous Optical Networks ("SONET") performance is enhanced with the
incorporation of SAW-stabilized oscillators.

PRODUCTS

The Company's products are organized into four primary product families:
(1) low-power components; (2) low-power Virtual Wire(R) short-range radio
devices; (3) frequency control modules; and (4) filters.

LOW-POWER COMPONENTS:

Resonators. The Company's resonators are used in low-power wireless
transmitter and receiver applications, including automotive remote keyless entry
systems and related products. The Company manufactures SAW resonators in volume,
and they are supplied in both three-lead metal packages ("TO-39") and leadless
surface mount packages. The surface mount technology ("SMT") facility initiated
high-volume production in 1995. The market for low-power resonators is intensely
competitive and has been characterized by price erosion, rapid technological
change and product obsolescence. As a result, the Company has experienced
increasing price competition for these products.

Coupled-Resonator Filters. The Company's coupled-resonator filters are
resonator structures which are optimized for digital communications Intermediate
Frequency ("IF") filter designs used in air-to-ground telephone systems, 915 MHz
cordless telephones and hybrid receiver applications. Coupled-resonator filters
are well suited for certain frequency stabilization applications, such as the
frequency control clock modules, and as input filters for the hybrid receiver
modules and output filters for the hybrid transmitter modules manufactured by
the Company. In fiscal 1999, the Company intends to introduce a new line of
coupled resonators in surface mount packages.

LOW-POWER VIRTUAL WIRE(R) SHORT-RANGE RADIO DEVICES:

The Company's family of hybrid transmitter ("HX") and receiver ("RX")
modules are the primary products included in low-power Virtual Wire(R)
short-range radio device operations. During fiscal 1999, the Company will
introduce a transceiver chip based on its patented Amplifier Sequenced Hybrid
("ASH") technology. The chip offers two-way data communication in a single small
module with performance identical to the separate HX and RX modules at lower
total cost.

These products feature small size, very low-power consumption and excellent
RF performance, and provide the system designer flexibility and rapid time to
market for emerging applications. The breadth of frequency ranges covers both
North American and international frequency bands for low-power data
transmission. The receiver's ASH architecture provides exceptional performance
with extremely low harmonic radiation, allowing customers' ease of international
standards certification.

The Virtual Wire(R) short-range radio device product offerings also include
complete transceiver design and development kits that allow the system designer,
who has minimal RF experience, the ability to apply wireless, two-way data
transfer to emerging applications. The application market for Virtual Wire(R)
short-range radio devices includes remote bar-code data entry, remote meter
reading and wireless thermostats.

4

FREQUENCY CONTROL MODULES:

The Company's frequency control module products consist of clocks and both
fixed-frequency and voltage-controlled SAW-based oscillators. These products
provide added value to the SAW components manufactured by the Company. Each
module incorporates one or more SAW discrete devices with standard and custom
integrated circuits and related passive components. The Company manufactures
clocks and fixed-frequency oscillators applying resonators and coupled-resonator
filters to eliminate tuning coils for signal filtering and stabilization and SAW
delay lines to allow frequency variability in voltage-controlled oscillators.

High-frequency clocks. The Company's high-frequency clock modules are used
in high-speed computing and high-resolution graphics applications in the
computer market segment. The Company's SAW-based clocks allow the customer 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. SMT packages
complement the Company's leaded metal packaged product.

Oscillators. The Company produces commercial and military fixed-frequency
and voltage-controlled SAW oscillators. These products are supplied in leaded
metal packages and used in applications such as microwave radios, identification
friend or foe (IFF) transponders for commercial and military avionics, optical
network communication systems and precision instrumentation.

FILTERS:

The Company designs and manufactures four types of SAW filters: low-loss
transversal, precision transversal, proximity-coupled and coupled-resonator.
(See above discussion of coupled-resonator filter in Low-Power Components).

Low-loss transversal filters and precision transversal filters are used in
both digital cellular systems GSM and personal communications system (PCS)
standards and in SONET repeaters. The low-loss filters are designed to minimize
signal distortion in the frequency band that the filter is designed to pass. The
precision filters provide excellent amplitude and group delay flatness for
fractional bandwidths of 2% or more.

The proximity-coupled filters are narrow-band SAW filters used in cellular
applications deploying the IS-54 Time Division Multiple Access (TDMA) standard
and in cellular digital packetized data (CDPD) applications as intermediate
frequency (IF) filters. Proximity filters are also used extensively in digital
pagers and a number of analog cellular phone systems.

MANUFACTURING

The manufacturing of the Company's products is a highly complex and precise
process that is sensitive to a wide variety of factors, including the level of
contaminants in the manufacturing environment, impurities in the materials used
and the performance of manufacturing personnel and production equipment. Until
the devices are enclosed or sealed within their final package, they are subject
to contamination. Because of this, almost all operations prior to enclosure
welding or sealing are performed in controlled environments such as clean-room
environments. The Company has experienced product shipment delays and
lower-than-expected production yields. The Company has experienced and may in
the future experience a delay in transferring products from engineering to
volume manufacturing status. The manufacturing process could result in shipment
delays or loss of production yields that will materially and adversely increase
the

5

cost of manufacturing. The Company's manufacturing operations are housed in two
buildings located side-by-side in Dallas, Texas. The Company has limited ability
to outsource its manufacturing operations. As a result of the Company's
substantial reliance on a single manufacturing location, damage occurring to
such facility, whether by act of nature or otherwise, may have a material
adverse affect on the Company's manufacturing operations.

The Company's customers demand an increasing level of quality. The Company
has begun the process of implementing a program to achieve QS 9000 and ISO 9001
certification in fiscal 1999. The Company could fail to achieve these
improvements to its operations. To the extent they are not achieved, the
Company's operating results could be materially and adversely affected. The
Company has in the past experienced sudden increases in demand which have put
pressure on its manufacturing facilities to increase capacity to meet this
demand. In addition, new products sometimes require different manufacturing
processes than the Company currently possesses. The Company has devoted the bulk
of its capital expenditures to increase capacity and improve its manufacturing
processes. The Company may not be able to continue to increase its manufacturing
capacity and improve its manufacturing processes in a timely manner to take
advantage of increased market demand.

The Company divides its manufacturing operations into two key areas: wafer
fabrication and assembly.

WAFER FABRICATION:

Fabrication of deposited and patterned wafers takes place in a clean-room
environment. Thin aluminum films are precisely deposited onto three-inch and
four inch-diameter quartz substrates that are subsequently etched with very
small (micron and submicron) patterned structures. Each patterned device is
called a die, and there may be from 40 to 2,000 die on a single three-inch or
four-inch wafer. Over the past two years, the Company completed an expansion of
its wafer fabrication factory, adding facilities and new automated wafer
processing equipment. As demands on the wafer fabrication facility increase,
there is an ongoing need to increase the capacity and operational efficiency of
this facility. The Company may not be able to achieve these improvements in a
timely manner. To the extent the Company does not achieve acceptable wafer
fabrication yields or experiences product shipment delays as a result of
problems associated with the expansion of the wafer fabrication factory, the
Company's operating results could be materially and adversely affected. The
Company added the capability to process four-inch quartz wafers during fiscal
1998. This added capability is in line with the Company's on-going program to
increase capacity.

ASSEMBLY:

In assembly, there are three production areas that correspond to the three
distinct types of packages being manufactured: (1) TO-39 components; (2) module
devices; and (3) SMT components.

TO-39 component manufacturing involves the assembly of single-die devices
into leaded metal packaging. This method of assembly includes the Company's
older low-power component products.

Module manufacturing consists of multiple devices, one or more of which is
a SAW. The resulting packages vary in configuration, but all have leads that are
used to mount the package through holes in the customer's printed circuit
boards. The Company's products assembled in module manufacturing include
frequency control devices and filters.

The Company's SMT products contain SAW die and, in some cases, other
electronic components as well. The Company's manufacturing process is based on
arrays, which allows for automated processing of

6

up to 400 devices at a time. Since this represents a unique manufacturing
process, some of the equipment has been custom-designed for the Company and
represents several unique applications of existing manufacturing technology. The
SMT facility is responsible for assembly of low-power components and low-power
Virtual Wire(R) short-range radio device products.

During fiscal 1998, the Company completed construction of two 6,000 square
foot production facilities that are being utilized to manufacture the TO-39
components and module devices, respectively.

SOURCE OF COMPONENTS:

While the Company uses standard components whenever possible, certain of
the components used in the Company's SAW devices and modules are made to the
Company's specifications. This is particularly true for specialized
semiconductor manufacturers from whom the Company purchases several RF
integrated circuits. These companies include Maxim Integrated Products, Cal
Eastern Labs Inc. and Kyocera America Inc. The Company has experienced delays
and quality control problems with certain of its single-source suppliers in the
past. Although the Company is attempting to obtain second-source suppliers, the
Company believes it will continue to be dependent upon single-source suppliers
for the foreseeable future. Delays in delivery, quality problems or the
inability of the Company to obtain the components required to manufacture the
Company's products on a cost-effective basis could have a material adverse
effect on the Company's business and results of operations.

SALES AND MARKETING

The Company distributes its products in the United States through
manufacturers' representatives managed by the Company's restructured area sales
management team (internal sales force). Additionally, the Company has authorized
two North American distributors to stock and sell all Company products.
International sales are handled through a combination of manufacturers'
representatives and direct sales management. Despite these sales efforts, the
Company may not be able to maintain or increase demand for the Company's
products.

The Company's international sales are currently denominated in U.S.
currency. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. A significant portion of the
Company's business is in Asian markets which have been experiencing economic
instability. The Company's sales to Asian markets could be adversely affected by
such economic instability. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing international operations, potentially adverse tax consequences,
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. Such factors could have a material adverse effect on the Company's
future results of operations.

In fiscal 1998 and 1997, no single customer accounted for more than 10% of
sales and the top 10 customers accounted for approximately 40% and 39% of total
sales, respectively. Sales to major customers have fluctuated in the past and
may continue to fluctuate in the future.

RFM enters into select, custom product development programs. These
development programs can last from 2 months to 18 months. The scope of these
programs includes initial engineering of the RF function under development
through assisting in the interface of the RF and digital hardware. The Company
is engaged in an increasing number of these programs. In addition, many of the
Company's products are subject to regulations. Customers may require their
products to be certified with various regulatory agencies. The Company offers
its customers various types of assistance in obtaining certification. However,
the

7

Company's customers may not obtain required certifications in a timely manner or
at all. Delays in obtaining certification could result in significant losses of
potential Company sales.

COMPETITION

The markets for the Company's products are intensely competitive and are
characterized by price erosion, rapid technological change and product
obsolescence. In each of the markets for the Company's products, the Company
competes with very large vertically integrated, international companies,
including Matsushita Electrical Industrial Co., Ltd., Sanyo Electric Co.,
Siemens, AG, Toyo Communication Equipment Co., Ltd. and Murata Manufacturing
Co., that have substantially greater financial, technical, sales, marketing,
distribution and other resources, and broader product lines than the Company.
The Company's competitors with greater financial resources or broader product
lines may be able to engage in sustained price reductions in the Company's
primary markets to increase market share. The Company also expects increased
competition from existing competitors as well as competition from a number of
companies that currently use SAW expertise largely for internal requirements. In
addition, the Company has experienced increased competition from companies that
offer alternative solutions such as phase locked loop technology, which combines
a semiconductor with a traditional crystal. The Company believes competitors may
duplicate the Company's products, which could adversely affect selling prices
and market share.

The Company believes that its ability to compete in its target markets
depends on factors both within and outside the Company's control, including
timing and success of new product introductions by the Company and its
competitors, availability of manufacturing capability, the Company's ability to
support decreases in selling price through reduction in cost of sales, the pace
at which the Company's customers incorporate the Company's products into their
end user products and general economic conditions.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are primarily aimed at
deriving new, proprietary, innovative SAW device structures and SAW-based hybrid
modules that uniquely address market needs. These developments also include
process improvements in wafer fabrication involving better line width and metal
thickness control as well as improvements in device packaging.

RFM employs approximately 50 individuals in engineering and product
development, including design engineers and scientists. They are responsible for
new products from inception to the commencement of volume manufacturing. The
Company believes that the efforts of this group help to ensure that RFM's
products provide an optimum system solution for the customer and are
manufacturable at a competitive cost.

From time to time, the Company has entered into agreements with customers
to develop specific SAW devices for inclusion in the customer's end product.
Pursuant to such agreements, the non-recurring engineering ("NRE") cost
associated with such development work, which is treated by the Company as cost
of technology development sales, is generally reimbursed by the customer. Total
technology development (or NRE) sales during fiscal years 1998, 1997 and 1996
were $338,000, $318,000 and $125,000, respectively. Costs related to these sales
were included in the Company's cost of sales during these years. The Company
considers the development of new products essential to increasing and
maintaining sales.

PROPRIETARY RIGHTS

The Company relies on a combination of patents, copyrights and
nondisclosure agreements in order to establish and protect its proprietary
rights. The Company's policy is to file patent applications to protect
technology, inventions and improvements that are important to its business.
Patents may not be issued from

8

any of the Company's pending applications. In addition, claims which are allowed
from existing or pending patents may not be sufficiently broad to protect the
Company's technology. While the Company intends to protect its intellectual
property rights vigorously, patents held by the Company may be challenged,
invalidated or circumvented, or the rights granted thereunder may not provide
competitive advantages to the Company.

The Company also seeks to protect its trade secrets and proprietary
technology, in part, through confidentiality agreements with employees,
consultants and other parties. These agreements could be breached and the
Company may not have adequate remedies for any breach. Further, the Company's
trade secrets could otherwise become known to or independently developed by
others. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States.

The electronics industry is characterized by uncertainty and conflicting
intellectual property claims. The Company has in the past and may in the future
become aware of the intellectual property rights of others that it may be
infringing. The Company may be notified that it is infringing on other patents
and/or other intellectual property rights of third parties. In the event of such
alleged infringement, a license to the technology in question may not be
available on commercially reasonable terms, if at all. In addition, litigation
could occur and the outcome of such litigation could be adverse to the Company.
The failure to obtain necessary licenses or other rights, the occurrence of
litigation arising out of such claims or an adverse outcome from such litigation
could have a material adverse effect on the Company's business. In any event,
patent litigation is very expensive, and the Company's results of operations
could be materially adversely affected by such litigation, regardless of its
outcome.

REGULATIONS

The Company is subject to a variety of federal, state and local laws, rules
and regulations related to the use, storage, emission, treatment, disposal,
transportation and exposure of others to certain toxic, volatile and other
hazardous chemicals used in the Company's manufacturing process. The failure to
comply with present or future regulations could result in fines being imposed on
the Company, suspension of production or a cessation of operations. Such
regulations could also require the Company to acquire costly equipment, to make
changes to its manufacturing process, or to incur substantial other expenses to
comply with environmental regulations. Any past or future failure by the Company
to control the use of, or to restrict adequately the discharge of, hazardous
substances could subject the Company to future liabilities and could have a
material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

As of August 31, 1998, the Company had a total of 632 employees. Of such
employees, approximately 162 were temporary employees. With the exception of one
employee located in sales locations in Europe, all of the employees of the
Company are based at the Company's headquarters in the metropolitan area of
Dallas, Texas. The Company's future success depends to a significant degree upon
the continued service of its key technical and senior management personnel and
its continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense. The Company may
not be able to retain or continue to attract key managerial and technical
employees. Failure to retain or continue to attract key managerial and technical
employees could have a material adverse effect on the Company's business and
results to operations. None of the Company's employees are represented by a
labor union. The Company has not experienced any work stoppages and considers
its relations with its employees to be good.

9

POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS; ORDER TRENDS AND BACKLOG

The Company's quarterly and annual results have been and will continue to
be affected by a wide variety of factors that have had in the past and in the
future could have a material adverse effect on the Company's business and
results of operations during any particular period, including the level of
orders that are received and can be shipped in a quarter, the rescheduling or
cancellation of orders by its customers, competitive pressures on selling
prices, changes in product or customer mix, availability and cost of raw
materials, the ability of the Company to manufacture a sufficient volume of
products in a cost-effective manner, fluctuations in manufacturing yield,
availability of wafer fabrication and assembly manufacturing capacity, loss of
any strategic relationship, the ability to introduce new products and
technologies on a timely and cost-effective basis, new product introductions by
the Company's competitors, market acceptance of products of both the Company and
its customers, supply constraints for other components incorporated into its
customers' products, foreign currency fluctuations, delays in customer orders or
payments or interruptions in operations due to Year 2000 issues, and the level
of expenditures for research and development, sales, and general and
administrative functions.

Historically, the electronics industry has experienced sudden and
unexpected economic downturns. The Company's results of operations are subject
to such downturns. In addition, the Company's operating expenses are largely
fixed and difficult to change quickly should sales not meet the Company's
expectations, thus magnifying the adverse effect of any such revenue shortfall.
In view of its significant growth in recent periods, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance.

The Company's backlog at August 31, 1998, was approximately $9.8 million as
compared to $12.9 million as of August 31, 1997. The Company includes in its
backlog all purchase orders scheduled for delivery within the subsequent 12
months. The Company's backlog, although useful for scheduling production, does
not represent actual sales and should not be used as a measure of future sales.
All orders in backlog are subject to cancellation prior to 30 days before
shipment without penalty at the option of the customer and to changes in
delivery schedules. The Company's backlog is subject to fluctuations. Backlog as
of any particular date may not be a reliable measure of sales for any future
period.

The Company has improved its manufacturing operations to the point that
many products can be manufactured with lead times of seven weeks or less. The
Company typically receives and fulfills a significant portion of its orders
within the quarter. As a result, the Company may not learn of revenue shortfalls
until late in a fiscal quarter. Additionally, the Company's operating expenses
are based in part on future revenues and are relatively fixed in the short term.
Any revenue shortfall below its expectations could have an immediate and
significant adverse effect on results of operations.

ITEM 2. FACILITIES

The Company's principal administrative, sales, marketing, research and
development, and manufacturing facilities are located in the metropolitan area
of Dallas, Texas, in two adjacent buildings totaling approximately 93,000 square
feet. One building, totaling approximately 63,000 square feet, is leased through
July 2003, with the Company having an option to cancel the lease on July 31,
1999. The second building, totaling approximately 30,000 square feet, is also
leased through July 2003, with the Company having an option to cancel the lease
after July 31, 2001. The Company believes that its existing facilities are
adequate for its current requirements. Should additional space be needed, there
can be no assurance that it will be commercially available on reasonable terms
when it is needed.

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ITEM 3. LEGAL PROCEEDINGS

NONE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter
ended August 31, 1998.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") National Market System
under the symbol "RFMI" since the Company's initial public offering on July 28,
1994. The following table sets forth the high and low sales prices of the
Company stock for the periods indicated as furnished by NASDAQ. These prices
reflect prices between dealers, without retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.

1997: High Low
---- ---
First Quarter 11 3/4 7 1/8
Second Quarter 11 1/2 8 5/8
Third Quarter 15 1/4 9 1/2
Fourth Quarter 26 5/8 14 1/4
1998:
First Quarter 14 1/2 10
Second Quarter 15 1/2 12
Third Quarter 14 4/9 11 3/8
Fourth Quarter 10 1/2 7 7/8

The Company has not paid dividends on its Common Stock and presently
intends to continue this policy in order to retain earnings for use in its
business. The Company had approximately 200 stockholders of record as of
November 15, 1998 (which number does not include the number of stockholders
whose shares are held of record by a brokerage house or clearing agency, but
does include such brokerage house or clearing agency as one record holder). The
last sales price for RFMI's Common Stock, as reported by NASDAQ on November 13,
1998, was $11.0625.

11

ITEM 6. SELECTED FINANCIAL DATA

Year Ended August 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except earnings per share amounts)

Statement of Income Data:

Sales $ 55,172 $ 47,692 $ 35,718 $ 32,141 $ 24,787

Cost of sales 33,549 28,136 22,336 20,253 15,372
-------- -------- -------- -------- --------

Gross profit 21,623 19,556 13,382 11,888 9,415

Gross profit margin % 39.2 % 41.0 % 37.5 % 37.0 % 38.0 %

Research and development 5,081 4,169 3,366 3,148 1,381
Sales and marketing 5,646 5,842 4,391 4,300 3,517
General and administrative 2,889 3,391 2,747 2,266 2,104
Litigation 641
-------- -------- -------- -------- --------

Total operating expenses 14,257 13,402 10,504 9,714 7,002
-------- -------- -------- -------- --------

Income from operations 7,366 6,154 2,878 2,174 2,413
Other income (expense), net 14 (142) (107) 197 (139)
-------- -------- -------- -------- --------

Income before income taxes and accounting change 7,380 6,012 2,771 2,371 2,274
Income tax expense (benefit) 2,620 2,205 882 851 13
-------- -------- -------- -------- --------

Net income $ 4,760 $ 3,807 $ 1,889 $ 1,520 $ 2,261
======== ======== ======== ======== ========

Earnings per share (pro forma prior to 1995):
Basic $ 0.86 $ 0.70 $ 0.37 $ 0.31 $ 0.65
======== ======== ======== ======== ========
Diluted $ 0.80 $ 0.66 $ 0.35 $ 0.29 $ 0.59
======== ======== ======== ======== ========

Weighted average common shares outstanding (pro forma pror to 1995):
Basic 5,551 5,379 5,084 4,985 3,476
======== ======== ======== ======== ========
Diluted 5,978 5,790 5,429 5,325 3,830
======== ======== ======== ======== ========

Balance Sheet Data (at August 31):

Cash, cash equivalents and short-term investments $ 5,613 $ 5,969 $ 6,060 $ 5,086 $ 6,555
Working capital $ 17,286 14,674 12,879 9,616 9,101
Total assets $ 44,790 37,360 30,571 30,545 23,735
Long-term debt $ 815 1,911 2,413 2,854 153
Shareholders' equity $ 34,166 27,995 23,128 20,292 18,470

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

RFM designs, develops, manufactures and markets a broad range of RF
components and modules for the low-power component, Virtual Wire(R) short-range
radio device system, frequency control module and filter product areas. The
Company's products are based on SAW technology, and the Company's strategy is to
leverage its RF design skills and its packaging technology to provide SAW-based
solutions to the current and emerging needs of the electronics industry. The
Company's products include more than 500 resonators, filters, high-frequency
clocks, oscillators, and transmitter and receiver modules. The Company's average
selling prices within these product lines generally range from $.50 to $30 for
low-power products (components and radio systems), $10 to $350 for frequency
control modules and $4 to $30 for filter products.

During fiscal 1994 and the first two quarters of fiscal 1995, the Company
constructed and tested its new surface-mount technology ("SMT") manufacturing
facility. The purpose of the facility is to provide the capability to
manufacture products utilizing surface-mount packaging in a highly automated
environment. During this period, the facility had not reached production status,
so the related equipment was not placed into service, and certain associated
costs were capitalized as start-up costs. The related costs were included in
property and equipment as construction in progress. In the third quarter of
fiscal 1995, this facility achieved production status; accordingly, depreciation
on the equipment and amortization of capitalized start-up costs began.

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the sections entitled "Business," "Legal Proceedings" and "Selected Financial
Data" in this report.

RESULTS OF OPERATIONS

The following discussion relates to the financial statements of the Company
for the fiscal year ended August 31, 1998 (current year or fiscal 1998), in
comparison to the fiscal year ended August 31, 1997 (prior year or fiscal 1997),
as well as the fiscal year ended August 31, 1996 (fiscal 1996). In addition,
there is discussion of the financial statements for the three months ended
August 31, 1998 (fourth quarter), in comparison to the three months ended August
31, 1997 (comparable quarter of the prior year).

The following table sets forth, for the years ended August 31 (1) the
percentage relationship of certain items from the Company's statements of income
to total sales and (2) the percentage change in these items from year to year:

13

Percentage of Sales Year-to-Year Change
-------------------- -------------------
1997 to 1996 to
1998 1997 1996 1998 1997
---- ---- ---- ---- ----

Sales 100 % 100 % 100 % 16 % 34 %

Cost of sales 61 59 62 19 26
---- ---- ---- ---- ----

Gross profit 39 41 38 11 46

Research and development 9 9 9 22 24
Sales and marketing 10 12 12 (3) 33
General and administrative 5 7 8 (15) 23
Litigation 1 -- -- -- --
---- ---- ---- ---- ----
Total operating expenses 25 28 29 6 28
---- ---- ---- ---- ----

Income from operations 14 13 9 20 114

Other income (expense), net -- -- -- (1.1) 33
---- ---- ---- ---- ----

Income before income taxes 14 13 9 23 117

Income tax expense 5 5 3 19 150
---- ---- ---- ---- ----

Net income 9 % 8 % 6 % 25 % 102 %
==== ==== ==== ==== ====

Sales

The following table sets forth the components of the Company's sales and
percentage relationship of the components to total sales for the periods
indicated:

Year Ended August 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
% % %
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)

Product sales:

Low-power components $ 39,961 72 % $ 36,118 76 % $ 25,764 72 %

Short-range radio devices 3,384 6 2,415 5 1,729 5

Frequency control modules 4,164 8 3,429 7 6,064 17

Filters 7,325 13 5,412 11 2,036 6
-------- --- -------- --- -------- ---

Total product sales 54,834 99 47,374 99 35,593 100

Technology development sales 338 1 318 1 125 -
-------- --- -------- --- -------- ---

Total sales $ 55,172 100 % $ 47,692 100 % $ 35,718 100 %
-------- --- -------- --- -------- ---

Sales increased 16% in fiscal 1998, due to increased demand for each of
the Company's four product lines. Sales increased 34% in fiscal 1997 due to
increases in three of the Company's product lines.

14

Low-power component sales increased 11% in fiscal 1998 and 40% in
fiscal 1997, due to an increase in number of units sold in both periods,
particularly to automotive customers. This was despite a decrease in average
selling prices due to the competitive markets in which these products are sold.
The Company believes that the markets for its low-power component products is
approximately $100 million and is growing in terms of unit volume. These markets
have attracted a number of large international competitors, particularly for the
automotive segment. The increased competition has resulted in lower average
selling prices in many cases. The Company believes that the impact of lower
average selling prices may be significant enough in future periods to offset the
impact of selling an increased number of units. There can be no assurance that
sales for low-power components will continue to increase, or even stay at the
same level they have been in previous periods.

The Company continues to devote a considerable amount of its capital,
technical, sales and marketing resources to the Virtual Wire(R) short-range
radio device products. Sales for these products have increased 40% in both
fiscal years 1998 and 1997, due to an increase in the number of units sold for
these products. The latest product offering in this product family, is the
transceiver module, a fully integrated short-range radio device module. The
transceiver module offers robust operation, small size, low-power consumption
and low costs for short range wireless data applications. In addition, the
Company believes this product will match applications being identified by the
Home RF Working Group, sponsored by Intel and HP, and Bluetooth Consortium,
sponsored by Ericsson and Nokia. The Company believes this product group
provides an opportunity to exploit its proprietary technology and pursue its
strategy of focusing on value added products. The timing of when any sales
resulting from such new applications reach the production phase is dependent
upon the timing of both the customers' product development cycles and their
product introduction cycles. It is difficult to project if, and when, these new
products will have a significant impact on the Company's sales.

Filter sales continue year-to-year growth as sales increased 35% in
fiscal 1998 and 166% in fiscal 1997, primarily due to an increase in the number
of units sold for these products. The lower growth rate is a result of some
erosion of pricing in the filter market and the long development and
introduction cycle for our new filter products. The Company continues to invest
resources in this area and expects to continue increasing its filter offering,
as well as enhancing design capability for CDMA and W-CDMA products. In
addition, the Company is also capitalizing on its strengths in product packaging
and believes these initiatives will result in an increase in our share of the
filter market. It is difficult to predict if, and when, this strategy to focus
on filter products will have a significant impact on the Company's sales.

Frequency control module sales increased 21% in fiscal 1998, an increase
from a 43% decrease in fiscal 1997. These products accounted for 8% of total
sales in fiscal 1998 and 7% in 1997. Frequency control module sales in prior
years predominately included sales to the Company's then largest customer,
Digital Equipment Corporation ("Digital"), for use in systems based on the Alpha
microprocessor. Sales to Digital decreased in fiscal 1997 compared to 1996,
primarily as a result of lower average selling prices, as this customer
converted to lower-priced units as well as reduced number of units sold. Sales
to Digital accounted for approximately 1% and 10% of total sales during fiscal
1997 and 1996 respectively.

The Company's top five customers accounted for approximately 27%, 27%, and
28% of the Company's total sales in fiscal 1998, 1997 and 1996, respectively.
Over the last three fiscal years, a significant portion of the increased sales
were due to new customers. No single customer accounted for more than 10% of
total sales in 1998.

International sales (primarily in Europe and Asia) were approximately 50%
of the Company's total sales during the last three fiscal years. The Company
considers all product sales with a delivery destination outside North America to
be international sales. These sales are denominated primarily in U.S. currency.

15

Sales to customers in Asian markets ranged from 10% to 15% of total sales during
the last three years. The Company intends to continue its focus on international
sales in the future and expects that international sales will continue to
represent a significant portion of its business. This focus on international
sales may not be achieved. Even if achieved, the Company's international sales
are highly sensitive to fluctuations in such markets. For example, recent
instability in Asian economies may result in fluctuations in Asian sales and
could have a material adverse effect on the Company's business.

While the Company has achieved sales increases in prior periods, there
can be no assurance that this can be achieved in future periods. The Company's
success is highly dependent on achieving technological advances in its product
design and manufacturing capabilities, as well as its ability to sell its
products in a competitive marketplace that can be influenced by outside factors
such as economic and regulatory conditions. The Company experiences increased
competition from companies that offer alternative solutions such as phased
locked loop technology. Competition from alternative technologies or from
competitors duplicating the Company's technologies could adversely affect
selling prices and market share.

Gross Profit Margin

Gross profit margin decreased to 39.2% in fiscal 1998, compared to 41.0% in
fiscal 1997, and 37.5% in fiscal 1996, primarily as a result of decreased gross
profit margin for the Company's low-power component and Virtual Wire(R) short-
range radio device products. Margins for these products decreased because the
per-unit selling prices decreased due to competitive pressures more rapidly than
per-unit manufacturing costs. Per-unit manufacturing costs continued to decrease
due to improved production processes that increased yields and productivity, and
increased demand creating an increase in the number of units produced. The
increased number of units produced allowed relatively high fixed overhead costs
to be lower on a per-unit basis. The increase in 1997 gross profit margin was
primarily due to an increase in gross margin for the Company's low-power
component and Virtual Wire(R) short-range radio device products. In 1997, per
unit manufacturing costs decreased more rapidly than selling prices for these
products. However, the trend toward lower per-unit manufacturing costs, which
occurred in recent years, may not be able to continue. If average selling prices
were to decrease faster than per unit manufacturing costs decrease, then the
Company's gross profit margins would be adversely impacted. Gross margins for
the Company's frequency control and filter products were relatively stable
during these periods.

The Company has in the past experienced sudden increases in demand which
have put pressure on its manufacturing facilities to increase capacity to meet
this demand. In addition, new products sometimes require different manufacturing
processes than the Company currently possesses. The Company has devoted the bulk
of its capital expenditures to increase capacity and improve its manufacturing
processes. The Company may not be able to continue to increase its manufacturing
capacity and improve its manufacturing processes in a timely manner so as to
take advantage of increased market demand. Failure to do this would result in a
loss of potential sales in the periods impacted.

Research and Development

Research and development expenses increased approximately 22% in fiscal
1998 and 24% in fiscal 1997. The increase in both fiscal 1998 and 1997 was due
to the increased cost of process engineering, document control services, and
enhancing design capability for its product development efforts. Since sales
increased comparably to research and development expenses, such expenses
maintained a level at 9% of total sales for the last three fiscal years. The
Company believes that the continued development of its technology and new
products is essential to its success and is committed to continuing its
investment in research and development, which is expected to increase in
absolute dollars in future periods.

16

Sales and Marketing

Sales and marketing expenses decreased approximately 3% in fiscal 1998 and
increased 33% in fiscal 1997. This decrease was due primarily to decrease in
sales incentives and marketing costs. Since sales increased comparably to sales
and marketing expenses, such expenses decreased to 10% of total sales in fiscal
1998 from 12 % of total sales in fiscal 1997. The Company expects to incur
higher sales and marketing expenses in absolute dollars in future periods as it
expands its sales and marketing efforts.

General and Administrative

General and administrative expenses decreased approximately 15% in fiscal
1998 and increased 23% in fiscal 1997. The decrease in 1998 was primarily
attributable to decreased incentive and legal costs. The increase in 1997 was
due to support for the Company's expansion and increased costs for write-offs of
certain receivable accounts. There can be no assurance that the Company will not
continue to incur bad debt write-offs as it expands its business to new
customers and new geographic areas. The Company currently expects general and
administrative expenses will increase in absolute dollars in future periods.
Since sales increased faster than general and administrative expenses, such
expenses decreased to 5% of sales in fiscal 1998 from 7% in fiscal 1997.

Litigation Expense

Litigation expense, which amounted to $641,000 in fiscal year 1998,
consists of expenses related to the resolution of the legal matter with
TimeKeeping Systems, Inc. Expenses include legal expenses, settlement costs and
related travel. Legal expenses related to the TimeKeeping Systems, Inc. matter
were substantially lower in the prior fiscal year. The Company does not expect
to incur significant expenses with regard to this matter in future periods.

Other Income (Expense)

During the current year, the Company maintained indebtedness at an lower
average balance compared to prior years, resulting in a decrease in interest
expense for fiscal 1998, compared to fiscal 1997. Additionally, improved results
of invested cash and currency conversion resulted in increases in interest
income and gains/losses on currency exchange transactions. All of these factors
contributed to an increase in other income (expense).

Income Tax Expense

The Company's income tax expense was $2.6 million in fiscal 1998, compared
to $2.2 million in fiscal 1997, and $882,000 in fiscal 1996. Fiscal 1996
included the one-time favorable impact of $116,000 ($.02 per share), resulting
from recognition of research and development tax credits.

The Company's effective tax rate, exclusive of the fiscal 1996 one-time tax
credit, was approximately 36%, 37%, and 36% in fiscal 1998, 1997 and 1996,
respectively. The reduction in tax rate in 1998 compared to 1997 was primarily
due to the Company taking advantage of Foreign Sales Corporation benefits.

17

Earnings per Share

Net income increased 25% to $4.8 million in the current year as compared to
$3.8 million in the prior year. The Company's earnings per share was $.80 per
diluted share for fiscal 1998, compared to $.66 per diluted share for fiscal
1997 and $.35 per diluted share for fiscal 1996.

Fourth Quarter of Fiscal 1998

Unaudited quarterly financial data is presented in Note 12 of the
accompanying financial statements.

Sales for the fourth quarter increased 3% to $14.5 million, compared to
$14.1 million in the comparable quarter of the prior year. The sales increase
was primarily due to an increase Virtual Wire(R) short-range radio device
modules and frequency control modules sales of approximately 69% and 46%,
respectively, compared to the comparable quarter of the prior year. This was
primarily due the increased demand for some of the Company's newer value added
products. Sales were impacted negatively due to the General Motors strike during
this period.

Gross profit margins were 35.7% in the fourth quarter, compared to 42.5%
for the comparable quarter of the prior year. This was primarily due to
significant additional cost in increasing production late in the quarter and in
bringing newly developed products to production status in our filter and Virtual
Wire(R) short-range radio device modules product lines. As a result, start-up
costs, lower than desired yields and some loss of productivity occurred. The
Company plans to put the same cost reduction efforts on these products that have
historically resulted in lower per-unit manufacturing costs for low-power
components.

Operating income for the fourth quarter was $2.3 million, or 16% of total
sales which is comparable to the prior year. This stability in operating income
as a percentage of total sales was due to control of expenses which decreased
$1.4 million in the fourth quarter, compared to the comparable quarter of the
prior year. Operating expenses, including incentive costs, were reduced in
anticipation of the negative impact of the General Motors strike. Earnings per
diluted share was $.26 in the fourth quarter, compared to $.23 for the
comparable quarter of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Principal sources of liquidity at August 31, 1998, consisted of $6.0
million of cash, cash equivalents and short-term investments, and $5.3 million
of unused credit facilities. The unutilized portion of the credit facilities
includes $3.5 million under a line of credit agreement and $1.8 million under an
equipment-collateralized operating lease facility. The equipment-collateralized
operating lease facility is to be advanced in stages prior to December 31, 1998.
Subsequent to August 31, 1998, the Company negotiated an additional equipment-
collateralized operating lease facility for $4.0 million, to be advanced in
stages prior to October 22, 1999. The credit facilities contain financial
covenants and restrictions relating to various matters, including a minimum net
worth requirement, a minimum ratio of earnings before interest and taxes to
interest expense and current maturity of the term loan, a minimum quick ratio
and a maximum ratio of total liabilities to tangible net worth. As of August 31,
1998, the Company was in compliance with such covenants and restrictions.

Net cash from operations decreased to $4.7 million due to $3.1 million of
cash used in working capital, such as inventory, offset by a $2.0 million
increase in net income and non-cash items included in net income, such as
depreciation and amortization.

18

Included in the accounts receivable balance is a past-due receivable
totaling $889,000 from a customer. The Company is seeking to recover the entire
$889,000 of this past due account plus an additional $819,000 for custom
finished goods manufactured and raw material purchased for this customer. The
Company believes that reserves are not necessary with regard to this matter and,
as a result, no additional allowance for uncollectible amounts has been
established.

Cash used in investing activities in the current year was $7.0 million.
Fiscal year 1998 and 1997 capital acquisitions included significant purchases of
property and equipment to enhance the Company's manufacturing facilities. The
Company expects to acquire approximately $7 million to $10 million of capital
equipment by the end of fiscal 1999, consisting primarily of equipment needed
for its manufacturing facilities. Some of this equipment may be acquired under
an equipment-collateralized operating lease facility.

Net cash from financing activities was $2.0 million in 1998 and $.4 million
in 1997. Funds raised from operations and exercises of stock options were mostly
used to repay other debt and acquire property and equipment.

The Company believes that cash generated from operations, if any, banking
facilities, and the $6.0 million balance in cash and short-term investments will
be sufficient to meet the Company's operating cash requirements through fiscal
1999. To the extent that these sources of funds are insufficient to also meet
the Company's capital expenditure requirements, the Company will be required to
raise additional funds. Additional financing for capital expenditures may not be
available. If available, it may not be available on acceptable terms.

YEAR 2000 READINESS DISCLOSURE

The Year 2000 issue involves potential inability of information or other
data dependent systems to properly distinguish year references as of the turn of
the century. The Company believes the Year 2000 issue represents a material risk
to the Company.

The Company itself is heavily dependent upon the proper functioning of its
own computer systems, including (1) computers and related software for its
financial and manufacturing information systems, (2) computers, programmable
logic controllers and other data dependent equipment in its manufacturing
processes, and (3) computers, scientific equipment and related software for its
engineering, research and development activities. Any failure or malfunctioning
on the part of these or other systems could cause disruptions of operations,
including a temporary inability to process financial transactions, manufacture
products or engage in ordinary business activities in ways that are not
currently known, discernible, quantifiable or otherwise anticipated by the
Company.

The Company has formed a team to evaluate and deal with the impact of the
Year 2000 issue. It has developed a plan (the "Plan") for the Company to become
Year 2000 compliant in a timely manner. The Plan covers both systems such as
networked computers and software that are commonly called information technology
("IT") systems and those such as embedded technology in manufacturing equipment
("non-IT") systems.

The Company's Plan consists of several phases. The first is the inventory
and prioritization of potential Year 2000 items, and the assessment of Year 2000
compliance. The next phase is the remediation of any noted problems. The third
phase is the testing of material items. The last phase is the preparation of
contingency plans.

19

For the Company's most significant IT systems, the inventory and
remediation phases have been completed. Most of the Company's business
information systems have been recently replaced by Glovia(TM) and Oracle(R)
software, which are represented by providers to be Year 2000 compliant. The
inventory of non-IT systems is nearing completion and is scheduled for
completion prior to December 31, 1998. The remediation of remaining systems and
testing for all systems is scheduled for completion by June 30, 1999.

The Company currently has no contingency plans to deal with the most likely
worst case scenarios. The Company currently anticipates that it will complete
contingency planning by June 30, 1999.

The Company's suppliers (particularly sole-source and long lead time
suppliers) and key customers may be adversely affected by their respective
failures to address the Year 2000 issue. If the Company's suppliers are unable
to provide goods or services, the Company's operations could be materially
adversely effected. Key customers which encounter Year 2000 difficulties could
fail to order or take delivery of the Company's products, or could fail to make
or delay payments to the Company. Such failure or delay could have a material
adverse effect on the Company's business and results of operations. While some
of these risks are outside the control of the Company, the Company's Plan
includes communications with suppliers and customers to ascertain the state of
their Year 2000 compliance program. The questionnaire phase of this activity is
scheduled for completion by December 31, 1998. Remediation activities and
preparation of contingency plans related to suppliers and customers is scheduled
for completion by June 30, 1999.

The total cost of the purchase and implementation of the business
information systems recently implemented is expected to be approximately $2
million, of which approximately 90% has already been incurred. The remediation
costs for the other IT and non-IT systems is expected to be less than $500,000.
Such costs will be funded either from operating cash flows or by utilizing
existing Company credit facilities. Time spent by implementation team members is
not included in the above estimates but are included in the Company's normal
operating budget. The Year 2000 implementation program is not expected to cause
material delays in non-Year 2000 related IT projects.

The Company has determined that its products are not effected by calendar
dating. Therefore, there is no known or anticipated Year 2000 impact on its
product offering.

The Company believes its Year 2000 Plan will significantly reduce the
probability of significant interruptions of normal operations resulting from
Year 2000 issues. However, the Company may not properly identify and assess all
Year 2000 issues, or it may not remediate and test all its IT and non-IT systems
in a timely or adequate manner. In addition, its key suppliers or customers
could experience Year 2000 problems. If any of these potential situations occur,
the Company's contingency plans may not be adequate to protect the Company from
the adverse effects of such problems. The worst case scenario resulting from
Year 2000 issues would be a material adverse impact on the Company's results of
operations, an interruption in normal business operations, or an adverse impact
on the Company's relationships with customers, suppliers or others.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in Appendix A attached
hereto and incorporated by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

20

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1999 Annual Meeting (the "Proxy
Statement") under the heading "Nominees."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements. Financial statements are attached as Appendix A to
this report. The index to the financial statements is found on page F-1
of Appendix A.

(a) 2. Financial Statement Schedules. All schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and notes
thereto.

(a) 3. Exhibits. See Exhibit Index in part (c), below.

(b) The Company did not file any reports on Form 8-K during the quarter
ended August 31, 1998.

(c) Exhibit Number Description

3.1 Restated Certificate of Incorporation of
Registrant. (2)
3.2 Bylaws of Registrant. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate. (2)

21

10.1 Form of Indemnity Agreement entered into by the
Registrant and each of its officers and directors. (1)
10.2 1982 Incentive Stock Option Plan, as amended and
related grant forms. (1)
10.3 1982 Supplemental Stock Option Plan, as amended and
related grant forms. (1)
10.4 1986 Incentive Stock Option Plan, as amended and
related grant forms. (1)
10.5 1986 Supplemental Stock Option Plan, as amended and
related grant forms. (1)
10.6 Form of Employee Stock Purchase Plan. (1)
10.7 Form of Employee Stock Purchase Plan Offering. (1)
10.8 Non-Employee Director's Stock Option Plan. (2)
10.9 Form of Non-Employee Director's Stock Option. (1)
10.10 Lease Agreement between the Registrant and Jeff
Yassai. (2)
10.11 Lease Agreement between the Registrant and JFC Growth
Fund, Ltd. (2)
10.12 Transfer Agreement between the Registrant and Peter V.
Wright, dated October 31, 1990. (1)
10.13 Agreement regarding payment due under the October 31,
1990, Transfer Agreement between the Registrant and
Peter V. Wright, dated March 30, 1994. (1)
10.14 Letter Agreement by and between the Registrant and
Comerica Bank -Texas, dated January 1, 1994. (1)
10.15 Promissory Note between the Registrant and Comerica
Bank - Texas, dated December 1, 1994. (3)
10.16 Promissory Note between the Registrant and Comerica
Bank - Texas, dated March 1, 1995. (4)
10.17 Master Lease Agreement between Registrant and Banc One
Leasing Corporation, dated November 3, 1995. (5)
10.18 Form of Restrictive Stock Bonus Agreement to be entered
November 30, 1995. (6)
10.19 Loan Letter Agreement and Promissory Note between the
Registrant and Bank One, Texas, N.A. dated March 8,
1996. (7)
10.20 Promissory Note between the Company and Gary A.
Andersen dated March 28, 1996. (7)
10.21 Change of Control Agreement between the Company and Mr.
Andersen and Mr. Densmore dated December 18, 1995. (7)
10.22 Separation and Consulting Agreement between the Company
and Mr. Andersen. (8)
10.23 Form of Change of Control Agreement for certain
officers. (9)
10.24 Separation and Consulting Agreement between the Company
and Mr. Conlin. (10)
11.1 Computation of net income per share. (11)
23.1 Consent of Deloitte & Touche LLP, Independent
Auditors. (11)
24.1 Power of Attorney. See page 22.

(1) Previously filed as an exhibit to the Registration Statement on
Form S-1, as amended (Registration No. 33-78040) and incorporated
herein by reference.

22

(2) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1994, and incorporated herein by
reference.

(3) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 1994, and incorporated
herein by reference.

(4) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 28, 1995, and incorporated
herein by reference.

(5) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1995, and incorporated herein by
reference.

(6) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended November 30, 1995, and incorporated
herein by reference.

(7) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended February 29, 1996, and incorporated
herein by reference.

(8) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1996, and incorporated herein by
reference.

(9) Previously filed as an exhibit to the Annual Report on Form 10-K
for the year ended August 31, 1997, and incorporated herein by
reference.

(10) Previously filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated herein
by reference.

(11) Filed as an exhibit to this Annual Report on Form 10-K.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

23

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
November, 1998.

RF MONOLITHICS, INC.

By: /s/ SAM L. DENSMORE
-------------------------------------
Sam L. Densmore
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the following page constitutes and appoints Cooley Godward LLP his attorneys-in-
fact for him in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that the said attorney-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of November, 1998.

/s/ SAM L. DENSMORE /s/ DEAN C. CAMPBELL
- ------------------------------------- -------------------------------------
Sam L. Densmore Dean C. Campbell
CEO, President & Director Director

/s/ JAMES P. FARLEY /s/ MATTHEW J. DESCH
- ------------------------------------- -------------------------------------
James P. Farley Matthew J. Desch
VP Finance and Controller Director

/s/ MICHAEL R. BERNIQUE
- ------------------------------------- -------------------------------------
Michael R. Bernique Francis J. Hughes, Jr.
Director Director

/s/ CORNELIUS C. BOND, JR.
- -------------------------------------
Cornelius C. Bond, Jr.
Director

24

APPENDIX A
RF MONOLITHICS, INC.

INDEX TO FINANCIAL STATEMENTS -
ITEM 8 OF FORM 10-K
- --------------------------------------------------------------------------------
PAGE

INDEPENDENT AUDITORS' REPORT F-2

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:

Consolidated Balance Sheets as of August 31, 1998 and 1997 F-3

Consolidated Statements of Income for the Years Ended
August 31, 1998, 1997 and 1996 F-4

Consolidated Statements of Stockholders' Equity for the Years Ended
August 31, 1998, 1997 and 1996 F-5

Consolidated Statements of Cash Flows for the Years Ended
August 31, 1998, 1997 and 1996 F-6

Notes to Consolidated Financial Statements F-7

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of RF Monolithics, Inc.:

We have audited the accompanying consolidated balance sheets of RF Monolithics,
Inc. and subsidiary as of August 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended August 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of RF Monolithics, Inc. and subsidiary
as of August 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended August 31, 1998, in
conformity with generally accepted accounting principles.

/s/ Deloitte & Touche, LLP
Dallas, Texas
October 14, 1998

F-2

RF MONOLITHICS, INC.

CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1998 AND 1997
(In Thousands)
- --------------------------------------------------------------------------------

ASSETS 1998 1997

CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 199 $ 482
Short-term investments (Note 1) 5,414 5,487
Trade receivables, less allowance of $550 and $440 in 1998 and 1997,
respectively (Note 5) 11,357 9,517
Inventories (Notes 2 and 5) 8,514 4,934
Prepaid expenses and other 976 961
Deferred income tax benefits (Note 9) 635 747
------- -------

Total current assets 27,095 22,128

PROPERTY AND EQUIPMENT - Net (Notes 3 and 5) 17,129 13,694

DEFERRED INCOME TAX BENEFITS (Note 9) - 890

OTHER ASSETS - Net (Note 4) 566 648
------- -------

TOTAL $44,790 $37,360
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Line of credit and current portion of notes payable (Note 5) $ 2,000 $ 500
Capital lease obligations - current portion (Note 6) 699 665
Accounts payable - trade 3,400 2,135
Accounts payable - construction and equipment 866 604
Accrued expenses and other liabilities 2,405 2,965
Income taxes payable (Note 9) 439 585
------- -------

Total current liabilities 9,809 7,454

LONG-TERM DEBT - Less current portion:
Notes payable (Note 5) 505 1,005
Capital lease obligations (Note 6) 310 906
------- -------

Total long-term debt 815 1,911

COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)

STOCKHOLDERS' EQUITY (Note 7):
Common stock: $.001 par value, 20,000 shares authorized; 5,696
and 5,514 shares issued and outstanding in 1998 and 1997,
respectively 6 6
Additional paid-in capital 26,862 25,535
Retained earnings 7,353 2,593
Unearned compensation (75) (142)
Unrealized gain on short-term investments (Note 1) 20 3
------- -------

Total stockholders' equity 34,166 27,995
------- -------

TOTAL $44,790 $37,360
======= =======

See notes to consolidated financial statements.

F-3

RF MONOLITHICS, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
- -------------------------------------------------------------------------------

1998 1997 1996

SALES (Note 8) $55,172 $47,692 $35,718

COST OF SALES 33,549 28,136 22,336
------- ------- -------

GROSS PROFIT 21,623 19,556 13,382

OPERATING EXPENSES:
Research and development 5,081 4,169 3,366
Sales and marketing 5,646 5,842 4,391
General and administrative 2,889 3,391 2,747
Litigation (Note 11) 641 - -
------- ------- -------

Total 14,257 13,402 10,504
------- ------- -------

INCOME FROM OPERATIONS 7,366 6,154 2,878

OTHER INCOME (EXPENSE):
Interest income 306 288 337
Interest expense (325) (351) (488)
Other 33 (79) 44
------- ------- -------

Total 14 (142) (107)
------- ------- -------

INCOME BEFORE INCOME TAXES 7,380 6,012 2,771

INCOME TAX EXPENSE (Note 9) - Current and deferred 2,620 2,205 882
------- ------- -------

NET INCOME $ 4,760 $ 3,807 $ 1,889
======= ======= =======

EARNINGS PER SHARE:
Basic $ .86 $ .70 $ .37
======= ======= =======

Diluted $ .80 $ .66 $ .35
======= ======= =======

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,551 5,379 5,084
======= ======= =======

Diluted 5,978 5,790 5,429
======= ======= =======

See notes to consolidated financial statements.

F-4

RF MONOLITHICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------

RETAINED
COMMON STOCK ADDITIONAL EARNINGS UNREALIZED
------------- PAID-IN (ACCUMULATED UNEARNED GAIN ON
SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION INVESTMENTS TOTAL

BALANCE, SEPTEMBER 1, 1995 5,024 $5 $23,368 $(3,103) $ - $ 22 $20,292

Common stock granted to employees (Note 7) 51 - 362 - (362) - -
Forfeiture of common stock grants (Note 7) (17) - (119) - 119 - -
Amortization of unearned compensation (Note 7) - - - - 33 - 33
Issuance of common stock under the Purchase Plan
(Note 7) 24 - 137 - - - 137
Common stock options exercised, including tax benefit
(Note 9) 232 - 799 - - - 799
Change in unrealized gain on investments (Note 1) - - - - - (22) (22)
Net income - - - 1,889 - - 1,889
----- -- ------- ------- ----- ---- -------

BALANCE, AUGUST 31, 1996 5,314 5 24,547 (1,214) (210) - 23,128

Common stock options exercised, including tax benefit
(Note 9) 132 1 596 - - - 597
Amortization of unearned compensation (Note 7) - - - - 68 - 68
Issuance of common stock under the Purchase Plan (Note 7 68 - 392 - - - 392
Change in unrealized gain on investments (Note 1) - - - - - 3 3
Net income - - - 3,807 - - 3,807
----- -- ------- ------- ----- ---- -------

BALANCE, AUGUST 31, 1997 5,514 6 25,535 2,593 (142) 3 27,995

Common stock options exercised, including tax benefit
(Note 9) 66 - 506 - - - 506
Forfeiture of common stock grants (1) - (7) - 7 - -
Amortization of unearned compensation (Note 7) - - - - 60 - 60
Issuance of common stock under the Purchase Plan (Note 7 117 - 828 - - - 828
Change in unrealized gain in investment (Note 1) - - - - - 17 17
Net income - - - 4,760 - - 4,760
----- -- ------- ------- ----- ---- -------

BALANCE AUGUST 31, 1998 5,696 $6 $26,862 $ 7,353 $ (75) $ 20 $34,166
===== == ======= ======= ===== ==== =======

See notes to consolidated financial statements.

F-5

RF MONOLITHICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------

1998 1997 1996

OPERATING ACTIVITIES:
Net income $ 4,760 $ 3,807 $ 1,889
Noncash items included in net income:
Deferred income taxes 1,002 652 291
Depreciation and amortization 3,750 2,947 2,532
Provision for doubtful accounts 103 157 257
(Gain) loss on sale of assets - (9) 31
Amortization of unearned compensation 60 68 33
Cash from (used in) operating working capital:
Trade receivables (1,943) (2,971) (765)
Inventories (3,580) (999) 773
Prepaid expenses and other (15) (425) (59)
Accounts payable - trade 1,265 1,102 (1,583)
Accrued expenses and other liabilities (560) 993 203
Income taxes payable (146) 531 25
------- ------- -------

Net cash from operating activities 4,696 5,853 3,627
------- ------- -------

INVESTING ACTIVITIES:
Proceeds from sale of short-term investments (5,785) (5,481) (5,031)
Purchases of short-term investments 5,875 5,028 4,631
Acquisition of property and equipment (7,079) (5,550) (2,114)
Proceeds from sale of assets - 34 33
Increase (decrease) in other assets 13 9 (13)
------- ------- -------

Net cash used in investing activities (6,976) (5,960) (2,494)
------- ------- -------

FINANCING ACTIVITIES:
Borrowings on notes payable 1,500 - 2,385
Repayments of notes payable (500) (1,500) (2,921)
Repayments of capital lease obligations (599) (391) (302)
Borrowings (repayments) of accounts payable - construction and equipment 262 462 (631)
Common stock issued for options exercised 506 598 799
Common stock issued under the Purchase Plan 828 391 137
Dividends paid on preferred stock - - (4)
------- ------- -------

Net cash from (used in) financing activities 1,997 (440) (537)
------- ------- -------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (283) (547) 596

CASH AND CASH EQUIVALENTS:
Beginning of year 482 1,029 433
------- ------- -------

End of year $ 199 $ 482 $ 1,029
======= ======= =======

SUPPLEMENTAL INFORMATION:
Interest paid $ 295 $ 352 $ 507
======= ======= =======

Income taxes paid $ 1,605 $ 761 $ 132
======= ======= =======

Noncash investing and financing activities - property and
equipment acquisitions by capital leases $ 37 $ 725 $ 18
======= ======= =======

See notes to consolidated financial statements.

F-6

RF MONOLITHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS - RF Monolithics, Inc. (the Company) designs, develops, manufactures
and markets a broad range of radio frequency (RF) component and module
products in four areas: low-power components, low-power Virtual Wire radio
systems, frequency control modules and filters. The Company's products,
which are based on surface acoustic wave (SAW) technology, address the
growing requirements in the electronics markets for miniaturization, reduced
power consumption, increased precision, and greater reliability and
durability. These products are incorporated into application designs in five
primary markets: automotive, computer, consumer, industrial and
telecommunications, and are sold primarily in North America, Europe and Asia.

CONSOLIDATED FINANCIAL STATEMENTS include the accounts of RF Monolothics,
Inc. and, in 1998, its wholly owned subsidiary, RFM Export, Inc. referred to
collectively as the "Company." Significant intercompany balances and
transactions are eliminated in consolidation.

FINANCIAL STATEMENT PREPARATION requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses for the
period. Actual results could differ significantly from those estimates.

REVENUES are recognized when products are shipped. The Company permits the
return of damaged or defective products and accepts limited amounts of
product returns in other instances. Accordingly, the Company provides
allowances for the estimated amounts of these returns at the time of revenue
recognition.

CASH EQUIVALENTS represent liquid investments with maturities at the date of
acquisition of three months or less.

SHORT-TERM INVESTMENTS represent primarily government and corporate
obligations with original maturities at the date of acquisition of three or
more months which are classified as available-for-sale and are stated at fair
value. At August 31, 1998 and 1997, the original investment costs were
$5,383,671 and $5,481,000, resulting in unrealized gains of $31,000 ($20,000
net of tax) and $5,000 ($3,000 net of taxes), respectively. Because of the
nature of the investments, the Company believes that there is very little
credit risk in them.

INVENTORIES are stated at the lower of cost (first-in, first-out method) or
market.

PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-
line method over the following estimated useful lives: machinery and
equipment, three to seven years or the related capital lease term if shorter;
capitalized SMT facility start-up costs, five years; leasehold improvements,
three to eight years not exceeding the lease term; and office furniture, five
years.

F-7

OTHER ASSETS include legal costs of obtaining patents. These costs are
amortized over the estimated useful lives of the respective patents, which
are based on the related technology.

FINANCIAL INSTRUMENTS consist of cash, short-term investments, receivables,
payables and debt, the carrying value of which are a reasonable estimate of
their fair values due to their short maturities or variable interest rates.

RESEARCH AND DEVELOPMENT COSTS are expensed as incurred. These costs do not
include nonrecurring engineering costs related to contract technology
development sales which are included in cost of sales.

DEFERRED INCOME TAXES are provided under the asset and liability method for
temporary differences in recognition of income and expense for tax and
financial reporting purposes.

EARNINGS PER SHARE (EPS) is based on Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," which was adopted by the
Company on February 28, 1998. Accordingly, Basic EPS is calculated using
income available to common shareholders divided by the weighted average
number of common shares outstanding during each year. Diluted EPS is similar
to Basic EPS except that it is based on the weighted average number of common
and potentially dilutive shares, from dilutive stock options, outstanding
during each year. All prior-year EPS amounts have been restated in
accordance with SFAS No. 128. The adoption of SFAS No. 128 did not have a
significant impact upon the Company's reported earnings per share.

STOCK-BASED COMPENSATION arising from stock option grants is accounted for by
the intrinsic value method under APB Opinion No. 25. SFAS No. 123,
``Accounting for Stock-Based Compensation,'' was effective for the Company
beginning September 1, 1996. This statement requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. As permitted by SFAS No. 123, the Company will
continue to apply APB Opinion No. 25 to its stock-based compensation awards
to employees and will disclose the required pro forma effect on net income
and earnings per share (Note 7).

NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and
its components (revenues, gains and losses) in financial statements and is
effective for fiscal years beginning after December 15, 1997, including
interim periods. The Company will adopt SFAS No. 130 beginning the first
quarter of fiscal year 1999. The FASB also issued in June 1997 SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company will adopt SFAS No. 131
beginning the first quarter of fiscal year 1999. In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes standards for measuring, classifying and
reporting all derivative financial instruments in the financial statements.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company will adopt SFAS No. 133 beginning the first
quarter of fiscal year 2000. The Company does not expect the adoption of
these standards to have a material impact on the Company's financial position
or results of operations. In April 1998, the Accounting Standards Executive
Committee issued Statement of Position ("SOP") No. 98-5, "Reporting on the
Costs of Start-Up Activities," which requires start-up activities to be
expensed as incurred. SOP No. 98-5 is effective

F-8

for financial statements for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of this standard, when it is
required to be adopted, to have a material impact on the Company's financial
position or results of operations.

2. INVENTORIES

Inventories consist of the following (in thousands):

1998 1997

Raw materials and supplies $ 4,677 $ 2,569
Work in process 2,139 1,239
Finished goods 1,698 1,126
------- -------

Total $ 8,514 $ 4,934
======= =======
3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

1998 1997

Machinery and equipment $20,016 $16,402
Equipment under capital leases (Note 6) 2,553 2,516
Construction in progress 3,941 3,021
Leasehold improvements 4,817 2,651
Capitalized SMT facility start-up costs 579 579
Computer software 567 282
Office furniture 404 310
------- -------

Total 32,877 25,761

Less accumulated depreciation and
amortization (including $1,067 and
$763 in 1998 and 1997, respectively,
for capital leases 15,748 12,067
------- -------

Property and equipment - net $17,129 $13,694
======= =======

Capitalized start-up costs are related to the construction and start-up
activities for the surface mount technology (SMT) production line, the
Company's first new technology production facility built since the original
facility. Amortization of these costs began in 1995. Construction in
progress includes equipment and other assets not yet placed in service
primarily related to increasing the capacity of the manufacturing facilities.

F-9

4. OTHER ASSETS

Other assets consist of the following (in thousands):

1998 1997

Patents, less accumulated amortization of $290 and $221 in 1998 and 1997,
respectively $ 351 $ 366
Patent deposits 156 209
Other 59 73
----- -----

Total $ 566 $ 648
===== =====

5. NOTES PAYABLE

Notes payable at August 31, 1998 and 1997, consist of the following (in
thousands):

1998 1997

Note payable under $5,000 revolving line-of-credit facility which
expires December 31, 1999, bearing interest at the bank's prime floating
rate or LIBOR (8.5% at August 31, 1998), subject to certain covenants
generally related to working capital, shareholder's equity and earnings
and collateralized by all accounts receivable, inventory and equipment
purchased on or subsequent to March 1, 1996 (net book value of $2,796
at August 31, 1998), excluding leased equipment $1,500 $ -

Note payable under $2,500 equipment term loan facility payable in equal
monthly installments, maturing five years from the date of each
advance, bearing interest at the bank's prime floating rate or LIBOR
(8.5% to 8.9% at August 31, 1998), subject to certain covenants
generally related to working capital, shareholder's equity and earnings
and collateralized by certain equipment (net book value of $5,985 at
August 31, 1998) 1,005 1,505
------ ------

Total 2,505 1,505

Less current portion 2,000 500
------ ------

Long-term portion $ 505 $1,005
====== ======

Long-term debt matures as follows: $2,000 in 1999, $483 in 2000 and $22 in 2001.

At August 31, 1998, the available unused balance under the revolving line-of-
credit facility is $3.5 million.

F-10

6. LEASES AND OTHER COMMITMENTS

The Company has entered into noncancelable capital and operating lease
agreements for its manufacturing facility and certain equipment. Rent
expense under the operating leases in 1998, 1997 and 1996 was $922,724,
$748,000 and $486,000, respectively. Minimum future rental commitments under
the capital and operating leases at August 31, 1998, are as follows (in
thousands):

CAPITAL
LEASE OPERATING
OBLIGATIONS LEASES

Fiscal year ending August 31:

1999 $ 703 $1,304
2000 377 1,221
2001 - 883
2002 - 551
2003 - 505
------ ------

Total minimum payments 1,080 $4,464
======

Less amounts representing interest 71
------

Total present value of net minimum lease payments at August 31, 1998 1,009

Less current portion 699
------

Long-term portion $ 310
======

The Company had a $1,500,000 equipment lease facility with a bank which was
fully utilized at August 31, 1996. Borrowings under this facility, which are
presented as capital lease obligations, are due in monthly installments over
a five-year period from the date of each advance.

Lease obligations, which are presented as operating lease obligations in the
above table, are under a $3,500,000 equipment lease facility, of which the
Company had utilized $1,700,000 at August 31, 1998. Payments are due in
monthly installments over a four-year period from the date of each advance.
During October 1998, the Company negotiated an additional equipment-
collateralized operating lease facility for $4.0 million, to be advanced in
stages prior to October 22, 1999.

CONSULTING AGREEMENT - In August 1996, the Company entered into a contract
for future consulting services and noncompete agreement with a former officer
of the Company. Pursuant to the agreement, the Company paid the former
officer approximately $13,000 per month until February 28, 1998. The former
officer has agreed not to compete with the Company for a period ending one
year after the termination of the consulting agreement.

7. CAPITAL STOCK

Preferred stock of 5,000,000 shares with $.001 par value is authorized; none
was issued at August 31, 1998 and 1997. Rights, preferences and other terms
of the preferred stock will be determined by the Board of Directors at the
time of issuance.

F-11

The following table reconciles the numerators and denominators used in the
computation of both basic and diluted EPS:

1998 1997 1996

Basic EPS computation:
Numerator:
Net income $4,760 $3,807 $1,889
Denominator:
Weighted average shares outstanding (000's) 5,551 5,379 5,084
------ ------ ------

Basic EPS $ .86 $ .70 $ .37

Diluted EPS computation:
Numerator:
Net income 4,760 3,807 1,889
Denominator (000's):
Weighted average shares outstanding 5,551 5,379 5,084
Stock option conversion 427 411 345
------ ------ ------

5,978 5,790 5,429

Diluted EPS $ .80 $ .66 $ .35

STOCK OPTIONS - In October 1997, the Company amended and restated the terms
of the 1982 Stock Option Plan and adopted the 1997 Equity Incentive Plan
(1997 Plan). The Company has reserved 975,000 shares of common stock for
this plan. Under terms of the 1997 Plan, nonqualified and incentive options
to purchase common stock, and stock bonuses and rights to purchase restricted
stock may be granted to key employees, directors or consultants at the
discretion of the board of directors and subject to certain restrictions.
Generally, one forty-eighth of the shares optioned become exercisable each
month beginning at the date of grant. The options expire ten years after the
date of grant. At August 31, 1998, there are 753,902 options outstanding and
100,352 options available for grant under this plan. A summary of the
activity for the 1997 Plan follows:

EXERCISE
SHARES PRICE

Options outstanding September 1, 1995 37,499 $ 4.50-$6.00
Granted:
1996 327,000 6.25-8.50
1997 215,500 8.125-22.50
1998 409,000 8.688-12.563
Exercised:
1996 (31,750) 6.25
1997 (31,276) 4.50-10.125
1998 (45,734) 6.25-11.125
Expired:
1996 (20,250) 6.25-8.50
1997 (12,292) 6.25-8.25
1998 (93,795) 6.25-22.25
------- -------------

Options outstanding at August 31, 1998 753,902 6.25-22.50
=======

Exercisable at August 31, 1998 250,442 6.25-14.75
=======

F-12

Under terms of the 1986 Stock Option Plan (1986 Plan), nonqualified options
to purchase common stock may be granted to key employees and consultants at
the discretion of the board of directors, subject to certain restrictions.
Generally, one forty-eighth of the shares optioned become exercisable each
month beginning at the date of grant. The options expire ten years after the
date of grant. At August 31, 1998, there are 227,616 options outstanding and
21,968 options available for grant under this plan. A summary of the
activity for the 1986 Plan is as follows:

EXERCISE
SHARES PRICE

Options outstanding at September 1, 1995 555,378 $.60-$9.00
Granted:
1996 - -
1997 - -
1998 - -
Exercised:
1996 (200,243) .60-6.00
1997 (93,718) .60-7.25
1998 (20,613) .60-7.25
Expired:
1996 (9,047) .60-7.25
1997 (3,810) .60-4.50
1998 (331) .60-4.50
-------- ----------

Options outstanding at August 31, 1998 227,616 .60-7.50
========

Exercisable at August 31, 1998 224,214 $.60-$7.50
========

Under the terms of the Non-Employee Director Stock Option Plan (Director
Plan), options to purchase common stock may be granted every January 1 to
each director who is not an officer of the Company. One-fourth of the shares
optioned become exercisable on the first anniversary of the date of grant and
one forty-eighth of the shares optioned become exercisable each month
thereafter, with all options fully exercisable four years after the date of
grant. The options expire ten years after the date of grant. At August 31,
1998, there are 109,268 options outstanding and 58,500 options available for
grants. A summary of the activity for the Director Plan is as follows:

EXERCISE
SHARES PRICE

Options outstanding at September 1, 1995 51,000 $ 6.00-$10.875
Granted:
1996 13,500 9.125
1997 13,500 10.875
1998 38,500 11.375-27.0625
Exercised:
1997 (7,232) 6.50
------- ---------------

Options outstanding at August 31, 1998 109,268 6.00-27.0625
=======

Exercisable at August 31, 1998 56,424 $ 6.00-$27.0625
=======

F-13

Options under the above plans are granted at prices equal to or greater than
the estimated fair value of the common stock at grant dates as determined by
the board of directors.

EMPLOYEE STOCK PURCHASE PLAN - In 1994, the Company adopted an employee stock
purchase plan (Purchase Plan). In connection with the adoption of the
Purchase Plan, the Company initially reserved 175,000 shares of its common
stock. During January 1998, the Company increased the number of shares
available under the plan to 350,000 shares of common stock. Under terms of
the Purchase Plan, rights to purchase common stock may be granted to eligible
employees at the discretion of the board of directors, subject to certain
restrictions. The Purchase Plan enables eligible employees of the Company to
purchase shares of common stock at not less than 85% of the fair market value
of the common stock at the determination date through payroll withholding. A
summary of the activity for the employee stock purchase plan is as follows:

PURCHASE
SHARES PROCEEDS

Fiscal 1996 24,310 $ 138,896
Fiscal 1997 68,154 392,021
Fiscal 1998 117,117 827,666
------- ----------

Total 209,581 $1,358,583
======= ==========

COMMON SHARES reserved at August 31, 1998, for possible future conversion or
issuance are as follows:

Options granted:

1997 Plan 753,902
1986 Plan 227,616
Director Plan 109,268
---------

Total shares contingently issuable 1,090,786

Options and purchase rights available for grants:
1997 Plan 100,352
1986 Plan 21,968
Director Plan 58,500
Purchase Plan 140,419
---------

Total 321,239
---------

Total common shares reserved 1,412,025
=========

STOCK-BASED COMPENSATION-The Company applies Accounting Principles Board
Opinion No. 25 and related Interpretations in accounting for its stock option
plans. No compensation cost (generally measured as the excess, if any, of the
quoted market price of the common stock at the date of the grant over the
amount an employee must pay to acquire the common stock) has been recognized
for the Company's stock option plans. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," issued by the
Financial Accounting Standards Board in 1995, prescribed a method to record
compensation cost for stock-based employee compensation plans at fair value,
but allowed disclosure as an alternative. Pro forma disclosures as if the
Company had adopted the cost recognition

F-14

requirements under SFAS No. 123 in 1998 and 1997 are presented below. The
pro forma compensation cost may not be representative of that expected in
future years.

YEARS ENDED
-------------------------------------
1998 1997 1996

Net income (in thousands):
As reported $ 4,760 $ 3,807 $ 1,889
Pro forma 3,776 3,251 1,605

Earnings per share - diluted:
As reported $ 0.80 $ 0.66 $ 0.35
Pro forma 0.64 0.56 0.30

Stock options issued 475,500 229,000 340,500

Weighted average exercise price $ 12.86 $ 9.40 $ 6.65

Average compensation value of options
Granted per option $ 3.82 $ 4.75 $ 3.31

Compensation cost (for current-year grants) was calculated in accordance with
the binomial model, using the following assumptions: (i) expected volatility
computed using the monthly average of the Company's common stock market price
as listed on the New York Stock Exchange for the period July 28 ,1994, date
of the Company's initial public offering, through August 1998, which market
price volatility averaged 60%; (ii) expected dividend yield of 0%; (iii)
expected option term of six years; and (iv) risk-free rate of return as of
the date of grant, which ranged from 5.5% to 6.5%, based on extrapolated
yield of five- and seven-year U.S. Treasury securities.

COMMON STOCK GRANTS - In January 1995, the Company granted 51,700 shares of
its common stock to key employees of the Company. Based on a share price of
$7.00 per share at the measurement date, the Company recorded unearned
compensation of $361,900. One-fourth of the shares granted became
exercisable on November 27, 1996, November 27, 1997, November 27, 1998, and
November 27, 1999, respectively. During 1996, certain employees who were
granted 17,000 shares terminated their employment with the Company. All
shares granted to these employees were reacquired and retired. Compensation
expense related to remaining common stock grants was approximately $60,000,
$68,000 and $33,000 in 1998, 1997 and 1996, respectively.

STOCKHOLDER RIGHTS PLAN - In December 1994, the Company adopted a stockholder
rights plan. In connection with the adoption of such plan, the Company
reserved 250,000 shares of its Series A Junior Participating Preferred Stock,
$.001 par value, and declared a dividend of one preferred share purchase
right (a Right) for each outstanding share of common stock, par value $.001
per share (the Common Shares), of the Company. The dividend of 4,965,847
Rights was issued to the stockholders of record on January 16, 1995. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par
value $.001 per share (the Preferred Shares), at a price of $74.40 per one
one-hundredth of a Preferred Share, subject to adjustment. The Rights become
exercisable on the earlier of the tenth day after the public announcement of
acquisition by a person or group of persons, not including an exempt person
as defined by the stockholder rights plan, of 15% or more of the Company's
common shares outstanding or the tenth business day after the date of first
public announcement of the intention of a person or group of persons to
commence a tender or exchange offer to acquire 15% or more of the Company's

F-15

common shares outstanding. When issued, the Preferred Shares have dividend
and voting rights that are defined in the Rights plan. The Rights may be
redeemed by the Company at a redemption price of $.01 per Right in accordance
with the Rights plan, and the Rights expire on December 20, 2004.

8. SIGNIFICANT CUSTOMER AND EXPORT SALES

Sales to a significant customer and export sales to foreign markets as a
percent of the Company's total revenues are as follows:

1998 1997 1996

Significant customer 6% 1% 10%

Export sales:
North America 43% 50% 50%
Europe 35 32 28
Asia 15 14 18
Other 7 4 4
---- ---- ----

Total export sales 100% 100% 100%
==== ==== ====

There are no assets separately identified with foreign sales, and the
profitability of such sales is similar to that of domestic sales.

9. INCOME TAXES

The tax effects of significant items comprising the Company's net deferred
income tax benefits as of August 31, 1998 and 1997, are as follows (in
thousands):

1998 1997

Accruals and valuation allowances not currently deductible $ 342 $ 666
Inventory costs capitalized for tax purposes 177 81
Tax credit carryforwards 116 -
----- ------

Total current 635 747

Book over tax depreciation - 109
Tax net operating loss (NOL) and tax credit carryforwards - 781
----- ------

Total noncurrent - 890
----- ------

Total deferred income tax benefit $ 635 $1,637
===== ======

Management believes that no valuation allowance against the deferred tax
benefits is necessary at August 31, 1998 or 1997.

F-16

The resulting income tax expense is shown below (in thousands):

1998 1997 1996

Current - federal $1,470 $1,359 $ 484
Current - state 148 194 107
Deferred 1,002 652 291
------ ------ -----

$2,620 $2,205 $ 882
====== ====== =====

A reconciliation between income taxes computed at the federal statutory rate
and income tax expense is shown below (in thousands):

1998 1997 1996

Income taxes computed at federal statutory rate $2,510 $2,044 $ 942
State income tax expense - net of federal
income tax benefit 117 128 71
Research and development tax credit - - (116)
Expiration of investment and research and development
tax credits - - 30
Expenses not deductible for tax purposes 20 20 14
Effect on tax of foreign sales corporation (101)
Other 74 13 (59)
------ ------ -----

Total income tax expense $2,620 $2,205 $ 882
====== ====== =====

As of August 31, 1998, the Company has income tax carryforwards related to
alternative minimum federal income tax benefits of $116,000 available to
reduce future federal income tax liabilities.

10. EMPLOYEE BENEFIT PLAN

The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code, which covers substantially all employees. The Company may
match employee contributions at a rate determined by the board of directors.
Matching contributions of $81,000 were made in 1998. No matching
contributions were made in 1997 or 1996.

11. LITIGATION AND CONTINGENCIES

On June 7, 1996, the Company was served with a complaint filed by
TimeKeeping Systems, Inc. (TimeKeeping). The complaint purports to state a
single cause of action for breach of contract and alleged that the Company
failed to timely fulfill certain purchase orders TimeKeeping issued in 1995.
The Company reached a settlement with TimeKeeping at the end of the second
quarter of 1998 and paid settlement costs totaling $425,000 in April 1998.

Included in the accounts receivable balance is a past-due receivable
totaling $889,000 from a customer. The Company is seeking to recover the
entire $889,000 of this past due account plus an additional $819,000 for
custom finished goods manufactured and raw material purchased for this
customer. The Company believes that reserves are not necessary with regard
to this matter. As a result, no additional allowance for uncollectible
amounts has been established.

F-17

12. QUARTERLY INFORMATION (UNAUDITED)

Selected unaudited quarterly financial data is as follows (in thousands,
except per-share amounts):

FISCAL 1998 QUARTER ENDED FISCAL 1997 QUARTER ENDED
--------------------------------------- ------------------------------------------
NOV. 30 FEB. 28 MAY 31 AUG. 31 NOV. 30 FEB. 28 MAY 31 AUG. 31

Sales $12,882 $13,214 $14,595 $14,481 $10,077 $10,695 $12,841 $14,079

Cost of sales 7,634 7,889 8,708 9,318 6,090 6,422 7,527 8,097
------- ------- ------- ------- ------- ------- ------- -------

Gross profit 5,248 5,325 5,887 5,163 3,987 4,273 5,314 5,982

Operating expenses:
Research and development 1,467 1,313 1,276 1,025 914 969 1,060 1,226
Sales and marketing 1,394 1,476 1,557 1,219 1,357 1,431 1,497 1,557
General and administrative 667 819 774 629 700 778 987 926
Litigation 61 580 0
------- ------- ------- ------- ------- ------- ------- -------

Total 3,589 4,188 3,607 2,873 2,971 3,178 3,544 3,709
------- ------- ------- ------- ------- ------- ------- -------

Income from operations 1,659 1,137 2,280 2,290 1,016 1,095 1,770 2,273

Other income (expense), net 7 15 (43) 35 (48) 8 (9) (93)
------- ------- ------- ------- ------- ------- ------- -------

Income before income taxes 1,666 1,152 2,237 2,325 968 1,103 1,761 2,180

Income tax expense 633 412 778 797 368 419 612 806
------- ------- ------- ------- ------- ------- ------- -------

Net income $ 1,033 $ 740 $ 1,459 $ 1,528 $ 600 $ 684 $ 1,149 $ 1,374
======= ======= ======= ======= ======= ======= ======= =======

Earnings per share:
Basic $.19 $.13 $.26 $.27 $.11 $.13 $.21 $.25
======= ======= ======= ======= ======= ======= ======= =======

Diluted $.17 $.12 $.24 $.26 $.11 $.12 $.20 $.23
======= ======= ======= ======= ======= ======= ======= =======

Weighted average common
shares outstanding:
Basic 5,520 5,586 5,628 5,687 5,332 5,380 5,438 5,499
======= ======= ======= ======= ======= ======= ======= =======

Diluted 5,992 5,949 5,979 5,849 5,599 5,687 5,774 5,988
======= ======= ======= ======= ======= ======= ======= =======

******

F-18