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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

- OR -

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended August 31, 2004

Commission File No. 0-24414

RF Monolithics, Inc.

(Exact name of Registrant as specified in its charter)

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of RF Monolithics, Inc. Common Stock held by nonaffiliates as of October 31, 2004, based on the last reported sale price on the NASDAQ Stock Market composite tape on February 27, 2004 (the last trading date of the registrant’s most recently completed second fiscal quarter), was $59,823,130. 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.

Common Stock outstanding at October 31, 2004: 7,808,417 shares, par value $0.001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, which will be filed with the Commission on or about December 9, 2004, is incorporated by reference into Part III of this report.

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RF MONOLITHICS, INC.

FORM 10-K

YEAR ENDED AUGUST 31, 2004

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PART I.

ITEM 1. BUSINESS

RF Monolithics, Inc., or the Company, was organized in 1979 as a Texas corporation and converted to a Delaware corporation in 1994. We design, develop, manufacture and market a broad range of radio frequency, or RF, component and module products in two groups: (a) Low-power Products Group, which includes low-power components and Virtual Wire^™ Short-range Radio products, and (b) Communications Products Group, which includes frequency control modules and filters. Most of our products are based on surface acoustic wave, or SAW, technology and are manufactured as discrete devices to perform specific functions and as integrated modules to meet system performance requirements.

We focus our product development in the frequency range of 50 megahertz, or MHz, to 2.4 gigahertz, or GHz. We market our line of more than 350 active resonators, filters, clocks, oscillators, transmitters and receivers to distributors, electronic manufacturing service companies and original equipment manufacturers world-wide. Our customers include Acal plc, Celestica Inc, Delphi Delco Electronics, Flextronics International, Insight Electronics, Holy Stone Enterprises, Motorola Inc, Schrader Electronics Ltd, Solectron Corporation and Walasey Ltd.

Advantages of SAW Technology / Our Solutions

We believe that a significant market opportunity for more widespread adoption of SAW technology is emerging. As electronic products move into additional wireless applications, there will be an increasing demand for lower power consumption, reduced size, improved performance, greater precision, and greater reliability.

We believe that our SAW-based products, coupled with our RF design and manufacturing expertise, offer potential customers certain fundamental advantages over alternative technologies. As electronic applications ranging from automated meter reading to satellite radio migrate to lower power consumption and reduced size, we think demand for RF modules and SAW discrete components will increase.

Our product offerings combine a complex mix of application assistance, design technology, wafer fabrication capability, hybrid assembly and packaging processes to meet stringent customer performance requirements. The unique features of SAW technology provide flexible solutions to system designers defining tomorrow’s emerging applications in various market segments.

Markets and Applications

We focus on specific market opportunities where we believe that our SAW technology solutions coupled with our RF design expertise address the application requirements. Our products are incorporated into application designs in five markets: automotive, consumer, distribution, industrial and telecommunications.

Automotive

The automotive industry utilizes SAW-based components in transmitter and receiver designs for remote keyless entry, tire pressure monitoring and satellite radio applications. The automotive industry continues to develop new and improved safety features. The Tread Act, which phases in tire pressure monitoring through 2007 in the United States, presents an opportunity in the RF-type direct method of tire pressure monitoring. In September 2004, the U.S. Department of Transportation’s National Highway Traffic Safety Administration proposed a new safety standard under the Tread Act that would require that all new vehicles be equipped with tire pressure monitoring systems. The regulation is not yet effective and could be

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modified. Therefore, the ultimate effect is still unknown. We believe that SAW devices are stable and resistant to shock, vibration and moisture, all characteristics required for this application.

Satellite Radio is an emerging market opportunity. Published reports say that in ten years there could be as many as 48 million subscribers to satellite radio services. From a technology standpoint, the digital modulation used in satellite radio systems is more efficient than traditional analog AM or FM. Current proposed digital standards, within the same bandwidth, are achieving near CD quality audio. Automotive electronic applications continue to grow with the ongoing drive toward smaller size, reduced cost and improved system performance. Our low-power components, Virtual Wire^™ Short-range Radio products and filters meet many of the requirements of this automotive market. This market is characterized by fierce competition due to commodity pricing by competitors.

Consumer

The consumer market is a relatively small market for our products. However, we believe that there is significant growth potential in the areas of global positioning systems, including hand held units; sports applications; home security; internet appliances; garage doors; cable TV and a wide variety of other wireless applications. Both low-power components and Virtual Wire^™ Short-range Radio products may be designed into consumer applications.

Distribution

Several of our products, particularly in the low-power product group, have widespread potential uses and standardized characteristics that make them ideal for sales through distribution. Three of the top applications serviced by distribution are (a) wireless computer connectivity, (b) wireless medical and (c) keyless entry applications. Our distributors have the technical expertise and experienced personnel required to help potential customers design their products using our products. Distributors also provide service to customers with special delivery and lead-time requirements. Standard distribution contracts govern sales to distributors and substantially limit the amounts that distributors may return to us for stock rotation. Our largest distributors are Insight Electronics Inc. and Richardson Electronics, Ltd. in North and South America, and Acal Electronics and Equipements Scientifiques S.A. in Europe.

Industrial

The industrial market includes applications such as automated meter reading, medical systems, security systems, RF ID tags, bar code reading devices, and custom data link equipment. We believe that the automated utility meter reading, medical systems and industrial security market segments have the potential for significant growth. As the deregulation of utility companies gains momentum and proposed legislation concerning real time cost and consumption monitoring gets closer to becoming law, the utility providers’ need to access data remotely becomes critical. A published report says that utilities in the USA are adopting automated meter reading at an approximately 15% to 20% annual rate and the penetration level is expected to grow from 20% now to 40% by 2008. The need to transfer more and more data with low power consumption is ideally suited for our Virtual Wire^™ Short-range Radio products. We were selected as the transceiver of choice for the communication protocol network of several companies for use in their Mesh network applications. Our low-power components, Virtual Wire^™ Short-range Radio products and filters are used in industrial security applications.

Telecommunications

We believe that a number of dynamics within the telecommunication and wireless communications market are opening new applications for SAW technology. The deployment of digital cellular telephone standards, such as Global System for Mobile Communications, Code Division Multiple Access, Enhanced Digital Global Evolution, Wideband Code Division Multiple Access and Wireless Local Area Network has

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been initiated worldwide. All of these digital cellular telephone standards entail digital modulation, which requires SAW filters that minimize distortion and conform to international cellular telephone standards.

Other markets, such as wireless Internet access and broadband multimedia, will continue to use SAW-based filter and timing products. We believe that as broadband wireless communication systems demand more performance to support Internet requirements, bandwidth will become the key element that allows information to flow efficiently. This will create a requirement to minimize systems noise present in broadband wireless communication and provide clean timing to maximize throughput around the system’s backbone. Analog communications, test instrumentation, computer timing and military applications also create markets for SAW-based frequency control products. Timing integrity and elimination of system noise in circuits are critical for these applications. We have introduced optical timing products based upon our patented technology that we believe are well suited for the dense wave division multiplex internet application.

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

Low-power Products Group

Low-power Components:

Resonators. Our resonators are used in low-power wireless transmitter and receiver applications, including automotive remote-keyless-entry systems, tire pressure monitoring systems, and wireless security systems and related products. We offer SAW resonators in volume, and they are supplied in both three-lead metal packages, or TO-39, and various surface mount packages. We accelerated the development of smaller package styles for these products in recent years. The market for low-power resonators is intensely competitive and has experienced price erosion, rapid technological change and product obsolescence.

Coupled-Resonator Filters. Coupled-resonator filters are well suited for certain frequency stabilization applications, such as the receiver portion of remote-keyless-entry systems, and input and output filter for module products manufactured by us. We provide coupled-resonator filters in both three-lead metal packages and surface mount packages.

Virtual Wire^™ Short-range Radio Products:

Our second-generation hybrid transmitter, receiver and transceiver modules are the primary products included in Virtual Wire^™ Short-range Radio products. Our transceiver module, based on its patented Amplifier Sequenced Hybrid, or ASH, technology, offers two-way data communication in a single small module, with performance identical to the separate transmitter and receiver modules, at a lower total cost.

These products feature small size, very low-power consumption, excellent RF performance, and provide the system designer flexibility and fast 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 and exceptional resistance to electromagnetic interference, which helps facilitate international standards certification for our customer’s products.

The Virtual Wire^™ Short-range Radio product offerings also include complete transceiver design and development kits that provide the system designers having minimal RF experience the ability to easily incorporate wireless data transfer into their designs. We also provide software protocols for key applications. The markets for Virtual Wire^™ Short-range Radio products include remote bar code data entry, automated

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meter reading, point of sale terminals, medical monitoring systems, home automation, consumer sports, data link equipment and wireless thermostats.

We believe that markets for wireless products will continue to expand. We also believe that ASH technology has all the characteristics required to become an industry standard for short-range wireless applications. We have begun development of our third generation Virtual Wire^™ products. This next generation will capitalize on the low power consumption of the base Virtual Wire^™ technology and expand the product’s capabilities with new features. We believe the new features will fill additional needs in current wireless applications and support a variety of emerging applications.

In the past year we have formed a Module Group to utilize Virtual Wire^™ products and other technologies to develop and market higher level products, particularly for applications which utilize Mesh Network protocols. We believe that our radio technology provides the lowest energy consumption solution available for a large variety of wireless applications.

Communications Products Group

Frequency Control Modules:

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

High-frequency clocks. Our high-frequency clock modules are used in high-bandwidth, high-performance computer systems. Our “Diff Sine” clocks allow network applications to realize improved performance by providing a highly stable frequency source, which results in very low timing variations from one cycle to the next (commonly referred to as “jitter”) and good symmetry across each cycle.

Oscillators. We produce commercial and military fixed-frequency and voltage-controlled SAW oscillators. These products are supplied in surface mount or leaded metal packages and are used in applications such as microwave radios, identification-friend-or-foe transponders for commercial and military avionics and precision instrumentation.

Optical timing products. We have introduced a line of oscillators that uses our patented technology to target the Optical Dense Wave Division market. These products are targeted for customers in the optical network market, including high-speed routers and the OC768 backbone system.

Filters:

We pioneered the development of several SAW technologies related to the implementation of high performance band-pass filters having low insertion loss. World-class filter design capabilities are provided by our team of filter design employees and consultants located in Dallas, Texas and Moscow, Russia. Their state-of-the-art filter designs are transformed into highly manufacturable product configurations by our design engineering staff in Dallas, Texas. Our filter products are primarily intended for emerging satellite radio, GPS and various telecommunications applications, particularly cellular telephone base stations.

In response to the demand from manufacturers of wireless communications products, we have focused on intermediate frequency SAW filters based on new SAW structures that provide the best performance. However, we also offer a variety of RF filters.

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Manufacturing

We have manufacturing operations in Dallas, Texas and have contractual relationships with (a) one manufacturer in the Philippines (Automated Technology (Phil.) Inc.); (b) one manufacturer in Taiwan (Tai-Saw Technology Co., Ltd.); and (c) one manufacturer in Japan (Morioka Seiko Instruments Inc., a subsidiary of Seiko Instruments, Inc.). These multiple sites provide original source and back-up capability for our products and operations.

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

In the past, we have occasionally experienced temporary product shipment delays and lower-than-expected production yields. Similar events could occur in the future. Certain other acts-of-God or events of a political nature could also temporarily delay product shipment. However, we have taken steps to mitigate the potential impact of any of these events by establishing backup manufacturing capability at various sites and establishing procedures to put us back in production quickly.

We occasionally have experienced sudden increases in demand, which have put pressure on our manufacturing facilities to rapidly increase capacity. Capacity currently exists to meet any reasonably anticipated potential demand within a short time. We will continue to be aggressive in securing increased manufacturing capacity through offshore manufacturing alliances. However, we do not maintain large amounts of raw material and wafer inventories and may occasionally experience temporary shipment delays due to the unavailability of these parts in the face of rapidly increasing customer demands.

Our transition to offshore assembly has created additional complexities in logistics. However, we are working to reduce these complexities, and have developed the capability to ship directly to our customers from offshore locations to reduce our lead times. In recent years our customers have provided us less visibility in terms of orders and require very short lead times to meet their requirements. We believe that we offer competitive lead times to our customers.

We divide our manufacturing operations into three key areas: (a) wafer fabrication, (b) domestic pilot line assembly, and (c) offshore assembly.

Wafer Fabrication

Fabrication of deposited and patterned wafers takes place in a clean-room environment. Thin aluminum films are precisely deposited onto four-inch diameter piezoelectric wafers. These films are subsequently etched to create multiple, patterned structures with very small (micron and submicron) features on the surface of the wafers. Each patterned structure is called a die, and there may be from 40 to 3,500 die on a single wafer. These die are subsequently assembled and sealed into a hermetic enclosure to become a product that is sold to customers. The majority of wafer fabrication currently takes place at our Dallas, Texas location. We have secured a backup source of supply at one of our offshore locations that also provides added capability for new products.

Domestic Pilot Assembly

The domestic pilot line assembly is primarily focused on frequency control products, but can manufacture a limited quantity of all product types as required. This manufacturing capability supports customers’ short-term delivery requirements, engineering requirements and new product development.

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Because of its flexibility, this line also provides additional backup production capability in case of offshore manufacturing disruption.

Offshore Assembly

As noted above, we have manufacturing arrangements with Automated Technology (Phil) Inc., Morioka Seiko Instruments Inc. and Tai-Saw Technology Co., Ltd. Each of these organizations has hermetic packaging capability, which is essential to the manufacture of SAW devices. Each one also possesses an understanding of the unique aspects of SAW component assembly and testing. Assembly and testing of all our products (except clocks and oscillators) occurs at more than one of these locations.

Source of Components/Labor

While we use standard components whenever possible, some components used in the SAW devices and modules are made to our specifications by specialized manufacturers. For example, we purchase several RF integrated circuits from Maxim Integrated Products and ceramic arrays from Kyocera America, Inc. We have experienced delays and quality control problems with certain of our single-source suppliers in the past. Although we are attempting to obtain second-source suppliers, we think we will continue to be somewhat dependent upon single-source suppliers for the foreseeable future. As part of our agreement with offshore manufacturers, the responsibility for securing certain raw materials has been transferred to them.

Quality

Our customers demand an ever-increasing level of quality in our products. We, as well as our partners in the Philippines and Taiwan, have achieved QS 9000 and ISO 9001 certification. We are working toward certification to the new TS 16949 Quality Standard as are our Philippine and Taiwan based manufacturing partners. In addition to continually improving the efficiency and effectiveness of all of our functions, including manufacturing, we strive to assure that the features and benefits of our products meet or exceed customer expectations for performance and reliability. We have achieved significant operating improvements from these activities. Improvement of quality levels remains a high priority for us.

Sales and Marketing

International sales in foreign markets, as well as North American sales are as follows:

We distribute our products in the United States through manufacturers’ representatives managed by our area sales management team (internal sales force). During the current year we authorized two major North American distributors (Insight Electronics and Richardson Electronics) to stock and sell all of our products. International sales are handled on a nonexclusive basis through manufacturers’ representatives, manufacturers’ representatives acting as distributors and direct sales management. The increase in sales to

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customers in Asia results both from an increase in business to Asian based customers as well and an increase in sales to contract assemblers in that region that manufacture for end customers all over the world.

Our international sales are currently denominated in U.S. currency. We have set up a limited capability to allow customers to buy products at prices denominated in Euros. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in 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. These factors could have a material adverse effect on our sales prospects.

A number of factors may slow down or prevent customers from using our products. We help customers design in our existing products through applications assistance. We sometimes work with our customers under custom product development programs. Both types of assistance can last from 6 months to 18 months. We cannot predict when or whether a particular customer’s product will be designed and reach volume production status. We cannot predict whether a particular customer will be commercially successful in selling its product. In addition, customers may require their products to be certified with various regulatory agencies. We offer our customers various types of assistance in obtaining certification. However, those customers may not obtain required certifications in a timely manner or at all. Any one of these factors could result in significant losses of potential sales.

Competition

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

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

We believe that our ability to compete in our target markets depends on factors both within and outside of our control. These factors include (a) the timing and success of new product introductions by us and our competitors, (b) our ability to support decreases in selling prices through reduction in cost of sales, (c) the pace at which our customers incorporate our products into their end-user products, and (d) other factors listed under the heading “Forward-Looking Statements”.

Research and Development

Our research and development efforts are primarily aimed at creating new, proprietary and innovative SAW device structures and SAW-based hybrid modules that uniquely address market needs. An example is the work currently being conducted to develop a third generation of Virtual Wire^™ Short-range Radio products. Our development efforts also include process improvements in wafer fabrication involving better line width and metal thickness control as well as improvements in device packaging.

We employ a number of highly qualified individuals in engineering and product and process development, including technicians, design engineers and scientists. These individuals are responsible for

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

From time to time we have entered into agreements with customers to develop specific SAW devices for inclusion in the customer’s end product. In addition, we have participated in government sponsored research and development programs. We treat sales derived from engineering design services as technology development sales and their associated costs are included in cost of sales. Total technology development sales during fiscal years 2004, 2003 and 2002 were $334,000, $801,000 and $723,000 respectively. The decrease in sales in the current year was due to a greater focus on developing standard products. Costs related to these sales were included in our cost of sales during these years. We consider the development of new products essential to maintaining and increasing sales.

Proprietary Rights

We rely on a combination of patents, copyrights and nondisclosure agreements in order to establish and protect our proprietary rights. We have received 40 patents for various inventions that include both SAW devices and innovative RF circuits that employ SAW devices. We have applied for an additional seven patents. Our policy is to file patent applications to protect technology, inventions and improvements that are important to our business.

We believe that our patents provide us competitive advantages. Reliance upon proprietary or patented technology is subject to a number of risks, however. Patents may not be issued from any of the pending applications. In addition, claims that are allowed from existing or pending patents may not be sufficiently broad to protect our technology. While we intend to protect our intellectual property rights vigorously, patents may be challenged, invalidated or circumvented.

We also seek to protect our trade secrets and proprietary technology through confidentiality agreements with employees, consultants and other parties. However, these agreements could be breached and we may not have adequate remedies. Further, our trade secrets could otherwise become known to or independently developed by others. In addition, the laws of some foreign countries do not protect 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 that represents a risk to us. We may be notified that one of our products is infringing on patents and/or 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. Litigation could ensue and the outcome of such litigation might be adverse to us. The cost of defending ourselves from such litigation could have a material adverse effect on our business, regardless of its outcome.

Regulations

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

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Personnel

As of August 31, 2004, we had a total of 197 employees and full-time consultants. Most of our personnel are at our headquarters in Dallas, Texas. We have one person at each of our U.S. sales offices, which are located in Georgia, Minnesota and California, and two sales support individuals in Europe. Our future success depends to a significant degree upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such individuals can be intense. We may not be able to retain or continue to attract key managerial and technical personnel. Failure to retain or continue to attract key managerial and technical personnel could have a material adverse effect on our business, operating results and financial condition. None of our employees are represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good. The availability of offshore production tends to mitigate the impact of skilled labor shortages in Dallas, Texas.

Potential Fluctuations in Results of Operations; Order Trends and Backlog

Our quarterly and annual results have been and will continue to be affected by a wide variety of factors that could have a material adverse effect on our sales and results of operations. These factors include but are not limited to: (a) the level of orders that are received and can be shipped in a quarter; (b) the rescheduling or cancellation of orders by our customers; (c) competitive pressures on selling prices; (d) changes in product or customer mix; (e) loss of a strategic relationship; (f) the ability to introduce new products on a timely and cost-effective basis; (g) new product introductions by our competitors; (h) market acceptance of both our and our customers’ products; and (i) other factors listed under the heading “Forward-Looking Statements”.

Historically, the electronics industry has experienced sudden and unexpected economic downturns. Our results of operations are subject to such downturns. In addition, our operating expenses are largely fixed and difficult to change quickly should sales not meet our expectations. This magnifies the adverse effect of any such sales shortfall. Period-to-period comparisons of our financial results should not be relied upon as a guarantee of future performance.

Our backlog at August 31, 2004 was approximately $11.7 million as compared to $13.7 million as of August 31, 2003. Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months. We think this level of backlog is a reflection of a general economic uncertainty and reflects the reluctance of our customers to commit to purchase products when they have limited visibility of their own requirements. Customers require us to respond on increasingly short lead times when their demand materializes. Our 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 or change in delivery schedule prior to 30 days before shipment without penalty at the option of the customer.

ITEM 2. PROPERTIES

Our principal administrative, sales, marketing, research and development and manufacturing facilities are located in Dallas, Texas, in two adjacent buildings totaling 58,000 square feet. One building, containing 27,000 square feet, is leased through October 2008. In February 2003 we purchased the second building, containing 31,000 square feet, which we had previously leased. The purchase, including the surrounding parking lots, consisted of 2.1 acres. We believe that our existing facilities are adequate for our current requirements and that the current properties are suitable and productive for their currently intended purposes. Due to our flexible offshore manufacturing capabilities, we do not expect to require significant additions to our assembly facilities or equipment at any point in the foreseeable future.

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PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock (symbol RFMI) is quoted on the NASDAQ Stock Market. The following table sets forth the high and low sales prices of our common stock during each quarter of fiscal 2004 and 2003 as furnished by NASDAQ. These prices reflect prices between dealers, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

We have not paid dividends on our common stock during the past two most recent fiscal years and presently intend to continue this policy in order to retain earnings for use in our business. The number of record holders of our common stock as of October 31, 2004 was approximately 200 (which number does not include the number of stockholders whose shares are held of record by a brokerage house or clearing agency, but rather includes such brokerage house or clearing agency as one record holder). The last sales price for our common stock, as reported by NASDAQ on October 31, 2004, was $6.96.

We have not repurchased any of our outstanding equity securities during the two year period ending August 31, 2004.

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Equity Compensation Plan Information

The following table summarizes our equity compensation plans as of the fiscal year ended August 31, 2004:

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ITEM 6. SELECTED FINANCIAL DATA

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In fiscal 2002, we recorded an impairment expense of approximately $229,000 to write down or write off specific fixed assets that were determined at that time to be of no further use.

In fiscal 2001, we recorded an impairment expense of approximately $1.0 million to write down or write off specific fixed assets that were no longer required due to the move of certain manufacturing lines overseas. We also incurred approximately $399,000 restructuring costs related to the severance of 238 employees. This reduction occurred mostly in the manufacturing and manufacturing support departments of operations moving overseas.

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

Business

We design, develop, manufacture and market a broad range of radio frequency components and modules. Our products are organized into two groups: (a) the Low-power Products Group and (b) the Communications Products Group. The Low-power Products Group includes low-power components, as well as Virtual Wire^™ Short-range Radio products. The Communications Products Group includes frequency control modules and filter products. Our products generally utilize the SAW technology explained in Item 1 “Business” of this document.

Our strategy is to leverage our radio frequency design skills and our packaging technology to provide SAW-based solutions to the current and emerging requirements of the electronics industry. Our products include approximately 350 active individual products, also described in Item 1 “Business”. Our average selling prices generally range from $.35 to $10 for low-power products and from $1 to $100 for communications products.

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Critical Accounting Policies and Estimates

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

Accounts Receivable

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

In the current year, our losses due to credit issues were very small. However, there is no guarantee that we will continue to experience the same low rates in the future. A significant change in the liquidity or financial condition of a large customer or group of customers could have a material adverse effect on our ability to collect our receivables and we may incur losses as a result.

Inventory

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

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

In recent years we have written off significant amounts of inventory. In fiscal 2003 we wrote down $2.6 million of inventory to reflect changes that occurred in our marketing strategy to accelerate the migration of our products to smaller packages. This was done in response to an abrupt shift in market requirements toward smaller packages.

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

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significant changes in manufacturing costs, unanticipated changes in product demand or technological developments could have a significant impact on the value of inventory and reported operating results.

Impairment of long-lived assets

In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we regularly review our long-lived assets for changes in circumstances indicating that their carrying values may not be recoverable. We recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows. We measure an impairment loss as the difference between the carrying amount and fair value of the asset. As an example, we have moved assembly production offshore and consolidated our Dallas operations. This change in circumstances caused us to test for an impairment loss and ultimately record a $1.2 million charge in fiscal 2003 related to fixed assets.

Deferred Tax Assets

In fiscal year 2001 we recorded a full asset valuation allowance against tax loss carryforwards and other tax benefits according to the SFAS 109 “Accounting for Income Taxes” guidelines. Since then we have recorded no additional net federal tax benefits or expenses, since they were offset by the valuation allowance. The only exception to this was in fiscal year 2002 when a change in tax law allowed us to collect a significant tax refund, which was recorded in the period in which the change in tax law occurred. We still retain a large amount of potential tax benefits for tax loss carryforwards and other factors, as explained in the notes to the financial statements. These benefits may be realized in future periods. As a result, we do not expect to record significant federal income tax expense for some time.

Accrued Medical Benefits

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

Revenue Recognition

We recognize revenue for the most part when we ship the product to the customer. Less than 5% of fiscal 2003 sales were recognized under programs in which inventory is consigned to a customer. We recognize sales from consigned products when the customer pulls the product for use from the consigned inventory. In all cases, we recognize sales at the point at which legal title passes to the customer. Our standard terms and conditions are FOB our factory. We permit the return of defective products and accept limited amounts of product returns in other instances. Accordingly, we provide allowances for the estimated amounts of these returns based on historical experience when we recognize revenue.

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Results of Operations

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

The following table displays, for the years ended August 31, (a) the percentage relationship of certain items from our statements of operations to total sales and (b) the percentage change in these items from year to year:

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Sales

The following table displays sales for our product lines and the percentage relationship of those product lines to total sales for the periods indicated:

Overall Sales Trends in Fiscal Year 2004 Compared to Fiscal Year 2003

Our total sales increased 13% in fiscal 2004 compared to fiscal 2003. For three of our four product lines, this resulted from increases in sales due to increases in the number of units sold, which were due to greater market acceptance of newer products. Our fourth product line, low-power components, also experienced an increase in the number of units sold, but that was more than offset by the continuing decline in average selling prices for these products. The primary market for low-power components is the automotive market for keyless entry and tire pressure monitoring applications. The automotive market is very price competitive and we have had to reduce average selling prices significantly in the current year to maintain our market position. This is the primary reason why sales for low-power components declined almost 13% in the current year.

We expect the trend for lower average selling prices for low-power components to continue, and it may result in lower sales for these products in the future. We have anticipated this potential trend for some time. As a result, for several years we have focused our product and market development efforts on products with technical content to allow them to be sold at higher average selling prices. We had considerable success in increasing sales for these higher-priced products in the current year. Sales increased more than 47% for these products, as we sold 143% more units, particularly filters for the satellite radio application which is discussed below.

We compete in very price competitive markets in which customers require decreased prices over time to maintain their business. In addition, we understand that as new products ramp up in volume our customers expect ‘economy of scale’ to result in lower pricing. As a result, two of our product lines experienced a decline in average selling prices in the current year of 14% or more. A decline in average selling prices adversely impacts gross margin, as well as sales. Therefore, offsetting this impact is an important part of our

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strategic plan. We have achieved significant market position in most of the markets on which we focus. However, we believe that price competition from much larger and better financed competitors represents a significant risk in maintaining our sales levels and gross margins, particularly in the automotive market.

One of the biggest factors in determining what happens to total sales in the future will be whether or not the anticipated growth in higher-priced product line sales will be greater than or less than the anticipated decline in sales for our low-power components business. We expect sales for our first quarter of fiscal 2005 to be 10% to 12% greater than the prior year. For further information, please see the discussion of fourth quarter results and further sales guidance on the first quarter of fiscal 2005 below under the heading “Fourth Quarter of Fiscal 2004”.

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

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

Overall Sales Trends in Fiscal Year 2003 Compared to Fiscal Year 2002

Our total sales were approximately the same in fiscal 2003 as they were in fiscal 2002. However, our individual product lines showed very different trends year over year. Our base business has been the low-power components product line. These products had accounted for well over half of our sales for many years. The primary market for these products is the automotive market which is very price competitive. We have had to reduce average selling prices significantly to maintain our market position, which is the primary reason why sales for this base business declined almost 12% in fiscal 2003.

For several years we have focused our product and market development efforts on products with technical content to allow them to be sold at higher average selling prices to offset the trend of lower sales for low-power components. Sales increased more than 16% for these higher-priced products in fiscal 2003, as we sold almost 60% more units, including several new products. In fiscal 2003 the decrease in our base business sales was just about equal to the increase in sales of higher-priced products, resulting in overall sales slightly less than fiscal 2002.

Product Line Sales Trends:

Low-power Components

Sales for low-power components products decreased 13% in the current year and 12% in fiscal 2003. The decrease in sales for the current year was primarily due to a 14% decrease in average selling prices, partially offset by a 1% increase in the number of units sold. The decrease in sales for the prior year was primarily due to a 7% decrease in average selling prices, together with a 4% decrease in the number of units sold. The primary market for these products is the automotive market, which is characterized by very competitive conditions and declining average selling prices.

In each of fiscal 2004 and 2003 there was a decrease in the number of units sold for our older style TO-39 packaged products, which continued the trend of applications for those products either converting to

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surface mount versions or being lost to lower-priced competitors. Sales of TO-39 packaged products now amount to less than 15% of total low-power component sales. The number of units sold of surface mount products increased in the current year and was almost unchanged in the prior year. In both fiscal years, sales for keyless entry applications decreased due to loss of some sales to alternative technologies, but that was partially offset by increased sales for tire pressure monitoring applications. During the year, sales of low-power components products fluctuated in accordance with changing production schedules for automotive customers. We expect this fluctuation to continue.

Competitive pressures and consumer preferences in the low-power components and filter markets caused us to change our marketing strategy in the third quarter of the prior year. We significantly accelerated the migration of these older version products to new smaller packages. In addition, we modified our product line strategy by reallocating resources to support products in newer, smaller packages and discontinued selected products. Discontinued products resulted in a less than 1% reduction in annual sales. We believe we have the package sizes available to meet or exceed competitive offerings and meet customer expectations. During fiscal 2004 we introduced more than 70 new products. Some of these were low-power component products in smaller packages which we expect will have increasing market acceptance in fiscal 2005.

We expect that the trend of lower average selling prices for low-power component products to continue at close to the same rate as many customers convert to our products in smaller packages. In addition, the trend toward lower TO-39 product sales is expected to continue. We believe the number of units sold for tire pressure monitoring applications will continue to increase, partially offsetting these events. We also believe that the Tread Act, which mandates a growing number of new vehicles in the United States to have some form of tire pressure monitoring, will continue to increase market demand. Proposed regulations to implement this legislation may go into effect in calendar year 2005, which may have a favorable impact on demand for the type of products we make that support the direct conversion method of tire pressure monitoring. We believe there is still considerable uncertainty as to the actual impact of the potential regulations on us.

As a result of these various factors, we think low-power components sales may decrease somewhat in the next fiscal year, despite the fact that the number of units sold may increase.

Virtual Wire^™ Short-range Radio products

Sales for Virtual Wire^™ Short-range Radio products increased 20% in the current year and 22% in the prior year. One of the primary applications for these products is Automated Meter Reading or AMR. Sales for the AMR application increased 20% in the current year. The increase in both fiscal 2004 and 2003 was primarily due to an increase in the number of units sold of 26% in the current year and 32% in fiscal 2003. Partially offsetting this effect was the fact that average selling prices for these products declined as unit volumes increased and customers reached negotiated volume price reduction levels. This effect was much smaller for these products than products in other, more competitive markets.

For several years we have devoted considerable resources developing and marketing Virtual Wire^™ Short-range Radio products. We believe these products offer potential for significant growth in sales in numerous wireless applications, particularly for applications that require small size and low power consumption. We intend to continue working with our customers to develop new applications using Virtual Wire^™ Short-range Radio products and we expect future sales increases for these products. In addition, we have formed a Module Group to take advantage of new products designed to use this core radio technology to develop and market higher level products that fit the low power consumption requirements of Mesh network products. However, it is difficult for us to predict when, or if, these products will have a significant impact on our sales.

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Filters

Filter sales increased 85% in fiscal 2004, compared to 12% in fiscal 2003. In both fiscal years we sold an increased number of units, particularly for satellite radio applications. The unit increase was 250% in the current year and 90% in fiscal 2003. We provide filters for radios that provide services from both Sirius Satellite Radio Inc. (NASDAQ:SIRI) and XM Satellite Radio Holdings, Inc. (NASDAQ:XMSR). We are working with both service providers on future generations of product. We expect sales for the satellite radio application will continue to increase very rapidly as subscriptions for those services continue to increase. We have seen both automotive and general consumer applications for satellite radio service develop. These markets tend to be more price competitive than we have seen for many low-power components markets.

Partially offsetting the increase in the number of units sold was a reduction in average selling price of 47% in the current year and 42% in the prior year. A portion of this was due to increased sales for newer products in smaller packages that have lower average selling prices, as well as the fact that customers reached sales volumes for which they have negotiated volume discounts. We expect the trend for an increasing number of units sold to more than offset the trend for lower average selling prices, resulting in a general trend of increased filter sales for at least the immediate future.

Frequency Control Modules

Frequency control module sales increased 57% in fiscal 2004, as compared to 5% in fiscal 2003. The increase in both years was primarily due to an increased number of units sold to customers in high-end computer and optical timing markets. Some of these markets have been very depressed in recent periods, so we believe the increased number of units sold represents some recovery in economic conditions in those markets. While there have been some decreases in average selling prices for Frequency control module products, the pressures are not nearly as great as in some of our other markets. Future sales of these products will be highly dependent upon economic conditions in the markets these products serve, particularly the optical timing market.

Other Sales Trends

The following table provides additional data concerning our sales:

Our strategy is to seek diversification in our sales. We believe we have achieved a significant level of diversification in our customers, markets, products and geographic areas. However, due to the very competitive nature of the markets in which we compete, we may not always be able to achieve such diversification.

We consider all product sales with a delivery destination outside North America to be international sales. The increased international sales for the current year primarily relate to the satellite radio application. International sales are denominated primarily in U.S. currency, although some European customers require that we sell in Euros. We have not entered into any hedging activities to mitigate the exchange risk associated with sales in foreign currency. We intend to continue our focus on international sales. We anticipate that international sales will continue to represent a significant portion of our business. However, international

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sales are subject to fluctuations as a result of local economic conditions and competition. Therefore, we cannot predict whether we will be able to continue to derive similar levels of our business from international sales.

We have put forth considerable effort developing new products. However, the timing of any sales resulting from new products is dependent upon the customers’ product development and product introduction cycles. It is difficult for us to predict when, or if, new products will have a significant impact on our sales. We have seen that consumer applications are often part of special promotional programs by our customers, so sales to those customers will tend to fluctuate with the timing of those programs.

Gross Profit Trends in Fiscal Year 2004 Compared to Fiscal Year 2003

Gross profit margin increased to 31.6% in the current year, compared to 21.3% in fiscal 2003. A major portion of the improvement from the prior year was the fact that the current year included only a minor non-cash charge for obsolescence and write-down of inventory, which amounted to $2.6 million or 6.1% of sales in fiscal 2003. This is further explained in the next paragraph. The remainder of the increase was primarily due to the continuation of our cost reduction efforts that resulted in 15% to 50% per unit cost manufacturing cost reductions in each of our product lines. We have moved most of our assembly production offshore and we have reduced our Dallas, Texas workforce as a result. This has resulted in significantly lower ongoing production costs. Ongoing cost reduction is crucial because of the expected trend towards lower average selling prices noted above.

Additional factors that improved gross margins include increased sales that allow significant fixed manufacturing costs to be spread over additional sales and an improved product mix towards newer products we have developed that have higher margin potential.

In the third quarter of the prior year we changed our marketing strategy to significantly accelerate the migration of low-power component and filter products to new, smaller packages. We did this in response to an abrupt shift in market requirements toward smaller packages. We experienced significant decreases in average selling prices for older-style products in our second and third quarters and saw significant acceptance by customers of new products in smaller packages. As a result, we modified our product line strategy by reallocating resources to support those newer products and by discontinuing selected products. Discontinuation of products reduced by approximately 50% the number of products offered, but reduced sales by less than 1%. The change in strategy and reduction in the number of products offered, as well as other factors, resulted in a $2.6 million non-cash charge related to the write-down of inventory recorded as cost of sales on our statements of operations. Since that time, we have disposed of most of this inventory.

Gross Profit Trends in Fiscal Year 2003 Compared to Fiscal Year 2002

Gross profit margin decreased to 21.3% in fiscal 2003, compared to 24.5% in fiscal 2002. Fiscal 2003 cost of sales was $33.8 million. This included a $2.6 million non-cash charge (6.1% of sales) for obsolescence and write-down of inventory, as explained above. The decrease in gross profit due to the inventory write-down was partially offset by the continuation of cost reduction achieved as a result of our restructuring program. We transitioned volume assembly operations offshore to contract manufacturing companies over a two-year period. By the end of fiscal 2002, this process was essentially complete.

Factors Influencing Gross Margins

Our gross margin continues to be influenced by several factors, some of which are unfavorable and some of which are favorable. These unfavorable factors, some of which are outside our control include, but are not limited to, the following:

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prices within our product lines will continue due to competitive pressures and the fact that newer products, like older products, are reaching volume-based price breaks.

Offsetting these unfavorable factors are other favorable factors that represent our long-term efforts to improve gross margins. These favorable factors include:

The discussion above indicates that there are numerous factors that may have a material impact on our gross margins. Any one of them could cause a significant change in gross margin in either a favorable or unfavorable way, depending on the circumstances. This makes long-term estimates of our gross margin very difficult. However, we believe that gross margins in the first quarter of fiscal 2005 will remain in the low 30% of sales range.

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Research and Development

Research and development expense was approximately $4.5 million, $3.3 million and $3.1 million in fiscal 2004, 2003 and 2002 respectively. Research and development expense in fiscal 2004 increased by 37% compared to a 4% increase in fiscal 2003. The current year increase was due to three factors. First, more focus was given to internal product development, while external product development declined, Engineering Technology Sales declined approximately $467,000, along with approximately $350,000 in Engineering Technology Cost of Sales. Those resources were redirected to our own research and development activities and were therefore part of research and development expense. Second, we made a large investment in consulting and other outside services related to the development of our third generation of Virtual Wire^™ Short-range Radio products, amounting to approximately $600,000. Finally, we increased our overall number of people devoted to research and development, which resulted in increasing the number of new products developed to over 70 in the current year, compared to 50 in fiscal 2003.

We believe that the continued development of our technology and new products is essential to our success and we are committed to increasing our investment in research and development expense over the long term. While we expect our spending related to the completion of the third generation of Virtual Wire^™ Short-range Radio products will wind down, we expect all other research and development expenses to remain the same or increase in absolute dollars over the next several quarters.

Sales and Marketing

Sales and marketing expense was $5.4 million, $4.9 million and $4.8 million in fiscal 2004, 2003 and 2002, respectively. In all three years, sales and marketing expenses were 11% of sales. This was largely the result of changes in sales commission expenses that fluctuated in line with sales levels. Part of our increased expenses have been additional sales application support for our customers, which we plan to do at a measured pace in the future. We expect to incur comparable or slightly higher sales and marketing expenses in absolute dollars over the next several quarters, with the exception of sales commission expenses that will fluctuate in line with sales levels.

General and Administrative

General and administrative expense was $3.0 million, $2.6 million and $2.8 million in fiscal 2004, 2003 and 2002, respectively. General and administrative expenses increased 15% in the current year, compared to a decrease of 7% in fiscal 2003. The increases were related to increased compensation expense and the initial costs of implementing various new regulatory requirements, including the Sarbanes Oxley provisions. We expect general and administrative expenses to remain approximately the same in absolute dollars over the next several quarters. Increased expenses related to the implementation of Sarbanes Oxley may increase spending beyond currently planned levels.

Restructuring and Impairment Expense

In the prior year, we identified additional opportunities to create efficiencies in our Dallas, Texas operations by consolidating our pilot line and wafer fabrication facilities into a building that we had formerly leased. For this and other reasons, we incurred non-cash charges of $1.2 million, which was primarily for equipment and other assets that will no longer be usable in our operations. Included in this charge was $33,000 in costs related to severance of employees. The $1.2 million charge was recorded as restructuring and impairment in our statements of operations. We believe the restructuring and consolidation of our assembly operations is now complete and do not anticipate significant additional restructuring or impairment expense. There was no restructuring or impairment expense in the current year.

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Other Income (Expense)

Other income (expense), primarily interest expense on our bank debt, decreased $269,000 (58%) in the current year and $605,000 (57%) in the prior year. This was primarily due in both years to a lower amount borrowed, as well lower interest rates. We have paid down net bank debt by approximately $4.1 million in the current year and $2.3 million in the prior year. Since our bank debt has been eliminated as of the end of the fiscal year, we expect these expenses will remain low.

Income Tax Expense (Benefit)

In both the current and prior years we recorded small provisions for state income tax and in the current year we also recorded a provision for alternative minimum federal income tax. We expect to record relatively small income tax provisions in future periods. The net alternative minimum federal tax is expected to be approximately 2% of taxable income prior to applying loss carry forwards and other credits.

In fiscal 2001, we fully reserved, in a non-cash charge, all tax benefits that had been recorded prior to that point in accordance with FAS 109. We continue to maintain a full valuation allowance on our deferred tax assets due to our historical losses and a limited history of taxable income. However, we retain the tax benefits involved and we will realize the benefit in future periods to the extent we are profitable. As of the end of the current year, we have income tax carry forwards and other potential tax benefits available to reduce future federal taxable income by approximately $17.3 million as explained in Note 11 to our financial statements. The net operating loss carry forward begins to expire August 31, 2023.

We do not expect to record any significant future federal income tax benefits or expense until the recovery of deferred tax assets is more likely than not.

Income (Loss) per Share

The net income for the current year was $2.2 million, compared to a $3.3 million loss in the prior year and a $442,000 loss for fiscal 2002. Our diluted income per share was $.27 for fiscal 2004, compared to a basic and diluted loss of $.47 per share for fiscal 2003 and $.06 per share for fiscal 2002. The loss in the prior year was primarily due to $3.8 million in non-cash charges to cost of sales for obsolescence and write-down of inventory and to operating expenses for restructuring and impairment expenses as explained above. The improvement in the current year was primarily due to increased sales and increased gross margin on those sales, also as explained above. Over the past several years we have completed a restructuring program aimed at (1) developing new products to increase sales, (2) reducing our manufacturing costs by moving assembly operations offshore and other cost reduction programs, and (3) generating positive operating cash flow to pay down debt and reduce interest expense. These efforts have resulted in a marked improvement in reported results over the past several years.

Fourth Quarter of Fiscal 2004

Unaudited quarterly financial data is presented in Note 14 to the accompanying financial statements.

Sales for the fourth quarter of $12.5 million increased approximately 13%, compared to $11.1 million in the comparable quarter of the prior year. Sales also decreased approximately 8% compared to the previous third quarter. The sales increase in the current quarter compared to the comparable quarter of the prior year was primarily due to a strong 50% or better increase in the number of units sold for three of our four product lines, particularly for satellite radio filters. We have developed new products for each of these product lines over recent years and they continue to grow in market acceptance. The only product line to experience a decrease in the number of units sold was low-power components due to much lower production schedules at our automotive customers. Also offsetting the overall increase in units sold in comparison to the comparable quarter of the prior year was a decrease in the average selling prices of our volume product lines

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ranging from 7% to 50%. See the above discussion under the heading “Product Line Sales Trends” for more details on the impact of average selling prices on our sales and gross margins.

Our sales decrease from the previous quarter was primarily due to an 18% reduction in the number of units sold of low-power components products, particularly to automotive customers as production levels at these customers were much lower. The other three product lines experienced increases in the number of units sold ranging from 5% to 26%. An expected decrease in shipments to filter customers as a result of fewer special promotions was more than offset by an increase in shipments for an application supporting a second satellite radio service provider and for a GPS consumer application. Also contributing to lower sales compared to the previous quarter was a reduction of average selling prices of 8% for Virtual Wire^™ Short-range Radio products and 20% for filter products. The reduction of average selling prices for the other product lines was not significant.

For our first quarter of fiscal 2005, we expect sales to increase 10-12% over the prior year’s first quarter sales of $11.1 million. Consistent with our historical sales cycle, first quarter sales may not exceed fourth quarter sales. Going forward, it is becoming more difficult to predict sales because some of our targeted growth markets often operate on very short lead times and general market conditions remain uncertain. Our lower backlog on increased sales for 2004 underscores this trend. We have made tremendous progress in supporting our customers with quick response times.

Gross profit margin was 32.1% in the fourth quarter, compared to 28.3% for the comparable quarter of the prior year and 32.6% for the previous quarter. The primary reason for the increase in gross margin from the comparable quarter of the prior year was a decrease in per unit manufacturing cost for each of our four product lines that exceeded the impact of the reduction in average selling prices. Also helping margins were increased sales volume and an improvement in product mix towards Virtual Wire^™ Short-range Radio products and Frequency Control Modules from 27% of total sales to 35% of total sales. We expect that gross margin in the first quarter of fiscal 2005 will remain in the low 30% range. We plan on reducing our production rates in the first quarter to offset the impact of an increase in finished goods that occurred in the fourth quarter. This will have a slight negative impact on production costs per unit and therefore margins, as will potential unfavorable changes in product mix.

Operating expenses for the fiscal 2004 fourth quarter were approximately $3.4 million, compared to approximately $2.8 million for the comparable quarter of the prior year and $3.6 million for the previous quarter. The increase in operating expenses from the comparable quarter of the prior year was primarily due to an increase in research and development expense of approximately $400,000, resulting from a greater focus on internal development instead of custom engineering services and expenses related to the development of our third generation of Virtual Wire^™ Short-range Radio products. Sales and marketing expense also increased due to increased sale commissions expense related to increased sales. General and administrative expense increased primarily due to increased compensation expense and increased costs of compliance with new financial reporting regulations. The decrease in operating expenses from the previous quarter resulted primarily from reduced expenses related to the development of our third generation of Virtual Wire^™ Short-range Radio products and lower sales commission expense related to lower sales. We expect that operating expenses will be flat relative to sales the next quarter, except for sales commission expense, which will change in line with sales levels. We intend to continue our investments in research and development to support market requirements in our targeted growth markets over the next year. We also expect that sales commission expense will continue to change in line with sales levels.

Other expense was $44,000 in the fiscal 2004 fourth quarter, compared to $78,000 in the comparable quarter of the prior year and $51,000 in the previous quarter. The decreases were primarily due to lower interest expense resulting from a lower amount borrowed. Since we have paid down our bank debt, we expect other expense to remain at very low levels for fiscal 2005.

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Liquidity

Financing Arrangements

Our banking agreement and its status at the end of the current quarter are described in Note 6 to our Financial Statements included in this report.

Our banking agreement contains financial covenants, some of which become increasingly restrictive over time. We were in compliance with all covenants as of August 31, 2004. Although we believe that we will be able to continue compliance with the covenants, there is no assurance that this will occur. Should there be a covenant violation when we have outstanding borrowings and we are unable to negotiate a waiver or amendment, the maturity of our debt could be accelerated. In that case, other sources of cash would be needed to support our operations. The banking agreement will expire in December 2005.

At August 31, 2004, we maintain access to the revolving line of credit. Our revolving line-of-credit facility loan balance was zero at August 31, 2004, but a loan advance of $6,079,000 was available under our current borrowing base.

Cash Flows

Liquidity at August 31, 2004 consisted primarily of $2.7 million of cash and approximately $6.1 million available under our banking agreement. Net cash provided by our operating activities was $5.0 million in the current year, an increase from $4.5 million in the prior year. The primary reason for increased cash provided by operations was the increase in net income by $5.6 million in fiscal 2004 over the prior year. The current year increase in net income was partially offset by a $4.5 million reduction in non-cash items included in net income. Last year’s non-cash items included $3.8 million of special charges that did not recur this year. In addition, depreciation was approximately $0.9 million lower in fiscal year 2004 as a result of assets reaching the end of their lives and the various fixed asset write downs we have reported.

Working capital used in operations increased by approximately $500,000, primarily because of an increase in trade receivables and inventory, partially offset by an increase in trade payables. These increases in working capital elements were all related to increases in our sales levels. Collection of our receivables on a days-sales-outstanding measurement remained in the mid 50-day range in the current year. The inventory increase occurred mostly in finished goods during our fourth quarter as sales declined more quickly than our production levels. Since we offer our customers shorter lead times than we get from our contractors, volatile sales levels can lead to changes in inventory balances. We plan to reduce our inventory levels in our first quarter of fiscal 2005. We continued to be within payment terms with our vendors in fiscal 2004.

We expect to maintain a positive cash flow from operations for fiscal 2005, as we did in the last three years. We believe continued positive cash flow, as well as access to our credit facilities, will be sufficient to maintain normal operations for the next twelve months.

Cash used in investing activities was $0.5 million in the current year, compared to $2.7 million for the prior year. The reduction was primarily due to reduced capital spending of approximately $0.6 million in the current year compared to $2.9 million in the prior year. The bulk of our capital spending for the prior year was for the purchase of a building that we had formerly leased and improvements to that building. We expect to acquire up to $2.0 million of capital equipment by the end of fiscal 2005, primarily related to the development of new products and new manufacturing processes.

We used $2.0 million in net cash in financing activities in fiscal 2004, nearly the same in fiscal 2003. In the current year, approximately $4.1 million was used to reduce bank borrowings, compared to $2.3 million (net of a $1.1 million mortgage) in the prior year. We raised $2.1 million from sales of stock to employees under various stock programs in the current year, compared to $0.4 million last year.

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As of August 31, 2004, we had approximately $6.1 million of cash availability under our banking agreement based upon the borrowing base. In addition, approximately $1.4 million more may become available under our banking agreement if our borrowing base were to increase sufficiently to support increased borrowing. We are not able to say when or if that will happen because of our inability to see very far into the future due to limited lead times on orders placed by our customers.

While we reported positive operating cash flows for the last thirteen quarters, a reduction in sales or gross margins could occur due to economic or other factors. We believe that cash generated from operations, our cash balances and the amounts available under our credit facility will be sufficient to meet our cash requirements for the next twelve months. If for any reason these sources of funds are not sufficient to meet our requirements, we may be required to raise additional funds. We cannot guarantee that we would be able to obtain additional financing or, if available, that it would be available to us on acceptable terms. Should that happen, there could be a significant adverse impact on our operations.

Contractual Obligations

The following represent our known contractual obligations as of August 31, 2004 (in thousands):

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Index to Financial Statements

Stock Options

(a) Stock Option Program Description

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented personnel and align stockholder and employee interests. We currently have four plans (1999 Plan, 1997 Plan, 1986 Plan and Director Plan) under which we grant stock options to employees, directors and consultants. The options generally vest at a rate of one forty-eighth each month beginning the first day of the month following the date of grant. The exercise price of each option equals the market price of our stock on the date of grant and each option generally expires ten years after the date of grant. The 1986 Plan expired for future grants according to its terms in November 2002. The Director Plan expired for future grants according to its terms in April 2004.

We currently account for our option plans under APB 25 and, accordingly, do not recognize compensation expense for options granted to employees and directors. Options granted to consultants are accounted for under SFAS 123 and are valued using the Black-Scholes model. Compensation expense of those options is recognized over the vesting life of the options, which is aligned with the consulting service life.

We also use the 1997 Plan to grant restricted stock. The grants are considered issued stock when granted and certificates are presented to the grantee as vesting occurs. We record unearned compensation, valued using the Black-Scholes model based on the share price on the date of grant, and expense that compensation over the vesting period.

(b) Distribution and Dilutive Effect of Options

Employee and Executive Option Grants

The following table summarizes the options granted to (a) our employees and (b) our chief executive officer and other four most highly compensated executive officers at August 31, 2004, whose total annual salary and bonus exceeded $100,000 during the fiscal year ended August 31, 2004. This and other information will be reported in our Proxy Statement filed with the Securities and Exchange Commission in connection with our 2005 annual meeting of stockholders. The individuals in category (b) above are referred to in the table below as our Named Executive Officers.

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(c) General Option Information

Summary of Option Activity

The following is a summary of stock option activity for the fiscal years ended August 31, 2004 and 2003:

In-the-Money and Out-of-the-Money Option Information

The following table compares the number of shares subject to option grants with exercise prices below the closing price of our common stock at August 31, 2004 (referred to as “In-the-Money”) with the number of shares subject to option grants with exercise prices equal to or greater than the closing price of our common stock at August 31, 2004 (referred to as “Out-of-the-Money”). The closing price of our common stock at August 31, 2004 was $7.08 per share.

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(d) Executive Options

Options Granted to Named Executive Officers

The following table sets forth a summary of the stock options granted to our Named Executive Officers during the fiscal year ended August 31, 2004. Named Executive Officers are those executive officers described in the table above under the heading “Employee and Executive Option Grants”. The following table does not contemplate status of granted options relative to our current stock price.

The percentage of total options granted to employees is based on an aggregate of 384,000 options granted to our employees, consultants and directors during the year ended August 31, 2004, including our Named Executive Officers. The exercise price per share of each option is equal to the fair market value of the common stock on the date of grant.

The potential realizable value is calculated based on the term of the option at its time of grant (ten years). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option, and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit the stockholder.

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Options Exercises and Remaining Holdings of Named Executive Officers

The following table sets forth information concerning stock options exercised during the fiscal year ended August 31, 2004 and the number of shares of our common stock subject to both exercisable and unexercisable stock options as of August 31, 2004 for each of our Named Executive Officers described in the table above under the heading “Employee Executive Option Grants”. The value of unexercised in-the-money options is based on the fair market value of our common stock as of August 31, 2004, of $7.08 per share, minus the exercise price, multiplied by the number of shares underlying the option.