RF MONOLITHICS INC /DE/ - FORM 10-Q

RF MONOLITHICS INC /DE/ - FORM 10-Q - April 13, 2011

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EX-32.1 - SECTION 906 CERT. - CEO - RF MONOLITHICS INC /DE/	dex321.htm
EX-31.2 - SECTION 302 CERT. - CFO - RF MONOLITHICS INC /DE/	dex312.htm
EX-32.2 - SECTION 906 CERT. - CFO - RF MONOLITHICS INC /DE/	dex322.htm
EX-31.1 - SECTION 302 CERT. - CEO - RF MONOLITHICS INC /DE/	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended February 28, 2011

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

For the transition period from to

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 incorporation of organization)		(I.R.S. Employer Identification)

4441 Sigma Road, Dallas, Texas		75244
(Address of principal executive offices)		(Zip Code)

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

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

10,901,531

Number of shares of the Registrant’s Common Stock, $.001 par value,

outstanding as of March 31, 2011

RF MONOLITHICS, INC.

FORM 10-Q

QUARTER ENDED FEBRUARY 28, 2011

TABLE OF CONTENTS


Item Number		Page

	PART I. FINANCIAL INFORMATION

1.	Condensed Consolidated Financial Statements – Unaudited

	Condensed Consolidated Balance Sheets - Unaudited February 28, 2011 and August 31, 2010		2

	Condensed Consolidated Statements of Operations - Unaudited Three and Six Month Periods Ended February 28, 2011 and 2010		3

	Condensed Consolidated Statements of Cash Flows - Unaudited Six Months Ended February 28, 2011 and 2010		4

	Notes to Condensed Consolidated Financial Statements - Unaudited		5

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

3.	Quantitative and Qualitative Disclosures about Market Risk		28

4.	Controls and Procedures		28

	PART II. OTHER INFORMATION

1.	Legal Proceedings		29

1A.	Risk Factors		29

6.	Exhibits		29

	SIGNATURES

	INDEX TO EXHIBITS

- 1 -

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(In Thousands)


	February 28, 2011			August 31, 2010 (a)
ASSETS

CURRENT ASSETS:
Cash	$	628		$	631
Trade receivables - net		5,747			5,269
Inventories - net		5,727			5,011
Prepaid expenses and other		303			322

Total current assets		12,405			11,233

PROPERTY AND EQUIPMENT - Net		1,364			1,671
GOODWILL		556			556
INTANGIBLES - Net		369			369
OTHER ASSETS - Net		278			381

TOTAL	$	14,972		$	14,210


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current portion of long term debt - bank	$	60		$	60
Capital lease obligations - current portion		18			20
Accounts payable - trade		2,283			2,508
Accrued expenses and other current liabilities		1,058			1,386

Total current liabilities		3,419			3,974

LONG-TERM DEBT - Less current portion:
Long term debt - bank		3,630			2,860
Capital lease obligations		26			35

Total long-term debt		3,656			2,895

DEFERRED TAX LIABILITIES		125			125

Total liabilities		7,200			6,994


STOCKHOLDERS’ EQUITY:
Common stock: 10,888 and 10,726 shares issued		11			11
Additional paid-in capital		51,827			51,649
Common stock warrants		—			86
Treasury stock, - and 36 common shares at cost		—			(227	)
Accumulated deficit		(44,066	)		(44,303	)

Total stockholders’ equity		7,772			7,216

TOTAL	$	14,972		$	14,210

(a)	Derived from audited financial statements.

See notes to condensed consolidated financial statements.

- 2 -

RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(In Thousands, Except Per-Share Amounts)


	Three Months Ended February 28,						Six Months Ended February 28,
	2011			2010			2011			2010
SALES	$	7,587		$	7,887		$	16,099		$	16,340

COST OF SALES		4,858			5,143			10,361			10,844


GROSS PROFIT		2,729			2,744			5,738			5,496

OPERATING EXPENSES:
Research and development		758			769			1,656			1,527
Sales and marketing		1,248			1,092			2,437			2,263
General and administrative		597			589			1,291			1,210

Total operating expenses		2,603			2,450			5,384			5,000


INCOME FROM OPERATIONS		126			294			354			496
OTHER INCOME (EXPENSE):
Interest expense		(59	)		(95	)		(131	)		(370	)
Other		14			(20	)		27			(44	)

Total other expense		(45	)		(115	)		(104	)		(414	)


INCOME BEFORE INCOME TAXES		81			179			250			82
Income tax expense		4			5			13			10


NET INCOME	$	77		$	174		$	237		$	72


INCOME PER SHARE
Basic	$	0.01		$	0.02		$	0.02		$	0.01

Diluted	$	0.01		$	0.02		$	0.02		$	0.01


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		10,828			10,116			10,768			10,078

Diluted		11,302			10,322			11,216			10,156

See notes to condensed consolidated financial statements.

- 3 -

RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In Thousands)


	Six Months Ended February 28,
	2011			2010
OPERATING ACTIVITIES:
Net income	$	237		$	72
Noncash items included in net income:
Depreciation and amortization		425			502
Charge for inventory obsolescence		428			519
Stock-based compensation		200			236
Loss (gain) on disposal of property and equipment		(1	)		41

Changes in operating assets and liabilities:
Trade receivables		(478	)		(358	)
Inventories		(1,144	)		(271	)
Prepaid expenses and other		19			30
Accounts payable - trade		(225	)		(7	)
Accrued expenses and other liabilities		(328	)		(238	)

Net cash provided by (used in) operating activities		(867	)		526


INVESTING ACTIVITIES:
Acquisition of property and equipment		(26	)		(78	)
Proceeds from disposition of property and equipment		6			14
Change in other assets		6			10

Net cash used in investing activities		(14	)		(54	)


FINANCING ACTIVITIES:
Net borrowings (repayments) on bank revolver note		800			(283	)
Repayments of mortgage note		(30	)		(30	)
Repayments of capital lease		(11	)		(21	)
Proceeds from common stock issued-net of tax payments		119			(1	)

Net cash provided by (used in) financing activities		878			(335	)

INCREASE (DECREASE) IN CASH		(3	)		137
CASH:
Beginning of period		631			585

End of period	$	628		$	722

SUPPLEMENTAL INFORMATION:
Interest paid	$	100		$	181

Income taxes paid	$	6		$	4

See notes to condensed consolidated financial statements.

- 4 -

RF MONOLITHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1.	INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments and accruals that, in the opinion of the management of RF Monolithics, Inc., are necessary for a fair presentation of our financial position as of February 28, 2011, the results of operations for the three and six months ended February 28, 2011 and 2010 and cash flows for the six months ended February 28, 2011 and 2010. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended August 31, 2010, filed with the Securities and Exchange Commission.

Operating results for the six months ended February 28, 2011 are not necessarily indicative of the results to be achieved for the full fiscal year ending August 31, 2011.

2.	INVENTORIES

Inventories consist of the following (in thousands):


	February 28, 2011			August 31, 2010

Raw materials and supplies	$	2,930		$	2,699
Work in process		81			46
Finished goods		5,057			4,420

Total gross inventories		8,068			7,165
Less: Inventory reserves		(2,341	)		(2,154	)


Total inventories	$	5,727		$	5,011

3.	CREDIT FACILITIES

Our bank debt as of the dates indicated consists of the following (in thousands):


	February 28, 2011		August 31, 2010

Bank revolving line-of-credit	$	2,900	$	2,100
Mortgage note		790		820

Total		3,690		2,920

Less: Current portion		60		60


Long-term portion	$	3,630	$	2,860

- 5 -

Effective November 30, 2010, our $5 million senior secured credit facility (revolving line-of-credit) agreement with ViewPoint Bank was renewed with many similar terms to our original facility. Advances under the renewed senior credit facility are based on eighty percent of eligible accounts receivable and fifty percent of eligible finished goods inventory, which is subject to a $1 million maximum on eligible finished goods inventory. At February 28, 2011, our revolving line-of-credit facility had a loan availability of $2.1 million determined in accordance with our borrowing base. This senior credit facility has a term of two years and includes quarterly financial covenants that consist of: i) a current ratio of at least 1.0 and ii) a minimum net worth of $5.5 million and certain other non-financial covenants. Substantially all our assets serve as collateral under this credit agreement.

The interest rate on revolving line-of-credit borrowings under our senior credit facility is the higher of the Wall Street Journal Prime Rate plus 2% or the floor rate of 7%. The interest rate on these borrowings was 7% on February 28, 2011. The interest rate on our mortgage note is the higher of the Wall Street Journal Prime Rate plus 1% or the floor rate of 6.5%. The interest rate on this borrowing was 6.5% on February 28, 2011.

4.	STOCK-BASED COMPENSATION PLANS

We have several stock-based compensation plans, which are more fully described in Note 11 in our fiscal year 2010 annual report on Form 10-K. Compensation expense related to stock-based plans recognized for the three months ended February 28, 2011 and 2010 was $105,000 and $116,000 respectively. Compensation expense for such plans recognized for the six months ended February 28, 2011 and 2010 was $200,000 and $236,000 respectively.

Stock Options – There were no stock option grants in the current or prior year. During the six months ended February 28, 2011, options to purchase 185,866 shares of stock were forfeited due to employee terminations and option period expirations. The summary of stock option activity for the six months ended February 28, 2011 follows:


	Six Months Ended February 28, 2011
	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value ($000)
Outstanding at September 1, 2010		978,665		$	3.61
Exercised		(93,080	)	$	1.34
Expired/forfeited		(185,866	)	$	2.87

Outstanding at February 28, 2011		699,719		$	4.11		2.01	$	22

Exercisable at February 28, 2011		699,719		$	4.11		2.01	$	22

The aggregate intrinsic values in the table above are calculated using the market price on February 28, 2011 of $1.61.

- 6 -

Restricted Stock Units – We have switched to restricted stock units, or RSUs, as our primary stock compensation vehicle in lieu of stock options to better match the employees’ perceived benefit with the financial statement cost. Most of our stock compensation expense in the current year relates to RSUs. The following table sets forth the status of our Restricted Stock Unit compensation activity for the six months ended February 28, 2011:


Nonvested Shares	Shares			Weighted- Average Grant- Date Fair Value
Nonvested at August 31, 2010		751,250		$	1.05
Granted		174,956		$	1.37
Vested and issued		(103,779	)	$	1.83
Cancelled		(41,626	)	$	1.24

Nonvested at February 28, 2011		780,801		$	1.01

5.	EARNINGS PER SHARE

Our earnings per share is computed by dividing our net earnings by the weighted average number of outstanding common shares during the period. Our diluted earnings per share is computed by dividing our net earnings by the weighted average number of outstanding common and potentially dilutive shares. Potentially dilutive shares are derived from outstanding stock options and warrants that have an exercise price less than the weighted average market price of our common stock. Any options and warrants with an exercise price greater than the weighted average market price of our common stock are considered antidilutive and are excluded from the computation of diluted earnings per share. In a period of net loss, all outstanding options and warrants are considered antidilutive. The number of common stock options and warrants considered antidilutive and thus excluded from the diluted earnings or loss per share computation for the three and six months ended February 28, 2011 was 612,220 and was 864,258 for the three and six months ended February 28, 2010.

SALES

The following table sets forth the components of our sales and the percentage relationship of the components of sales by segment for the periods indicated (in thousands, except percentage data):


	Amounts								% of Total
	Three Months Ended Ended February 28,				Six Months Ended Ended February 28,				Three Months Ended Ended February 28,						Six Months Ended Ended February 28,
	2011		2010		2011		2010		2011			2010			2011			2010
Segment Sales:
Wireless Solutions Segment	$	3,677	$	4,034	$	7,642	$	8,083		48	%		51	%		47	%		50	%

Wireless Components Segment		3,910		3,853		8,457		8,257		52			49			53			50


Total sales	$	7,587	$	7,887	$	16,099	$	16,340		100	%		100	%		100	%		100	%

International sales were approximately 65% or $4,910 during the current quarter and 60% or $4,694 during the comparable quarter of the prior year. On a six month year to date basis, international sales were approximately 66% or $10,607 during the current year and 59% or $9,569 during the comparable period of the prior year. We consider all product sales with a delivery destination outside of North America to be international sales.

- 7 -

7.	SEGMENT INFORMATION

In the section below entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we describe two lines of business, the Wireless Solutions business and the Wireless Components business. Our strategy is to focus our product and market development efforts and resources on the Wireless Solutions business, which we believe gives us greater potential for both increased sales and gross margin.

Our senior management reviews discrete gross margin information on these two businesses and has made decisions on allocation of resources based on this information and our strategy. Most of our research, selling, general and administrative and restructuring activities for both segments are managed on a consolidated basis. Therefore, we do not have discrete segment information for operating expenses and many balance sheet accounts. The information we are presenting below represents the information we have readily available to us.

As a result of the shared administrative services reported separately, the segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. There were no intersegment sales.

- 8 -

Information concerning the operations and assets in these reportable segments is as follows (in thousands):


	Three Months						Six Months
	Ended February 28,						Ended February 28,
	2011			2010			2011			2010
Net Sales:

Wireless Solutions Group	$	3,677		$	4,034		$	7,642		$	8,083

Wireless Components Group		3,910			3,853			8,457			8,257


Total	$	7,587		$	7,887		$	16,099		$	16,340

Gross Profit:

Wireless Solutions Group	$	1,486		$	1,665		$	3,069		$	3,332

Wireless Components Group		1,243			1,079			2,669			2,164


Total	$	2,729		$	2,744		$	5,738		$	5,496

Operating Expenses (not allocated to segments):

Research and development		758			769			1,656			1,527

Sales and marketing		1,248			1,092			2,437			2,263

General and administrative		597			589			1,291			1,210


Income from operations	$	126		$	294		$	354		$	496


Gross Profit percent to sales:

Wireless Solutions Group		40.4	%		41.3	%		40.2	%		41.2	%

Wireless Components Group		31.8	%		28.0	%		31.6	%		26.2	%

Total		36.0	%		34.8	%		35.6	%		33.6	%

	February 28, 2011			August 31, 2010
Segment assets:
Wireless Solutions Group	$	7,436		$	6,481
Wireless Components Group		4,976			4,747
Corporate and unallocated		2,560			2,982


Total	$	14,972		$	14,210

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8.	LEGAL PROCEEDINGS

On December 3, 2010, the arbitrator of our dispute with CMS Liquidating Company (“CMS”) made its final written determination, ruling in favor of our position that no payments are due CMS under an Earn Out Agreement entered into in connection with the acquisition of substantially all the assets of Caver Morehead, Inc. in September 2006. The arbitrator also determined that RFM is entitled to reimbursement of certain legal and other expenses we incurred in defending our position. We have not recognized any potential benefits from this award in our unaudited Condensed Consolidated Financial Statements.

9.	FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash, accounts receivable, accounts payable and debt. The estimated fair value of cash, accounts receivable and accounts payable approximate their carrying amounts due to the relatively short period to maturity of these instruments. The estimated fair value of all debt as of February 28, 2011 and 2010 approximated the carrying value since the loans incur interest at a variable rate.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion may be understood more fully by reference to the financial statements, notes to the financial statements, and management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended August 31, 2010, filed with the Securities and Exchange Commission.

General

RF Monolithics, Inc., or RFM, was organized in 1979 as a Texas corporation and converted to a Delaware corporation in 1994. We design, develop, manufacture and market solutions-driven and technology-enabled wireless connectivity products for a broad range of wireless applications – from individual standard and custom components to modules for comprehensive industrial wireless sensor networks and machine-to-machine, or M2M, technology. We have two business segments—Wireless Solutions and Wireless Components.

Our Wireless Solutions segment includes short-range radios based on surface acoustic wave, or SAW, and radio frequency integrated circuit, or RFIC, technologies; RF module products; and stand alone radio systems. Our goal is to provide customers with a wide variety of alternative products for their wireless network applications. Our product offerings include miniature radios that are very short range and ultra low power. We also market standard and custom RF radio modules as well as stand alone radio systems that are packaged radio and network gateway products that possess the capacity for longer range and increased data transmission rates.

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

Executive Summary

The market place profiles in which our two businesses operate are materially distinct from one another. The Wireless Components business is characterized by a very competitive environment that has declining average selling prices and frequent product innovation. This market includes several large competitors who have superior financial and other resources. We have competed successfully for over 30 years by cultivating close relationships with a diverse group of customers who offer varied applications and serve diverse markets and geographic locations. In contrast, our Wireless Solutions business is characterized as a developing market with only a generalized definition of products, services, markets and applications. Competition is not well defined and typically consists of much smaller competitors, many of whom are similar in size and resources to us, or even smaller.

- 10 -

Our strengths benefiting us in both markets include: (a) our ability to identify and capitalize on trends in a rapidly growing wireless marketplace; (b) our capability to develop products that have superior technical characteristics; (c) our expertise to assist our customers in incorporating our products into their applications; (d) our sales channels to gain access to customers and (e) our demonstrated ability to have high quality cost-effective products manufactured in volume with acceptable lead times. Our manufacturing capabilities consist mostly of our relationships with several domestic and offshore contractors.

We have focused our product and market development efforts on products for our Wireless Solutions segment, which we feel offers a technical edge and normally generates a greater gross margin. Our Wireless Components segment, which historically was our core business, has generally declined in sales due to decreased average selling prices in several intensely competitive markets and due to our loss of market share to competing technologies. This did not occur this year due to some recovery in the automotive market, but this has been a trend for several years.

A key factor in our sales performance is expected to be successfully developing and selling new products in volumes adequate to offset the decline in selling price and unit sales volumes of our older products. Two key factors in our gross margin performance are expected to be reducing our costs (through innovation, assisting our contractors to identify lower manufacturing costs, and increased volume) and improving our product mix towards higher margin products to offset expected declines in average selling prices.

With the exception of the current period, we generally have had positive operating cash flows in recent periods, including fiscal 2010. See the section below entitled “Liquidity” for discussion of cash flows for the current year. Our ability to maintain positive cash flows is dependent on our success in controlling our expenses in relation to our sales. See the section below entitled “Impact of Economic Conditions and Our Response” for discussion of our cost control program. In any case, the amount of positive cash flow may decrease or occasionally turn negative due to the need for increased working capital, fluctuating revenues, declining margins, escalating operating costs, or increased spending to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.

Impact of Economic Conditions and Our Response

The world-wide economic recession had a material impact on our sales and operations during fiscal 2009 and fiscal 2010. Fiscal 2009 sales declined 41% from fiscal 2008. While sales recovered somewhat in fiscal 2010 with a 5% increase, they still remain significantly below fiscal 2008 levels. This resulted in significant losses during fiscal 2009. We reacted with a series of cost savings measures and we have had generally improved results since then. These cost savings measures included reductions in head count and in salaries and various benefit programs. The salary reductions were restored in stages during fiscal 2010.

We believe that our operating results for the last seven quarters demonstrate that we have taken appropriate actions to control expenses in our business. We reported net income for six of the last seven quarters and only our decision to obtain a new lender prevented us from reporting net income for the first quarter of fiscal 2010 (see the section below entitled “Financing Arrangements” for further discussion of our banking arrangements).

Demand within the electronics industry fluctuates widely over short periods. This condition is a key factor that influences our sales performance. We believe our markets are in a period of relatively stable overall demand, although they have not yet returned to prior levels.

- 11 -

Because our core businesses is now generating operating income at much lower sales levels than prior periods, we have demonstrated the ability to match expense levels with expected revenue. While our cost reductions have resulted in a much lower cost business model, current economic conditions make forecasting future profitability very difficult, and there can be no assurance that we will achieve profitability in the future.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. We described our most significant accounting policies, which we believe are the most critical to fully understanding and evaluating reported financial results, in our Annual Report filed with the Securities and Exchange Commission on November 22, 2010 on Form 10-K. Those policies continue to be our most critical accounting policies for the period covered by this filing.

Results of Operations

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

•

The current quarter and current year-to-date period (current year), each ended February 28, 2011, of the fiscal year ending August 31, 2011, in comparison to the comparable quarter of the prior year (comparable quarter) and prior year-to-date period (prior year), each ended February 28, 2010 of the fiscal year ended August 31, 2010.

•

Certain comparisons with the three months ended November 30, 2010 (previous quarter) are provided where we believe it is useful to the understanding of trends.

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

- 12 -

The following table illustrates operating results for the four quarters of fiscal 2010 and the first two quarters of fiscal 2011 (in thousands, except percentage data). These figures will be used when discussing trends in the following section.


	Fiscal 2010 Quarter Ended												Fiscal 2011 Qtr. Ended
	Nov. 30			Feb. 28			May 31			Aug. 31			Nov. 30			Feb. 28
Sales by segment:
Wireless Solutions Segment	$	4,049		$	4,034		$	4,377		$	4,005		$	3,965		$	3,677
Wireless Components Segment		4,404			3,853			4,344			4,554			4,547			3,910

Total Sales		8,453			7,887			8,721			8,559			8,512			7,587
Sales %-Wireless Solutions		48	%		51	%		50	%		47	%		47	%		48	%
Sales %-Wireless Components		52	%		49	%		50	%		53	%		53	%		52	%
Cost of sales		5,701			5,143			5,777			5,729			5,503			4,858


Gross profit		2,752			2,744			2,944			2,830			3,009			2,729
% of sales-Wireless Solutions		41.2	%		41.3	%		41.7	%		34.1	%		39.9	%		40.4	%
% of sales-Wireless Components		24.6	%		28.0	%		25.8	%		32.1	%		31.4	%		31.8	%
% of sales-Total		32.6	%		34.8	%		33.8	%		33.1	%		35.4	%		36.0	%

Operating expenses:
Research and development		758			769			808			906			898			758
Sales and marketing		1,171			1,092			1,217			1,340			1,189			1,248
General and administrative		621			589			589			490			694			597

Total		2,550			2,450			2,614			2,736			2,781			2,603

Income from operations		202			294			330			94			228			126
Other expense, net		(299	)		(115	)		(106	)		(86	)		(59	)		(45	)


Income (loss) before income tax		(97	)		179			224			8			169			81
Income tax expense (benefit)		5			5			5			(13	)		9			4


Net Income (loss)	$	(102	)	$	174		$	219		$	21		$	160		$	77

- 13 -

The following table sets forth, for the three and six months ended February 28, 2011 and 2010, (a) the percentage relationship of certain items from our statements of operations to sales and (b) the percentage change in these items between the current period and the comparable period of the prior year:


	Percentage of Total Sales												Percentage Change From
	Three Months Ended Ended February 28,						Six Months Ended Ended February 28,						Three Months Ended February			Six Months Ended February
	2011			2010			2011			2010			2010 to 2011			2010 to 2011
Sales		100	%		100	%		100	%		100	%		(4	)%		(2	)%
Cost of sales		64			65			64			66			(6	)		(5	)

Gross profit		36			35			36			34			(1	)		4

Research and development		10			10			10			9			(1	)		8
Sales and marketing		16			14			15			14			14			8
General and administrative		8			7			8			8			1			7

Total operating expenses		34			31			33			31			6			8

Income from operations		2			4			3			3			(57	)		(29	)
Other expense, net		(1	)		(2	)		(1	)		(2	)		(61	)		(75	)

Income before income taxes		1			2			2			1			(55	)		205
Income tax expense		0			0			0			0			(20	)		30

Net income		1	%		2	%		2	%		1	%		(56	)%		229	%

Sales

Sales by Market Application

The following table compares market sales for the current quarter to the comparable quarter of the prior year and to the previous quarter as well as the current year to date and the prior year to date (in thousands). These figures will be used when discussing trends in the following paragraphs.


	Three Months Ended						Six Months Ended
	February 28,		February 28,		November 30,		February 28,		February 28,
	2011		2010		2010		2011		2010
Market sales:
Industrial	$	2,652	$	2,651	$	2,784	$	5,436	$	4,939
Medical		1,078		1,206		1,047		2,125		2,812
Automotive		2,281		2,654		2,888		5,169		5,716
Consumer		772		760		630		1,402		1,379
Telecommunications		472		432		693		1,165		1,083
Other		332		184		470		802		411

Total sales	$	7,587	$	7,887	$	8,512	$	16,099	$	16,340

Products sold to the industrial and medical markets are primarily Wireless Solutions segment products and products sold to the automotive, consumer, telecommunications and other markets are primarily Wireless Components segment products.

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

Total sales at $7.6 million decreased 4% in the current quarter compared to the $7.9 million for the comparable quarter of the prior year and decreased 11% from the $8.5 million in the previous quarter. Various fluctuations in sales occurred for our segments, most of which were related to changing production schedules for major customers.

The decrease in sales from the comparable quarter of the prior year was because the 9% reduction in sales for our Wireless Solutions segment sales was greater than the 2% increase in sales for our Wireless Component segment sales. The decrease in sales from the comparable quarter for Wireless Solutions segment products resulted from a decrease in the number of units shipped, primarily for customers in the medical market. Overall sales to the medical market declined by 11%, mostly due to a decrease in requirements from several major customers that were reducing inventories. The increase in sales for Wireless Component products resulted from an increase in the number of units shipped, including sales to customers in telecom and “other” markets, including relatively high margin, high reliability (“HI-REL”) products. Sales increased to telecom and “other” markets by 9% and 80%, respectively. The increases in those two markets reflected economic recovery and specific programs that occurred in those markets. Partially offsetting the increase in sales of Wireless Component products in these two markets was a 14% decrease in sales to automotive markets, primarily due to lower production schedules at several of our major customers.

The 11% decrease in sales from the previous quarter was due to a decrease in the number of units shipped by both of our segments, primarily related to the seasonal effect of fewer work days at customer factories due to extended holiday periods both in the US and around the world. This was similar to the 7% reduction in sales from our first quarter to our second quarter that occurred in the last fiscal year and historically has often occurred. This is most dramatically seen in the 21% reduction in sales to automotive customers as holiday production schedules were seasonally reduced at North American automotive factories. Wireless Component segment sales decreased by 15% and Wireless Solutions segment sales decreased 7%, mostly due to this seasonal variation.

Most of these changes were largely due to changes in production schedules at major customers. Our major customers for many products are OEM customers and contract manufacturers and distributors. These customers order product based upon their own production schedules or the production schedules requested by their customers, which have historically shown considerable volatility.

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

We have expended substantial resources in developing new products. However, the timing of any sales resulting from new products is dependent upon our customers’ product introduction cycles. Sales to OEM customers are particularly dependent on our customers’ success in their market development programs. For instance, in the past year, we have seen continued delays in customer adoption of our newer products in the machine-to-machine (“M2M”) market due to delays in specific customer programs. It is difficult for us to predict when, or if, new products will have a significant impact on our sales.

We have significant business in Japan, both with customers and suppliers. We were saddened by the disaster that occurred there and are trying to help in any way that we can. One of our contract manufacturers is located in Japan and, as reported, those facilities sustained no significant damage and production has resumed. While we do not currently expect to see a material adverse effect as a result of those unfortunate events, though the end result will depend on how soon a full level of logistical support and production is achieved. Additionally, we continue to watch for any indirect effects this disaster may have on the supply chains of various markets.

- 15 -

We have experienced sudden increases in demand in the past, which have strained the manufacturing capabilities of our offshore contractors and their raw material suppliers. We have seen lead times lengthen for key raw materials such as packages and integrated circuits. In addition, new products sometimes require manufacturing processes different than those to which we currently have access. Our assembly contractors may not be able to procure sufficient raw materials, or we may not be able to increase the manufacturing capacity of our assembly contractors 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. We believe we are currently in a period of increased raw material lead times that may negatively impact our near term sales prospects. We have mitigated this risk somewhat by increasing inventory on a selective basis.

Year-to-Date Sales Trends

On a year-to-date basis, sales of $16.1 million were almost the same as the $16.3 million for the prior year. Wireless Component sales of $8.5 million increased 2% from the prior year and Wireless Solutions segment sales of $7.6 million decreased 6% from the prior year. Increases in sales to our different markets included a 95% increase in sales to “other” markets (primarily government), 10% for the industrial market, 8% for the telecommunications market and 2% to the consumer market. These increases were due to an increased number of units shipped, reflecting both economic recoveries in the markets served and some penetration of our newer products. The decreases included 24% to the medical market and 10% for the automotive market. These decreases were a result of a decrease in the number of units shipped. We believe the decrease in sales to the medical market were largely a result of efforts on the part of several major customers to reduce inventory. The decrease in automotive sales reflected lower production schedules from the ramp up levels of the prior year.

The Wireless Component sales increase of 2% was due to a 10% increase in the number of units shipped, as several markets experienced recovery and there was greater penetration of crystal based products. Increases occurred in the telecom, consumer and other markets, including higher margin frequency control modules and HI-REL filters. This was offset by the reduction in sales to the automotive market. The increase in the number of units shipped for Wireless Component products was partially offset by a 7% reduction in average selling price, which was not unusual for these very competitive products.

The Wireless Solutions segment 6% sales decrease was due to a 28% decrease in the number of units shipped, primarily for relatively low-priced Virtual Wire^® products to customers in the medical market that were reducing their inventory levels. We have seen evidence in recent weeks that this inventory correction may be slowing down, but cannot project when sales levels for these products will return to historical levels. There have also been some program delays that will push out new programs that we are designed into. We have lost market share for a particular automotive program for which Virtual Wire^® products are being replaced with an alternative technology. A positive trend is the recovery of the industrial market, particularly for relatively high-priced RF modules, particularly for some medical applications and industrial surveying and telemetry products, which had been adversely affected by a low level of construction activity a year ago. The reduction in the number of units shipped was partially offset by a 32% increase in average selling prices for this segment. The increase in average selling prices for the Wireless Solutions segment resulted from the fact that sales of relatively high-priced RF modules increased, while sales of relatively low-priced Virtual Wire^® and RFIC Short-range Radio products decreased, resulting in the overall increase in average selling prices. Also, within the RF module product line there was an increase in average selling prices resulting from an increase in sales for relatively high-priced custom units, while sales decreased for relatively low-priced standard units.

- 16 -

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

Wireless Components Segment

Wireless Components products sales at $3.9 million increased 2% from the prior year, but decreased 14% from the previous quarter. The increase in sales in comparison to the comparable quarter of the prior year was primarily due to an 11% increase in the number of units sold, partially offset by an 8% decrease in average selling prices. Wireless Component products are largely sold to the automotive, consumer, telecommunications and “other” markets. In comparison to the comparable quarter of the prior year, there was an increase in sales of 80% in the “other” market, as well as increases of 9% and 2% in the telecommunications and consumer markets, respectively, due to a specific HI-REL filter program and continued economic recovery. Partially offsetting this was a 14% decrease in sales to automotive markets, as those markets were ramping up North American production levels a year ago and have lower production levels this year. The reduction in selling prices reflects both competitive conditions in those markets and increased penetration of crystal based products which normally have lower average selling prices.

We believe the 14% decrease in sales for Wireless Component products in comparison to the previous quarter was due to a seasonal reduction in production levels at major customers. Sales were lower in almost all of the markets for these products, including more than 20% reductions for the automotive, telecommunications and other markets. The number of units shipped decreased by 15%. The automotive, consumer and telecom markets have all shown significant volatility in recent years, as end customers change their production schedules for those markets. This includes sales for our primary application for the automotive and consumer markets, the satellite radio application. We provide filters for satellite radios that provide services from Sirius XM Radio, Inc. (NASDAQGS: SIRI), which has announced that its customer base had increased to 20 million subscriptions. In the previous quarter we announced that we had shipped over 100 million filters into this application. The supply chain for North American automotive production has been subject to volatile changes in production levels and inventory corrections in recent quarters, resulting in both quarterly increases and decreases. We expect the volatility of sales to automotive, consumer and telecom markets to continue. Average selling prices for these products actually increased 1%, due to product shifts within the segment towards higher priced products, rather than any overall reduction in competitive pressures.

Wireless Solutions Segment

Wireless Solutions products sales at $3.7 million decreased 9% from the prior year and 7% from the previous quarter. The decreases in sales in comparison to the comparable quarter of the prior year and the previous quarter were both due to a decrease in the number of units sold of 36% and 20%, respectively. Sales for relatively low-priced Virtual Wire^® products were adversely affected by reduced production schedules for several major customers and in medical, industrial, automotive and consumer applications. These major customers are OEM customers and contract manufacturers and distributors. These customers have historically shown considerable volatility. In addition, some major customers in medical markets were trying to reduce inventory levels, so their requirements were very low.

Partially offsetting the decease in the number of units shipped in comparison to the comparable quarter of the prior year was a 42% increase in average selling prices for Wireless Solutions products. This resulted from a product mix shift in which there was a significant increase in the number of units shipped of relatively high priced custom RF modules to the industrial and medical markets, combined with the aforementioned decrease in relatively low-priced Virtual Wire^® products. There was not a change in fundamental pricing conditions for these products, some of which remain very competitive. The markets for RF Modules were at very depressed levels a year ago due to economic conditions, including surveying and telemetry products, which had been adversely affected by a low level of construction activity. Our strategy to launch products for the sensor network portion of the M2M market is focused on various kinds of RF modules and supporting products.

- 17 -

The 6% decrease in sales of Wireless Solutions products relative to the previous first quarter had many of the characteristics of the decrease in comparison to the comparable quarter of the prior year. There was a 19% reduction in the number of units shipped, primarily for relatively low-priced Virtual Wire^® products partially offset by a 15% increase in average selling prices resulting from a product mix shift towards relatively high-priced RF Module sales. The decrease in number of units shipped of Virtual Wire^® products resulted both from a seasonal reduction in sales to major customers and the ongoing effects of the effort on the part of medical customers to reduce inventory levels.

The increase in current quarter Wireless Components segment sales in comparison to the comparable quarter of the prior year and decrease in Wireless Solutions sales resulted in the Wireless Solutions segment decreasing as a percentage of total sales from 51% in the comparable quarter of the prior year to 48% in the current quarter. This was an unfavorable product mix shift from a gross margin standpoint. The ratio of Wireless Solutions sales did increase slightly from the previous quarter, when they were 47% of total sales.

We have experienced a long-term trend of lower sales for Wireless Component segment products, including for some of our mature products, both due to a trend towards lower average selling prices and continued conversion of customers to alternative technologies. Our strategy has been to grow our Wireless Solutions segment to offset an expected long-term decline in the Wireless Components segment. In recent years, we have invested considerable resources in product and marketing development to support our strategic plan for the Wireless Solutions segment. A key part of our Wireless Solutions strategy is focused on a potential multi-billion dollar market for the sensor modem portion of the M2M market. We are not certain when, if ever, new products developed for this market will have a significant additive effect on future sales. An important consideration in our decision to expand resources in the Wireless Solutions segment was the increased potential gross margin these products offer due to their higher technical content. Our total sales on a company-wide basis will likely expand only if the anticipated growth in Wireless Solutions sales exceeds the anticipated decline in sales for our Wireless Components products.

Changes in Average Selling Prices

We compete in very price-competitive markets (particularly those for the Wireless Components group, such as the automotive and satellite radio markets), in which customers require decreased prices over time to retain their business. In addition, our customers expect economies of scale to result in lower pricing as new products ramp up in volume. For instance, our Wireless Component products segment experienced a decline in average selling prices of 7% of sales on a year-to-date basis, despite an improvement in product mix. The Virtual Wire^® product line also experienced a 3% decline in average selling prices on a year-to-date basis. A portion of this decrease was a product mix shift within the product lines, including a large increase in crystal based products. The impact of reductions in average selling price due to this product mix effect tend to be at least partially offset by differences in material costs, as the higher-priced products come in larger, more expensive packages. Wireless Components products experienced a 1% increase in average selling prices compared to the previous quarter, due to shifts in product mix, rather than any change in market conditions.

In contrast, in the Wireless Solutions segment various shifts of product mix resulted in an increase in average selling prices of over 42% in comparison to the comparable quarter of the prior year and 15% compared to the previous quarter. In both cases, the sales of relatively high-priced RF modules increased, while sales of relatively low-priced Virtual Wire^® products decreased, resulting in the overall increase in average selling prices. Also, within the RF module product line there was an increase in average selling prices resulting from an increase in sales for relatively high-priced custom units, while sales decreased for relatively low-priced standard units. Normally an increase in average selling price also results in an increase in material costs, as they involve higher cost products. Over the long term, we would expect there to be a trend towards lower average selling prices for Wireless Solutions products because we are introducing products that are targeted at lower price points and higher sales volumes, including recently announced products, as well as a series of RFIC products. However, changes in product mix reflecting relatively more sales of higher-priced products such as medical products may from time to time offset any negative impact on average selling prices for other products.

- 18 -

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

Other Sales Trends

The following table provides additional data concerning our sales:


	Percentage of Sales Revenue
	Current Quarter			Comparable Quarter			Previous Quarter
Sales to top five customers		43	%		44	%		44	%
Distribution sales		35	%		35	%		36	%
Number of customers with 10% or more sales		One			Two			One
Sales for 10% or more customers		17	%		25	%		21	%
International sales		65	%		61	%		61	%

Current quarter sales in most of these categories are similar to prior periods. An exception was that there were two customers with 10% or more of our sales a year ago, but in the two most recent periods there was only one such customer. The increase in international sales in the current quarter in comparison to the prior year was primarily due to a major customer changing its shipping location out of its North America location to an international location.

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. International sales are denominated primarily in U.S. currency, although some European customers require that we price our sales 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 and anticipate that international sales will continue to represent a significant portion of our business. However, international 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.

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Gross Profit

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

The current quarter gross profit was $2.7 million, which was the same as the gross profit for the comparable quarter of the prior year on lower sales due to an increase in gross margin as a percentage of sales. Current quarter gross profit decreased from the $3.0 million in the previous quarter, resulting from lower sales with a slightly higher gross margin.

The current quarter gross margin of 36.0% increased 120 basis points from 34.8% in the comparable quarter of the prior year and 60 basis points from 35.4% in the previous quarter. The primary reason for the increase from the previous quarter was an improvement in product mix toward relatively high margin products such as HI-REL filters and frequency control modules within our Wireless Component segment. The gross margin for this segment increased from 28.0% in the comparable quarter of the prior year to 31.4% in the previous quarter to 31.8% in the current quarter. The improvement in product mix was part of the overall increase in sales to telecommunications and “other” markets by 9% and 80%, respectively.

The gross margin for our Wireless Solutions segment, on the other hand, decreased from 41.3% in the comparable quarter of the prior year to 40.4% in the current quarter. This was also primarily due to a change in product mix, in this case related to the overall decrease in sales to the medical market of 11%. The gross margins of the Wireless Solutions segment did increase slightly from the previous quarter, however, from 39.9% to 40.4%, as sales to the medical market also increased by 3%.

Another factor improving gross margins in comparison to both periods was a reduction in overhead costs. Overhead costs include the cost of our staff that plans our operations and manages our contract manufacturing network and other relatively fixed costs such as depreciation. We have been reducing these costs for several years by moving production offshore and by other methods. The cost of non-cash charges for obsolescence and write-downs of inventory are also considered overhead costs. These costs were reduced in this quarter to $153,000, compared to $279,000 in the comparable quarter of the prior year and $275,000 in the previous quarter. There was a lower amount of slow moving inventory in the quarter, as well as less reserve required for quality issues. In addition, an increase in inventory levels contributed to a decrease in overhead cost of sales. These effects, as well as the favorable product mix, resulted in overhead cost as a percentage of sales to be lower at 10.4% of sales this quarter, compared to 10.6% in the comparable quarter of the prior year and 11.9% in the previous quarter.

An element in our strategy to increase gross margin is to increase sales volume in order to allocate a significant amount of fixed overhead costs over a larger amount of sales. Sales volume in fact was a negative factor in the current quarter, particularly in comparison to the previous quarter, since overall sales declined. While our long-term plan is to increase sales volumes to accomplish this volume effect, there can be no assurance that we can do this in future periods. We believe the effects of sales volume will continue to have a very significant impact on future gross margins.

Another strategy to improve gross margins is to focus our product and market development efforts on products that have higher potential gross margins, primarily the Wireless Solutions segment products. This does not mean that we will avoid taking advantage of opportunities to grow our Wireless Component sales if extensive additional resources are not required. However, this does not always occur. Changes in product mix between our segments in fact had a negative impact on gross margins in this quarter in comparison to the comparable quarter of the prior year, since Wireless Solutions sales decreased from 51% of total sales to 48%. The shift in product mix was slightly positive in comparison to the previous quarter in that Wireless Solutions sales increased from 47% to 48%. We cannot assure that our strategy to focus on Wireless Solutions products to increase margins will be achieved in future periods.

- 20 -

In recent quarters, we have experienced shifts in product mix between our product segments and even within them between specific products that significantly affect gross margins. We expect that this volatility in product mix both between our segments and within them will continue to cause gross margins to fluctuate, sometimes very significantly.

As discussed above in the sales section, we normally experience a reduction in average selling prices in virtually all of our volume product lines, a trend which we expect will continue due to competitive pressures and the fact that we are introducing newer products that are targeted at lower price points and higher sales volumes. Sometimes a shift in product mix within a product line can cause a shift in average selling price that is at least partially offset by corresponding changes in related costs per unit. This occurred for several product lines in the current quarter. However, lower average selling prices are generally a negative factor for gross margins and we expect the trend towards lower average selling prices will continue.

Besides our long-term effort to improve gross margin through improved product mix and increased sales volume, our key strategy for dealing with decreased average selling prices is to reduce our per unit manufacturing costs. We devote considerable resources to obtaining purchasing savings and in working with our suppliers and outside contractors to improve yields, increase productivity and to improve processes that result in lower costs. Historically we have been able to achieve per unit cost reductions on a year-over-year basis. This was achieved for most of our volume product lines in the current quarter compared to the comparable quarter of the prior year, including the impact of lower overhead costs per unit, as explained above in this section. We were successful offsetting the selling price reductions mentioned in the previous section with unit cost reductions for most of our product lines in the current quarter.

Year-to-Date Gross Profit Trends for Current Year Compared to the Prior Year

The current year-to-date gross margin was 35.6%, which is an increase from 33.6% in the prior year. This primarily was a result of favorable shifts within the Wireless Component segment. Gross margins for that segment were 31.6% in the current year, compared to 26.2% for the prior year. The shift in product mix towards higher margin frequency control modules and HI-REL filters was the primary reason for this. Gross margins for the Wireless Solutions segment, on the other hand, decreased from 41.2% last year to 40.2%, primarily because of an overall reduction in sales to the medical market of 24%. The reduction in overhead costs benefited both segments. The product mix shift between our segments was unfavorable, with Wireless Solutions sales decreasing from 49% of total sales to 47%.

Our strategies to improve product mix, increase sales volume and reduce per unit manufacturing costs mentioned in the previous section are intended to offset negative factors impacting our gross margin. We continue to target additional cost reductions. However, there is no assurance that margins will improve or even be maintained in future periods.

Research and Development Expenses

Research and development expenses were $0.8 million in the current quarter, compared to $0.8 million in the comparable quarter of the prior year and $0.9 million in the previous quarter. The decrease of 16% from the previous quarter was primarily a result of a head count reduction and its related severance cost that occurred in the previous quarter that did not recur. Salary rates have been restored to former levels for several quarters now.

Research and development expenses were 10% of sales in the current quarter, the same as the comparable quarter of the prior year. We believe that we have retained the core engineering capabilities we need to continue to develop products and service our customers, and that the continued development of our technology and new products is essential to our growth and success. We believe we have sufficient resources to support our growth strategy for the Wireless Solutions segment and adequate support to maintain our Wireless Component segment. Currently our focus is on developing new RF modules and crystal based products for a variety of applications.

- 21 -

Year-to-date research and development expenses were $1.7 million compared to $1.5 million in the prior year. The 8% increase was primarily due to increases in salary related items, including restoration of salary rates to former levels, severance costs and employee benefits.

Going forward, in the near term we expect to incur similar or slightly increased research and development expenses from the levels we incurred in our current quarter.

Sales and Marketing Expenses

Current quarter sales and marketing expenses were $1.2 million compared to $1.1 million in the comparable quarter of the prior year and $1.2 million in the previous quarter. This 14% increase from the comparable quarter of the prior year was primarily a result of increased salary related costs resulting from a restoration of salaries, some increase in headcount to promote sales growth and our awareness campaign.

Sales and marketing expenses were 16% of sales in the current quarter, compared to 14% in the comparable quarter of the prior year. The increase was primarily due to the increase in expense compared to approximately the same sales level. We continue to improve our sales channels by adding or changing sales representative firms and distributors. We intend to pursue increased sales aggressively in future periods, particularly for Wireless Solutions products. We believe that the greater technical content of the Wireless Solutions segment and our growth strategy requires the current level of sales and marketing expenses, at least for the foreseeable future.

Year-to-date sales and marketing expenses were $2.4 million compared to $2.3 million for the comparable year-to-date period. This 8% decrease was primarily due to increased salary related costs resulting from a restoration of salaries, some increase in headcount to promote sales growth and our awareness campaign.

Going forward, in the near term we expect to incur slightly increased sales and marketing expenses from the levels we incurred in our current quarter, except for sales commission expense which will fluctuate in line with sales levels and product mix.

General and Administrative Expenses

General and administrative expenses were $0.6 million for the current quarter, compared to $0.6 million for the comparable quarter of the prior year and $0.7 million in the previous quarter. This 14% decrease from the prior quarter was primarily a result of lower professional fees, including lower legal costs. These expenses were particularly high in the previous quarter due to additional legal expenses related to a successful arbitration that occurred then.

General and administrative expenses were 8% of sales in the current quarter, compared to 7% in the comparable quarter of the prior year and 8% in the previous quarter. The increase from the prior year was due to the decrease in sales at the same expense level. We have significant remaining fixed costs related to managing the business and fulfilling our obligations as a public company.

Year-to-date general and administrative expenses were $1.3 million for the current year, compared to $1.2 million for the prior year year-to-date period. The net 7% increase in expense primarily resulted from the increase in legal expense associated with the arbitration and a restoration of salary rates to former levels.

Going forward, in the near term we expect to incur similar general and administrative expenses from the levels we incurred in our current quarter.

- 22 -

Total Operating Expenses

Operating expenses in total were $2.6 million in the current quarter, compared to $2.45 million in the comparable quarter of the prior year and $2.8 million in the previous quarter. This represented a 6% increase from the comparable quarter of the prior year and a 6% decrease from the previous quarter. The largest increases from the prior year were salary related items related to restoration of salary levels and the awareness campaign. The largest decreases from the previous quarter were an absence of severance costs and decreased legal expenses. Operating expenses were 34% of sales in the current quarter, compared to 31% in the comparable quarter of the prior year and 33% in the previous quarter. Operating expenses increased in comparison to last year on almost the same amount of sales.

Year-to-date operating expenses in total were $5.4 million for the current year, compared to $5.0 million for the comparable year-to-date period. This 8% increase was primarily due to a restoration of salaries and the awareness campaign. Operating expenses were 33% of sales on a year-to-date basis, compared to 31% in the prior year, with expenses increasing on almost the same amount of sales.

Over the last couple of years, our strategy has been to control our expenses relative to sales closely to return to profitability and we have done that. We have recently adjusted our strategy to allow for small investments to support a growth strategy. In addition, we have restored the salary reductions we initiated as part of our cost reduction program. As a result, in the near term we expect to incur operating expense similar to the levels we incurred in our current quarter, while sales commission expense will continue to fluctuate with sales and product mix.

Other Income (Expense)

Total other expense was $45,000 in the current quarter, compared to $115,000 for the comparable quarter of the prior year and $59,000 for the previous quarter. The decrease in comparison to the prior year was primarily a result of lower interest rates under a new bank agreement and a lower amount borrowed.

Year-to-date total other expense was $104,000, compared to $414,000 for the comparable year-to-date period. The significant decrease in expense from last year was primarily a result of $160,000 in early termination fees and other costs related to our decision to terminate our senior lending agreement and enter into a new one, as discussed below in the section entitled “Financing Arrangements”.

Going forward, we expect to incur similar or slightly increased Other Expenses from the levels we incurred in our current quarter.

Income Tax Expense

In recent years, we recorded small provisions for state income tax or, in some cases, adjustments to alternative minimum federal and state income tax accruals. Since fiscal 2001, we have fully reserved, in a non-cash charge, all deferred tax assets that had been recorded. We continue to maintain a substantial valuation allowance on our deferred tax assets due to our historical losses and a limited history of taxable income.

We retain the tax benefits that have been reserved and we will realize the benefits in future periods to the extent we are profitable. As of the end of the prior year, we had income tax carryforwards and other potential tax benefits available to reduce future federal taxable income by approximately $25 million as explained in Note 15 to our financial statements included in our most recent Form 10-K. The net operating loss (“NOL”) carryforwards begin to expire August 31, 2020.

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Going forward, we expect to record relatively small income tax provisions until the recovery of deferred tax assets is more likely than not.

Earnings per Share

The net income for the current quarter was $77,000, or $0.01 per diluted share, compared to $174,000, or $0.02 per diluted share, for the comparable quarter of the prior year and $160,000 or $0.01 per diluted share for the previous quarter. The decrease in income in comparison to the prior year was primarily due to an increase in operating expenses. This was partially offset by lower other expense, with gross profit similar in both years. The decrease from the previous quarter was due to decreased sales, partially offset by higher gross margins and decreased operating expenses.

Year-to-date net income was $237,000 or $0.02 per diluted share compared to $72,000 or $0.01 per diluted share in the comparable quarter of the prior year. The increase in net income was primarily due to reduced other expense, including $160,000 in early termination fees and other costs related to our decision to terminate our senior lending agreement and enter into a new one.

Financial Condition

Financing Arrangements

In the first quarter of our prior fiscal year, we entered into a new $5 million senior secured credit facility with ViewPoint Bank, with whom we already had an existing mortgage relationship. The proceeds from that facility were used to repay and terminate our credit facility with our previous line of credit lender.

While we incurred $160,000 in termination fees and other costs in the first quarter of the prior year related to this change, we believe there are numerous advantages to the new agreement. First, it allowed us to end our forbearance status with our previous lender. Next, the new financial covenants and other restrictions have provided us increased flexibility to manage our operations. Third, loan costs and banking fees are much lower under the new banking agreement, a primary reason why non-operating expenses have decreased approximately $50,000 or more per quarter. Lastly, we believe this new facility has allowed us to concentrate on the long-term growth of our business.

The new $5 million facility is a revolving line of credit that has been renewed on terms similar to those of the initial facility for two years, until November 30, 2012. Due to the renewal beyond one year, our Revolving line of credit liability is now classified as a long-term liability on our balance sheet. Availability under the facility is based on eighty percent of eligible accounts receivable and fifty percent of eligible finished goods inventory, subject to a $1 million maximum on eligible finished goods inventory. The interest rate under the facility is the higher of the Wall Street Journal Prime Rate plus 2% or the floor rate of 7%. The interest rate on current borrowings is 7%.

Under the renewed agreement, we have quarterly financial covenants that consist of: i) a current ratio of at least 1.0; and ii) a minimum net worth of $5.5 million. We should be able to meet our covenants, but there is no assurance that this will happen. Should there be a violation of one or more of the financial covenants and we are unable to negotiate a waiver or amendment, the maturity of our debt could be accelerated.

At February 28, 2011, we maintained access to our revolving line of credit facility, which had a loan balance of $2.9 million. Additional loan advances of approximately $2.1 million were available based upon quarter end asset values. The terms of our revolving line of credit facility and its status at the end of the current quarter are described in Note 3 to our unaudited Condensed Consolidated Financial Statements included in this report.

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Adjusted EBITDA

The following table sets forth, for the three and six months ended February 28, 2011 and 2010, the calculation for Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization (including stock compensation)) that is referred to in this report (in thousands):


	Three Months				Six Months
	Ended February 28,				Ended February 28,
	2011		2010		2011		2010
Net income	$	77	$	174	$	237	$	72

Add back:

Interest expense		59		95		131		370

Taxes		4		5		13		10

Depreciation		164		189		328		388

Amortization:

Patents		47		57		97		114

Stock compensation		105		116		200		236

Total amortization		152		173		297		350

Adjusted EBITDA	$	456	$	636	$	1,006	$	1,190

Adjusted EBITDA is an important liquidity measurement used by financial institutions to measure a company’s capability to fund operations. Adjusted EBITDA is also used by our management to measure our performance in achieving necessary cost reductions.

Liquidity

Liquidity at February 28, 2010, consisted primarily of $0.6 million of cash and our revolving line of credit facility which had a loan availability of $2.1 million determined in accordance with our borrowing base, which consists of eligible accounts receivable and inventory.

Our primary long range strategy for providing liquidity is to manage our costs in relation to our projected sales levels (see section above entitled “Impact of Economic Conditions and Our Response”) and to generate positive Adjusted EBITDA as shown in the table above. We believe our current cost structure can generate positive Adjusted EBITDA absent further material changes in revenue or expenses. In addition, since we have an outsourced supply chain and have retained significant resources to seek additional sales, we believe we are capable of significantly increasing sales without significant additional fixed expenses.

Net cash used in operating activities was $0.9 million for the current year-to-date period as compared to $0.5 million provided by operating activities for the prior year. This is a $1.4 million decrease in operating cash flow. The primary reason for decreased cash provided by operations was that net cash used to finance increased working capital was $2.2 million for the year, compared to a $0.85 million for the prior year. This accounted for almost all of the decrease in operating cash flow.

A major use of cash to finance an increase in working capital in both years was an increase in accounts receivable of $0.5 million in the current year and $0.4 million in the prior year. In the current year, much of this increase resulted from the pattern of sales within the quarter, in which much of the quarter’s sales were shipped in the last two months, which resulted in an increase in ending receivables. We have experienced a slight increase in our days-sales-outstanding, which was in the high fifties this quarter compared to the mid-fifties in the previous quarter. We have seen some increase in past due accounts from recent quarters, but we do not believe this represents a significant collectability risk. We maintain credit insurance on most of our receivables.

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The largest use of cash to finance an increase in working capital in the current year was an increase in inventory, for which $1.1 million of cash was utilized, compared to $0.3 million in the prior year. Most of the $0.8 million in increased gross inventory in the current quarter resulted from a management decision to keep most of our contract manufacturers producing at normal rates, despite the decrease in sales. In recent quarters, we have experienced increased lead times for procurement of raw materials from suppliers and finished goods from our contract manufacturers. We took advantage of our seasonal pattern in the second quarter to stock active products to improve our ability to provide adequate customer service and protect future sales. It is our practice to keep our inventories at the minimum levels consistent with providing excellent customer service.

The other large uses of cash to finance working capital were a reduction in accounts payable of $0.2 million and a reduction in deferred revenue of $0.3 million. We remain current to normal terms with our suppliers. The deferred revenue refers to the final repayment of advance customer payments that we received during fiscal 2009 as a temporary measure to improve liquidity. These two factors were a use of cash of $0.2 million in the prior year.

We continue to generate substantial cash from net income adjusted for non cash items. We believe that in the long run, our primary source of cash is net income adjusted for non-cash items such as depreciation and amortization. As the following table shows, net income adjusted for non-cash items was a positive $1.3 million in the current year, compared to $1.4 million for the prior year.

The following table displays, for the three and six months ended February 28, 2011 and 2010, the calculation of net income adjusted for non-cash items (in thousands):


	Three Months				Six Months
	Ended February 28,				Ended February 28,
	2011		2010		2011			2010
Net income	$	77	$	174	$	237		$	72

Non-cash items included in net income:
Depreciation and amortization		211		246		425			502
Charge for inventory obsolesence		153		279		428			519
Stock-based compensation		105		116		200			236
Loss (gain) on disposal of property and equipment		—		18		(1	)		41

Net income adjusted for non-cash items	$	546	$	833	$	1,289		$	1,370

In the aggregate, cash requirements to finance increased working capital were $2.2 million, compared to $0.85 million in the prior year. Partially financing this was net income adjusted for non cash items of $1.3 million in the current year and $1.4 million in the prior year. Netting the cash requirements to finance working capital against the cash generating from net income and non-cash items results in the negative operating cash flow of $0.9 million in the current year and a positive operating cash flow of $0.5 million in the prior year.

The negative operating cash flow of $0.9 million in the current year is different than the trend of positive operating cash flow that we have historically experienced, including a $1.2 million positive operating cash flow in fiscal 2010 and a larger $4.2 million positive operating cash flow for fiscal 2009. The differences are largely related to working capital items, which are normally favorable factors when sales are decreasing as we liquidate working capital, while these are negative factors when sales are increasing as we need to support growing sales with increased working capital. Going forward, we would expect to return to a generally positive operating cash flow during periods when working capital requirements are approximately neutral or better. However, operating cash flow may be negative in periods when sales are increasing significantly.

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Cash used in investing activities was almost zero for the current year and the prior year. Capital spending was less than $0.1 million in both periods and we expect to acquire only up to $0.4 million of capital equipment in fiscal 2011. Capital spending under our fabless business model has remained low.

Net cash provided by financing activities was $0.9 million in the current year, compared to $0.3 million used for financing activities in the prior year. In the current year, we needed to utilize the bank line to finance the negative operating cash flow caused by the need to finance increased working capital. In the prior year, we utilized the positive operating cash flow to pay down bank debt. In the current year, $0.1 million was raised via proceeds of exercises of stock options.

While we reported positive operating cash flows in recent years, a reduction in sales or gross margins or changes in working capital could occur due to economic or other factors. We believe that cash generated from operations, our cash balances and the amounts available under our banking agreement will be sufficient to meet our cash requirements for the rest of fiscal year 2011. 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. Should that happen, there could be a material adverse effect on our business, financial condition and results of operations.

Forward-looking Statements

Except for the historical information, this report contains numerous forward-looking statements that involve risks and uncertainties. These statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Statements of our plans, objectives, expectations and intentions involve risks and uncertainties. Statements containing terms such as “anticipate”, “believe”, “estimate”, “expect”, “may”, “plan” or similar terms are considered to contain uncertainty and are forward-looking statements. We believe that these statements are based on reasonable assumptions and our expectations at the time. Our actual results may differ materially from the statements and assumptions discussed in this report. However, these statements involve uncertainties and are completely qualified by reference to several important factors. Factors that could cause or contribute to such differences include, but are not limited to those discussed in the sections entitled Risk Factors, Legal Proceedings, Selected Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report, as well as the other factors detailed from time to time in our SEC reports, including the report on Form 10-K for the year ended August 31, 2010.

Any forward-looking statement speaks only as of the date on which such statement was made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, nor will we necessarily make statements in advance to reflect the occurrence of unanticipated events. New factors emerge from time-to-time and it is not possible for us to predict all such factors. We cannot assess the impact of each new or old factor on our business. We also cannot determine the extent to which a factor or combination of factors might cause future results to differ materially from those contained in any forward-looking statement.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily due to fluctuations in interest rates on our bank debt. As of February 28, 2011, with all other variables held constant, a hypothetical one-percentage point increase in interest rates after they exceed the minimum borrowing rate of 7% as required by our banking agreement, would result in an increase in interest expense of approximately $37,000 on an annual basis.

A significant portion of our products have a manufacturing process in a foreign jurisdiction and are sold in foreign jurisdictions. We manage our exposure to currency exchange fluctuations by denominating most transactions in U.S. dollars. We consider the amount of our foreign currency exchange rate risk to be immaterial as of February 28, 2011 and accordingly have not hedged any such risk.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on management’s evaluation (with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures, or Disclosure Controls (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

ITEM 1A.

RISK FACTORS

There are a number of risks associated with RFM and its business, which are described in our Form 10-K filed with the SEC for the year ended August 31, 2010. Any of these risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline. The risks described in our Form 10-K are not the only ones facing RFM. Other risks not currently known to us or that we currently deem immaterial also may impair our business. Additional risks to those described in our Form 10-K that are pertinent to the current quarter disclosure are as follows:

A potential interruption in supply resulting from the disaster that occurred in Japan in March, 2011

We have significant business in Japan, both with customers and suppliers. One of our contract manufacturers is located in Northern Japan. They have reported to us that their facilities sustained no significant damage and that production resumed in late March. While we do not currently expect to see a material adverse effect on our shipments to customers as a result of those unfortunate events, the end result will depend on how soon a full level of logistical support and production is achieved. We have inquired of our other raw materials suppliers and customers in Japan and have not identified any other significant adverse effects on our ability to fill customer orders. If there were to be a sustained significant interruption in operations at our Japanese contract manufacturer or any other key raw material supplier, that could result in a material negative impact on our results of operations and financial condition. There also is a risk that this disaster will have an adverse effect on orders from our customers.

ITEM 6.

EXHIBITS

(a)	Exhibits. We hereby incorporate by reference all exhibits filed in connection with Form 10-K for the year ended August 31, 2010.

(b)	Exhibits included:


Exhibit		Description

31.1		Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO.

31.2		Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CFO.

32.1		Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CEO.

32.2		Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CFO.

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SIGNATURES

Pursuant to the requirements 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.


	RF MONOLITHICS, INC.

Dated: April 13, 2011	By:	/s/ Farlin A. Halsey
		Farlin A. Halsey
		Chief Executive Officer, President and Director

	By:	/s/ Harley E Barnes III
Dated: April 13, 2011		Harley E Barnes III
		Chief Financial Officer

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INDEX TO EXHIBITS


Exhibit		Description

31.1		Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO.

31.2		Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CFO.

32.1		Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CEO.

32.2		Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CFO.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company