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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended May 31, 2006

Commission File No. 0-24414



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RF Monolithics, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                 
|-------------------------------------------------------------- |  | --------------------------------
|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 is a
large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

 ̈Large accelerated
filer ̈Accelerated filer    x  Non-accelerated filer

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

As of June 30, 2006:
8,063,866 shares of the Registrants Common Stock, $.001 par value, were outstanding.



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##### Table of Contents

RF MONOLITHICS, INC.

FORM 10-Q

QUARTER ENDED MAY 31, 2006

TABLE OF CONTENTS



|                                                     |  |                                                                                                              |  |     
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Item Number                                          |  |                                                                                                              |  | Page
|PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION |  |                                                                                                             
|                                                     |  |                                                                                                             
|1.                                                   |  | Condensed Consolidated Financial Statements:                                                                 |  |     
|                                                     |  | Condensed Consolidated Balance SheetsMay 31, 2006 (Unaudited), and August 31, 2005                           |  | 2   
|                                                     |  |                                                                                                             
|                                                     |  | Condensed Consolidated Statements of Operations - UnauditedThree and Nine Months Ended May 31, 2006 and 2005 |  | 3   
|                                                     |  |                                                                                                             
|                                                     |  | Condensed Consolidated Statements of Cash Flows - UnauditedNine Months Ended May 31, 2006 and 2005           |  | 4   
|                                                     |  |                                                                                                             
|                                                     |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 5   
|                                                     |  |                                                                                                             
|2.                                                   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 12  
|                                                     |  |                                                                                                             
|3.                                                   |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 29  
|                                                     |  |                                                                                                             
|4.                                                   |  | Controls and Procedures                                                                                      |  | 29  
|                                                     | 
|PART II. OTHER INFORMATION                           |  |                                                                                                             
|                                                     |  |                                                                                                             
|6.                                                   |  | Exhibits                                                                                                     |  | 29  
|                                                     | 
|SIGNATURES                                           |  |                                                                                                             
|INDEX TO EXHIBITS                                    |  |                                                                                                             



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##### Table of Contents

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(In Thousands)



|                                               |  |              |         |   |                 |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | --------------- | - | ------- | -
|                                               |  | May 31, 2006 |         |   | August 31, 2005 |  
|                                               |  |              |         |   | (a)             |  
|ASSETS                                         |  |              |         |   |                 |   |         |  
|                                               |  |             
|CURRENT ASSETS:                                |  |              |         |   |                 |   |         |  
|Cash and cash equivalents                      |  | $            | 5,806   |   |                 | $ | 5,450   |  
|Trade receivables - net                        |  |              | 8,532   |   |                 |   | 6,753   |  
|Inventories - net                              |  |              | 9,005   |   |                 |   | 8,616   |  
|Prepaid expenses and other                     |  |              | 369     |   |                 |   | 315     |  
|                                               |  |              |         |   |                 |   |         |  
|Total current assets                           |  |              | 23,712  |   |                 |   | 21,134  |  
|                                               |  |             
|PROPERTY AND EQUIPMENT - Net                   |  |              | 6,381   |   |                 |   | 6,235   |  
|                                               |  |             
|OTHER ASSETS - Net                             |  |              | 620     |   |                 |   | 470     |  
|                                               |  |              |         |   |                 |   |         |  
|TOTAL                                          |  | $            | 30,713  |   |                 | $ | 27,839  |  
|                                               |  |              |         |   |                 |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY           |  |              |         |   |                 |   |         |  
|                                               |  |             
|CURRENT LIABILITIES:                           |  |              |         |   |                 |   |         |  
|Accounts payable - trade                       |  | $            | 4,225   |   |                 | $ | 2,962   |  
|Accrued expenses and other current liabilities |  |              | 1,888   |   |                 |   | 1,624   |  
|                                               |  |              |         |   |                 |   |         |  
|Total current liabilities                      |  |              | 6,113   |   |                 |   | 4,586   |  
|                                               |  |             
|OTHER LIABILITIES                              |  |              | 128     |   |                 |   | 181     |  
|                                               |  |             
|STOCKHOLDERS EQUITY:                          |  |              |         |   |                 |   |         |  
|Common stock: 8,064 and 7,949 shares issued    |  |              | 8       |   |                 |   | 8       |  
|Additional paid-in capital                     |  |              | 37,931  |   |                 |   | 36,992  |  
|Common stock warrants                          |  |              | 85      |   |                 |   | 128     |  
|Treasury stock, 36 common shares at cost       |  |              | (227    | ) |                 |   | (227    | )
|Accumulated deficit                            |  |              | (13,325 | ) |                 |   | (13,829 | )
|                                               |  |              |         |   |                 |   |         |  
|Total stockholders equity                     |  |              | 24,472  |   |                 |   | 23,072  |  
|                                               |  |              |         |   |                 |   |         |  
|TOTAL                                          |  | $            | 30,713  |   |                 | $ | 27,839  |  
|                                               |  |              |         |   |                 |   |         |  

---

|(a) | Derived from audited financial statements.
|--- | ------------------------------------------

See notes to condensed
consolidated financial statements.



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RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(In Thousands, Except Per-Share Amounts)



|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                            |  | Three Months Ended May 31, |        |   | Nine Months Ended May 31, |  
|                                            |  | 2006                       |        |   | 2005                      |   |        | 2006 |  |   | 2005   |  
|SALES                                       |  | $                          | 14,696 |   |                           | $ | 11,284 |      |  | $ | 39,685 |   |  | $ | 34,730 |  
|                                            |  |                            |        |  
|COST OF SALES                               |  |                            | 10,428 |   |                           |   | 8,128  |      |  |   | 28,312 |   |  |   | 24,579 |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|GROSS PROFIT                                |  |                            | 4,268  |   |                           |   | 3,156  |      |  |   | 11,373 |   |  |   | 10,151 |  
|                                            |  |                            |        |  
|OPERATING EXPENSES:                         |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Research and development                    |  |                            | 1,143  |   |                           |   | 1,105  |      |  |   | 3,450  |   |  |   | 3,287  |  
|Sales and marketing                         |  |                            | 1,741  |   |                           |   | 1,318  |      |  |   | 4,865  |   |  |   | 4,029  |  
|General and administrative                  |  |                            | 886    |   |                           |   | 726    |      |  |   | 2,446  |   |  |   | 2,174  |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                    |  |                            | 3,770  |   |                           |   | 3,149  |      |  |   | 10,761 |   |  |   | 9,490  |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|INCOME FROM OPERATIONS                      |  |                            | 498    |   |                           |   | 7      |      |  |   | 612    |   |  |   | 661    |  
|                                            |  |                            |        |  
|OTHER INCOME (EXPENSE):                     |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Interest income                             |  |                            | 54     |   |                           |   | 24     |      |  |   | 147    |   |  |   | 55     |  
|Interest expense                            |  |                            | (13    | ) |                           |   | (27    | )    |  |   | (48    | ) |  |   | (74    | )
|Other, net                                  |  |                            | (109   | ) |                           |   |       |      |  |   | (184   | ) |  |   | 20     |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total other income (expense)                |  |                            | (68    | ) |                           |   | (3     | )    |  |   | (85    | ) |  |   | 1      |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|INCOME BEFORE INCOME TAXES                  |  |                            | 430    |   |                           |   | 4      |      |  |   | 527    |   |  |   | 662    |  
|                                            |  |                            |        |  
|INCOME TAX EXPENSE (BENEFIT)                |  |                            | 17     |   |                           |   | (54    | )    |  |   | 23     |   |  |   | (24    | )
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|NET INCOME                                  |  | $                          | 413    |   |                           | $ | 58     |      |  | $ | 504    |   |  | $ | 686    |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|EARNINGS PER SHARE                          |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic                                       |  | $                          | 0.05   |   |                           | $ | 0.01   |      |  | $ | 0.06   |   |  | $ | 0.09   |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                     |  | $                          | 0.05   |   |                           | $ | 0.01   |      |  | $ | 0.06   |   |  | $ | 0.08   |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic                                       |  |                            | 8,042  |   |                           |   | 7,869  |      |  |   | 7,991  |   |  |   | 7,840  |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                     |  |                            | 8,498  |   |                           |   | 8,202  |      |  |   | 8,376  |   |  |   | 8,291  |  
|                                            |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  

See notes to condensed consolidated financial statements.



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RF MONOLITHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In Thousands)



|                                                    |  |                           |        |   |      |   |        |  
|--------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Nine Months Ended May 31, |       
|                                                    |  | 2006                      |        |   | 2005 |  
|OPERATING ACTIVITIES:                               |  |                           |        |   |      |   |        |  
|Net income                                          |  | $                         | 504    |   |      | $ | 686    |  
|Noncash items included in net income:               |  |                           |        |   |      |   |        |  
|Depreciation and amortization                       |  |                           | 1,596  |   |      |   | 1,816  |  
|Provision for trade receivable allowance            |  |                           | 15     |   |      |   |       |  
|Stock-based compensation                            |  |                           | 500    |   |      |   | 51     |  
|Gain on disposal of property and equipment          |  |                           | (59    | ) |      |   | (35    | )
|Changes in operating assets and liabilities:        |  |                           |        |   |      |   |        |  
|Trade receivables                                   |  |                           | (1,794 | ) |      |   | 262    |  
|Inventories                                         |  |                           | (389   | ) |      |   | 279    |  
|Prepaid expenses and other                          |  |                           | (54    | ) |      |   | (52    | )
|Accounts payable - trade                            |  |                           | 1,263  |   |      |   | 511    |  
|Accrued expenses and other liabilities              |  |                           | 309    |   |      |   | 39     |  
|                                                    |  |                           |        |   |      |   |        |  
|Net cash provided by operating activities           |  |                           | 1,891  |   |      |   | 3,557  |  
|                                                    |  |                           |        |   |      |   |        |  
|INVESTING ACTIVITIES:                               |  |                           |        |   |      |   |        |  
|Acquisition of property and equipment               |  |                           | (1,810 | ) |      |   | (1,150 | )
|Proceeds from disposition of property and equipment |  |                           | 136    |   |      |   | 126    |  
|Change in other assets                              |  |                           | (159   | ) |      |   | (201   | )
|                                                    |  |                           |        |   |      |   |        |  
|Net cash used in investing activities               |  |                           | (1,833 | ) |      |   | (1,225 | )
|                                                    |  |                           |        |   |      |   |        |  
|FINANCING ACTIVITIES:                               |  |                           |        |   |      |   |        |  
|Repayments of third party financing                 |  |                           | (90    | ) |      |   | (88    | )
|Change in other liabilities                         |  |                           | (8     | ) |      |   |       |  
|Proceeds from issuance of common stock              |  |                           | 396    |   |      |   | 302    |  
|                                                    |  |                           |        |   |      |   |        |  
|Net cash provided by financing activities           |  |                           | 298    |   |      |   | 214    |  
|                                                    |  |                           |        |   |      |   |        |  
|INCREASE IN CASH AND CASH EQUIVALENTS               |  |                           | 356    |   |      |   | 2,546  |  
|                                                    |  |                          
|CASH AND CASH EQUIVALENTS:                          |  |                           |        |   |      |   |        |  
|Beginning of period                                 |  |                           | 5,450  |   |      |   | 2,715  |  
|                                                    |  |                           |        |   |      |   |        |  
|End of period                                       |  | $                         | 5,806  |   |      | $ | 5,261  |  
|                                                    |  |                           |        |   |      |   |        |  
|SUPPLEMENTAL INFORMATION:                           |  |                           |        |   |      |   |        |  
|Interest paid                                       |  | $                         | 2      |   |      | $ | 6      |  
|                                                    |  |                           |        |   |      |   |        |  
|Income taxes paid                                   |  | $                         | 10     |   |      | $ | 58     |  
|                                                    |  |                           |        |   |      |   |        |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

RF MONOLITHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 May 31, 2006, the results of operations for the three and nine months ended May 31, 2006 and 2005 and cash flows for the nine months ended May 31, 2006 and 2005. 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, 2005, filed with the Securities and Exchange Commission.

Operating results for the nine months ended May 31, 2006, are not necessarily indicative of the results to be achieved for the full fiscal year ending
August 31, 2006.

2. INVENTORIES

Inventories consist of the following (in thousands):



|                           |  |              |        |   |                 |   |        |  
|-------------------------- |  | ------------ | ------ | - | --------------- | - | ------ | -
|                           |  | May 31, 2006 |        |   | August 31, 2005 |  
|Raw materials and supplies |  | $            | 4,155  |   |                 | $ | 3,560  |  
|Work in process            |  |              | 2,215  |   |                 |   | 2,287  |  
|Finished goods             |  |              | 3,789  |   |                 |   | 3,799  |  
|                           |  |              |        |   |                 |   |        |  
|Total gross inventories    |  |              | 10,159 |   |                 |   | 9,646  |  
|Less inventory reserves    |  |              | (1,154 | ) |                 |   | (1,030 | )
|                           |  |              |        |   |                 |   |        |  
|Total inventories          |  | $            | 9,005  |   |                 | $ | 8,616  |  
|                           |  |              |        |   |                 |   |        |  

3. PROPERTY AND EQUIPMENT

Property and equipment includes work in progress of $876,000 at May 31, 2006, and $569,000 at August 31, 2005, which was composed primarily of software implementation costs, manufacturing equipment for new
processes and other assets not yet placed in service.

4. CREDIT FACILITIES

Our revolving credit arrangement allows borrowings based on levels of eligible accounts receivable, subject to a limit of $10.0 million. As of May 31, 2006, our
revolving line of credit facility had an outstanding balance of zero and availability of approximately $6.1 million under our borrowing base. Financial covenants under the revolving credit arrangement include provisions as to the ratio of senior
funded debt to cash flow, tangible net worth, profitability, and fixed charges coverage.



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5. STOCK-BASED COMPENSATION PLANS

We adopted FASB Statement 123(Revised 2004), Share-Based Payment, or FASB Statement 123(R), for our fiscal year beginning September 1, 2005. In compliance with the standard, we recorded stock-based
compensation expense in the current year related to options for employees and directors and our Employee Stock Purchase Plan, or ESPP. The fair value of stock options granted and favorable pricing of our stock offered under the ESPP is determined
using the Black-Scholes model. Prior to the current fiscal year, we accounted for our option plans and ESPP under APB 25 and, accordingly, did not recognize compensation expense for options granted to employees and directors or for our ESPP.
Compensation expense for consultant options has been recorded in the current and prior years and is recognized over the vesting life of the options, which is aligned with the consulting service life.

In the previous quarter we changed from granting stock options as the primary means of stock compensation to granting restricted stock units, or RSUs. The fair value of
any RSU grant is based on the market value of our shares included in the RSU on the date of grant and is recognized as compensation expense over the vesting period.

The following table illustrates the stock compensation expense recognized in the three and nine months ended May 31, 2006 of our fiscal year ending August 31, 2006. Amounts are in thousands:



|                                          |  |                                 |     |                                |   |    
|----------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---
|                                          |  | Compensation Expense Recognized
|Stock Compensation Plan                   |  | Three months ended May 31, 2006 |     | Nine months ended May 31, 2006
|Stock options for employees and directors |  | $                               | 79  |                                | $ | 382
|Employee Stock Purchase Plan              |  |                                 | 10  |                                |   | 30 
|Stock options for consultants             |  |                                 | 6   |                                |   | 27 
|Restricted Stock Units                    |  |                                 | 38  |                                |   | 61 
|                                          |  |                                 |     |                                |   |    
|Totals                                    |  | $                               | 133 |                                | $ | 500
|                                          |  |                                 |     |                                |   |    

The adoption of FASB Statement 123(R) did not affect our accounting treatment of stock options granted to
consultants and is therefore not reflected as additional stock compensation expense in the following sentence. The effect of adopting FASB Statement 123(R) and change to RSUs in lieu of stock options was the recognition of additional stock
compensation expense in the current quarter and fiscal year to date of $127,000 and $473,000, respectively.

Stock Options Our stock
compensation 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 or have granted stock options to employees, directors and consultants. The options generally vest at a rate of one forty-eighth each month. 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, but options previously granted remain in effect in accordance with their terms. The
Director Plan expired for future grants according to its terms in April 2004, but options previously granted remain in effect in accordance with their terms. When stock options are exercised, new common stock is issued.



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Stock option grants in the current year are 6,000 incentive stock option grants to employees in the first quarter ended
November 30, 2005 only. As of May 31, 2006, options to purchase 76,262 shares of stock were cancelled due to employee terminations and option period expirations.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for all stock option grants in the year
indicated:



|                                 |  |             |   |  |             |  
|-------------------------------- |  | ----------- | - |  | ----------- | -
|                                 |  | Fiscal 2006 |   |  | Fiscal 2005 |  
|Expected dividend yield          |  | 0           |   |  | 0           |  
|Risk-free interest rate          |  | 4.5         | % |  | 3.6         | %
|Expected life of options (years) |  | 6.0 yrs.    |   |  | 4.2 yrs.    |  
|Weighted-average volatility      |  | 71          | % |  | 74          | %

The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield in
effect at the time of grant. The expected life of the options is the average of the vesting life and the contractual life of the option. Volatility is calculated in the Black Scholes model based on historic stock prices for the same term as the
expected life of options.

Generally, the stock option plans are on a four-year monthly vesting schedule 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 the options expire ten years after the date of grant. The summary of stock option activity for all plans (1999 Plan, 1997 Plan, 1986 Plan
and Director Plan) as of May 31, 2006 follows:



|                                 |  |           |   |  |                                  |      |                                                      |     |                                  |   |  
|-------------------------------- |  | --------- | - |  | -------------------------------- | ---- | ---------------------------------------------------- | --- | -------------------------------- | - | -
|                                 |  | Shares    |   |  | Weighted- Average Exercise Price |      | Weighted- Average Remaining Contractual Term (years) |     | Aggregate Intrinsic Value ($000)
|Outstanding at September 1, 2005 |  | 2,227,075 |   |  | $                                | 6.29 |                                                      |     |                                  |   |  
|Granted                          |  | 6,000     |   |  | $                                | 5.01 |                                                      |     |                                  |   |  
|Exercised                        |  | (71,021   | ) |  | $                                | 3.47 |                                                      |     |                                  |   |  
|Expired/cancelled                |  | (76,262   | ) |  | $                                | 7.16 |                                                      |     |                                  |   |  
|                                 |  |           |   |  |                                  |      |                                                      |     |                                  |   |  
|Outstanding at May 31, 2006      |  | 2,085,792 |   |  | $                                | 6.35 |                                                      | 4.9 |                                  | $ | 0
|                                 |  |           |   |  |                                  |      |                                                      |     |                                  |   |  
|Exercisable at May 31, 2006      |  | 1,978,556 |   |  | $                                | 6.40 |                                                      | 4.9 |                                  | $ | 0
|                                 |  |           |   |  |                                  |      |                                                      |     |                                  |   |  

The aggregate intrinsic values in the table above are zero because the market price on May 31, 2006 of
$6.0000 is less than the weighted average exercise prices. The weighted-average grant-date fair value of options granted as of May 31, 2006 of fiscal 2006 and all of fiscal 2005 were $2.72 and $2.60 respectively. The total intrinsic value of
options exercised in fiscal 2006 as of May 31, 2006 was $189,418. The total intrinsic value of options exercised in fiscal 2005 was $288,391. Intrinsic values of options exercised will result in a deduction for tax purposes.



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##### Table of Contents

A summary of shares of our common stock subject to our nonvested options as of May 31, 2006 and the changes during
the nine months then ended follows:



|                               |  |          |   |  |                                         |     
|------------------------------ |  | -------- | - |  | --------------------------------------- | ----
|Nonvested Shares               |  | Shares   |   |  | Weighted- Average Grant-Date Fair Value
|Nonvested at September 1, 2005 |  | 311,878  |   |  | $                                       | 2.23
|Granted                        |  | 6,000    |   |  | $                                       | 2.72
|Vested                         |  | (199,735 | ) |  | $                                       | 2.02
|Expired/cancelled              |  | (10,907  | ) |  | $                                       | 2.87
|                               |  |          |   |  |                                         |     
|Nonvested at May 31, 2006      |  | 107,236  |   |  | $                                       | 2.66
|                               |  |          |   |  |                                         |     

As of May 31, 2006, there was a total of $248,431 of unrecognized compensation cost related to nonvested
stock options granted. The total cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of stock options vested in fiscal 2006 as of May 31, 2006 was approximately $382,000.



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The following table illustrates the effect on net income and earnings per share in the comparable quarter and year to
date period of the prior year as if the fair value based method under FASB Statement 123 had been applied to all outstanding vested and unvested awards in that period. For the current quarter and year to date, in compliance with FASB Statement
123(R), we recorded expense for all amortized stock-based compensation. Amounts are in thousands, except per share amounts:



|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ---- | ---- | ------------------------- | ------ | ---- |  | ---- | ---- |  | - | ------ | -
|                                                                                                                                                            |  | Three Months Ended May 31, |      |      | Nine Months Ended May 31, |       
|                                                                                                                                                            |  | 2006                       |      | 2005 |                           |        | 2006 |  | 2005 |     
|Net Income, as reported                                                                                                                                     |  | $                          | 413  |      | $                         | 58     |      |  | $    | 504  |  | $ | 686    |  
|                                                                                                                                                            |  |                            |      |     
|Add: Stock option based compensation expense included in reported net income, net of related tax effects.                                                   |  |                            | N/A  |      |                           | 11     |      |  |      | N/A  |  |   | 41     |  
|                                                                                                                                                            |  |                            |      |     
|Deduct: Total stock option based compensation expense, including ESPP, determined under fair value based method for all awards, net of related
tax effects. |  |                            | N/A  |      |                           | (1,073 | )    |  |      | N/A  |  |   | (1,452 | )
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|Pro forma net income (loss)                                                                                                                                 |  | $                          | 413  |      | $                         | (1,004 | )    |  | $    | 504  |  | $ | (725   | )
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|EARNINGS (LOSS) PER SHARE                                                                                                                                   |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|Basic - as reported                                                                                                                                         |  | $                          | 0.05 |      | $                         | 0.01   |      |  | $    | 0.06 |  | $ | 0.09   |  
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|Basic - pro forma                                                                                                                                           |  | $                          | 0.05 |      | $                         | (0.13  | )    |  | $    | 0.06 |  | $ | (0.09  | )
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|Diluted - as reported                                                                                                                                       |  | $                          | 0.05 |      | $                         | 0.01   |      |  | $    | 0.06 |  | $ | 0.08   |  
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  
|Diluted - pro forma                                                                                                                                         |  | $                          | 0.05 |      | $                         | (0.13  | )    |  | $    | 0.06 |  | $ | (0.09  | )
|                                                                                                                                                            |  |                            |      |      |                           |        |      |  |      |      |  |   |        |  

See Item 2 of Part I entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations for an additional discussion of our stock option plans.



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Restricted Stock Units In the quarter ended February 28, 2006 we changed from granting stock
options as a primary means of stock compensation to granting RSUs. We grant RSUs out of our stockholder-approved 1997 Equity Incentive Plan. Each RSU represents the right to receive a share of common stock and typically is subject to vesting
requirements, normally on an annual basis over four years. Stock is issued to the grantee at each annual vesting date. When the stock is issued at vesting, the employee may elect to have fewer shares granted, with the amount of the reduction used to
cover the minimum income and social security tax withholding requirements under IRS rules. The fair value of any RSUs grant is the market price of the common stock on the date of grant and is recognized as compensation expense over the vesting
period. As of May 31, 2006, there was a total of $564,248 of unrecognized compensation cost related to nonvested RSUs granted. The total cost is expected to be recognized over a weighted-average period of 3.7 years. The following table sets
forth the status of our RSU compensation activity as of May 31, 2006:



|                               |  |         |   |  |                                         |     
|------------------------------ |  | ------- | - |  | --------------------------------------- | ----
|Nonvested Shares               |  | Shares  |   |  | Weighted- Average Grant-Date Fair Value
|Nonvested at November 30, 2005 |  | 0       |   |  | $                                       | 0.00
|Granted                        |  | 110,700 |   |  | $                                       | 5.69
|Vested                         |  | 0       |   |  | $                                       | 0.00
|Cancelled                      |  | (800    | ) |  | $                                       | 5.69
|                               |  |         |   |  |                                         |     
|Nonvested at May 31, 2006      |  | 109,900 |   |  | $                                       | 5.69
|                               |  |         |   |  |                                         |     

6. EARNINGS PER SHARE

Our earnings per share is computed by dividing the net earnings by the weighted average shares of common stock outstanding during the period. Our diluted earnings per share is computed by dividing net earnings by the weighted average number
of common and potentially dilutive shares. Potentially dilutive shares are derived from outstanding stock options, warrants and RSUs 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,
warrants and RSUs are considered antidilutive. The number of common stock options, warrants and RSUs considered antidilutive and thus excluded from the year to date diluted earnings or loss per share computation at May 31, 2006 and 2005 were
1,177,851 and 660,311, respectively.



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7. SALES REVENUE

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



|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|------------------------------ |  | -------------------------- | ------ | ------------------------- | - | ---------- |  | ------------------------- | ------ |  | ------------------------- | ------ |  |  | ---- | --- | - | ---- | --- | - | ---- | --- | - |  | --- | -
|                               |  | Amounts                    |        |                           |   | % of Total | 
|                               |  | Three Months Ended May 31, |        | Nine Months Ended May 31, |   |            |  | Three MonthsEnded May 31, |        |  | Nine Months Ended May 31, |       
|                               |  | 2006                       |        | 2005                      |   | 2006       |  | 2005                      |        |  |                           | 2006   |  |  | 2005 |     |   | 2006 |     |   | 2005 |    
|Product Sales:                 |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Low-power Product Group:       |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Low-power Components           |  | $                          | 3,245  |                           | $ | 2,989      |  | $                         | 9,946  |  | $                         | 10,993 |  |  |      | 22  | % |      | 26  | % |      | 25  | % |  | 31  | %
|Virtual Wire radio products   |  |                            | 3,680  |                           |   | 2,734      |  |                           | 10,435 |  |                           | 9,002  |  |  |      | 25  |   |      | 24  |   |      | 26  |   |  | 26  |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Subtotal                       |  |                            | 6,925  |                           |   | 5,723      |  |                           | 20,381 |  |                           | 19,995 |  |  |      | 47  |   |      | 50  |   |      | 51  |   |  | 57  |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Communications Products Group: |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Frequency Control Modules      |  |                            | 1,133  |                           |   | 993        |  |                           | 2,804  |  |                           | 3,038  |  |  |      | 8   |   |      | 9   |   |      | 7   |   |  | 9   |  
|Filters                        |  |                            | 6,522  |                           |   | 4,491      |  |                           | 16,104 |  |                           | 11,457 |  |  |      | 44  |   |      | 40  |   |      | 41  |   |  | 33  |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Subtotal                       |  |                            | 7,655  |                           |   | 5,484      |  |                           | 18,908 |  |                           | 14,495 |  |  |      | 52  |   |      | 49  |   |      | 48  |   |  | 42  |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Total Product Sales            |  |                            | 14,580 |                           |   | 11,207     |  |                           | 39,289 |  |                           | 34,490 |  |  |      | 99  |   |      | 99  |   |      | 99  |   |  | 99  |  
|Technology development sales   |  |                            | 116    |                           |   | 77         |  |                           | 396    |  |                           | 240    |  |  |      | 1   |   |      | 1   |   |      | 1   |   |  | 1   |  
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  
|Total Sales                    |  | $                          | 14,696 |                           | $ | 11,284     |  | $                         | 39,685 |  | $                         | 34,730 |  |  |      | 100 | % |      | 100 | % |      | 100 | % |  | 100 | %
|                               |  |                            |        |                           |   |            |  |                           |        |  |                           |        |  |  |      |     |   |      |     |   |      |     |   |  |     |  

An immaterial amount of sales of Wireless System module products are included in Virtual Wire radio products and
Technology development sales. International sales were approximately 60% or $8,755 during the current quarter and 64% or $7,191 during the comparable quarter of the prior year. We consider all product sales with a delivery destination outside of
North America to be international sales.

8. INCOME TAXES

During the nine months ended May 31, 2006 and 2005, we realized book income before income tax of $527,000 and $662,000, respectively. In both the current and prior year 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 3% of taxable
income prior to applying loss carry forwards and other credits. We continue to maintain a full valuation allowance on our deferred tax assets due to prior period losses, as well as the general economic environment. However, we retain the tax
benefits involved and we will realize the benefit in future periods (1) to the extent we have taxable income in a reported period for which we utilize some of the tax benefit and (2) whenever, and to the extent, management concludes that
it is more likely than not that we will also realize some of the tax benefits in future periods.



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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, 2005, filed with the Securities and Exchange Commission.

General

We design, develop, manufacture and market a broad range of wireless solutions. We have two lines of businessRadio Frequency, or RF, components
business and Wireless System module products business. Our RF components business consists of (a) the Low-power Products Group, which includes low-power components, Virtual Wire Short-range Radio products, and RF Integrated Circuits, or
RFICs, and (b) the Communications Products Group, which includes frequency control modules and filters. The Wireless System module products business includes both standard and custom modules that typically integrate a radio with a
microprocessor and link protocol. Most of our current products are based on surface acoustic wave, or SAW, technology and are manufactured either as discrete devices to perform specific functions or as integrated modules to meet system performance
requirements.

Executive Summary

We
operate in a very competitive environment characterized by declining average selling prices and frequent product innovation. Our strengths 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 and (d) our demonstrated ability to manufacture
products cost effectively in volume with excellent delivery and quality performance. Our manufacturing capabilities are greatly enhanced by our relationships with several offshore contractors and our own wafer foundry expertise.

Arrayed against us are several large competitors who have superior financial and other resources. We have competed successfully for over 25 years by
cultivating close customer relationships with a diverse group of customers in varied applications, markets and geographic locations.

Our
base low-power components have declined in sales due to decreased average selling prices in competitive automotive and other markets. As a result, we have focused our product and market development on products which we feel offer a technical edge
and have greater gross margin potential. A key factor in our sales performance is whether or not we develop and sell enough new products to offset the decline in selling price and unit volume of our older products. The overall economic conditions in
the electronics industry, which has historically experienced extreme increases and decreases in demand within short periods of time, are another key factor that influences our sales performance. We believe our markets are currently in a period of
stable overall demand. A key factor in our gross margin performance is whether or not we can reduce our costs (through innovation and increased volume) and improve our product mix towards higher margin products to offset expected declines in average
selling prices.

We have systematically increased our operating expenses to support our Wireless Systems initiative and that has somewhat
increased our sales breakeven point. Despite increased operating expenses, we have continued to generate positive cash flows in recent periods. While we intend to continue some level of positive cash flows in future periods, the amount of positive
cash flow may decrease or occasionally turn negative due to increased capital spending and other investments to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.



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Critical Accounting Policies

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. We described our most significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating reported financial results, in our Annual Report filed with the Securities and Exchange
Commission on November 17, 2005, on Form 10-K. Those policies continue to be our most critical accounting policies for the period covered by this report.

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, each ended May 31, 2006, of the fiscal year ending August 31, 2006, in comparison to the comparable quarter of the prior year
and prior year-to-date period, each ended May 31, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain comparisons with the three months ended February 28, 2006 (previous quarter) are provided where we believe it is useful to the understanding of trends.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There are some forward-looking statements that refer to our subsequent quarter ending August 31, 2006 (next quarter or fourth quarter).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

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



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The following table illustrates operating results for the four quarters of fiscal 2005 and the first
three quarters of fiscal 2006. These figures will be used when discussing trends in the following section.



|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------------- | ------ | - | ------------------------- | - | ------ | ------ |  | - | ------- | - |  | ------- | ------ | - | ------- | - | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|                                  |  | Fiscal 2005 Quarter Ended |        |   | Fiscal 2006 Quarter Ended |  
|                                  |  | Nov. 30                   |        |   | Feb. 28                   |   |        | May 31 |  |   | Aug. 31 |   |  | Nov. 30 |        |   | Feb. 28 |   |        | May 31 | 
|Sales by product area:            |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Low-power components              |  | $                         | 4,165  |   |                           | $ | 3,839  |        |  | $ | 2,989   |   |  | $       | 4,619  |   |         | $ | 3,590  |        |  | $ | 3,111  |   |  | $ | 3,245  |  
|Virtual Wire Radio products      |  |                           | 3,053  |   |                           |   | 3,215  |        |  |   | 2,734   |   |  |         | 2,278  |   |         |   | 3,335  |        |  |   | 3,420  |   |  |   | 3,680  |  
|Frequency control modules         |  |                           | 1,178  |   |                           |   | 867    |        |  |   | 993     |   |  |         | 642    |   |         |   | 511    |        |  |   | 1,160  |   |  |   | 1,133  |  
|Filters                           |  |                           | 3,643  |   |                           |   | 3,323  |        |  |   | 4,491   |   |  |         | 3,721  |   |         |   | 4,758  |        |  |   | 4,824  |   |  |   | 6,522  |  
|Technology development sales      |  |                           | 124    |   |                           |   | 39     |        |  |   | 77      |   |  |         | 232    |   |         |   | 102    |        |  |   | 178    |   |  |   | 116    |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Total sales                       |  |                           | 12,163 |   |                           |   | 11,283 |        |  |   | 11,284  |   |  |         | 11,492 |   |         |   | 12,296 |        |  |   | 12,693 |   |  |   | 14,696 |  
|Cost of sales                     |  |                           | 8,573  |   |                           |   | 7,878  |        |  |   | 8,128   |   |  |         | 8,441  |   |         |   | 8,978  |        |  |   | 8,906  |   |  |   | 10,428 |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Gross profit                      |  |                           | 3,590  |   |                           |   | 3,405  |        |  |   | 3,156   |   |  |         | 3,051  |   |         |   | 3,318  |        |  |   | 3,787  |   |  |   | 4,268  |  
|% of sales                        |  |                           | 29.5   | % |                           |   | 30.2   | %      |  |   | 28.0    | % |  |         | 26.5   | % |         |   | 27.0   | %      |  |   | 29.8   | % |  |   | 29.0   | %
|                                  |  |                           |        |   |                           |   |       
|Operating expenses:               |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Research and development          |  |                           | 1,063  |   |                           |   | 1,119  |        |  |   | 1,105   |   |  |         | 1,094  |   |         |   | 1,176  |        |  |   | 1,131  |   |  |   | 1,143  |  
|Sales and marketing               |  |                           | 1,364  |   |                           |   | 1,347  |        |  |   | 1,318   |   |  |         | 1,357  |   |         |   | 1,492  |        |  |   | 1,632  |   |  |   | 1,741  |  
|General and administrative        |  |                           | 734    |   |                           |   | 714    |        |  |   | 726     |   |  |         | 788    |   |         |   | 750    |        |  |   | 810    |   |  |   | 886    |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Total                             |  |                           | 3,161  |   |                           |   | 3,180  |        |  |   | 3,149   |   |  |         | 3,239  |   |         |   | 3,418  |        |  |   | 3,573  |   |  |   | 3,770  |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Income (loss) from operations     |  |                           | 429    |   |                           |   | 225    |        |  |   | 7       |   |  |         | (188   | ) |         |   | (100   | )      |  |   | 214    |   |  |   | 498    |  
|Other income (expense), net       |  |                           | 0      |   |                           |   | 4      |        |  |   | (3      | ) |  |         | (30    | ) |         |   | 52     |        |  |   | (69    | ) |  |   | (68    | )
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Income (loss) before income taxes |  |                           | 429    |   |                           |   | 229    |        |  |   | 4       |   |  |         | (218   | ) |         |   | (48    | )      |  |   | 145    |   |  |   | 430    |  
|Income tax expense (benefit)      |  |                           | 22     |   |                           |   | 8      |        |  |   | (54     | ) |  |         | (16    | ) |         |   | 1      |        |  |   | 5      |   |  |   | 17     |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  
|Net income (loss)                 |  | $                         | 407    |   |                           | $ | 221    |        |  | $ | 58      |   |  | $       | (202   | ) |         | $ | (49    | )      |  | $ | 140    |   |  | $ | 413    |  
|                                  |  |                           |        |   |                           |   |        |        |  |   |         |   |  |         |        |   |         |   |        |        |  |   |        |   |  |   |        |  



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The following table sets forth, for the three and nine months ended May 31, 2006, and 2005,
(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 May 31, |   |  | Nine Months Ended May 31, |   |                        |      |   | Three Months Ended May 2005 to
2006 |      |   | Nine Months Ended May 2005 to
2006 | 
|                             |  | 2006                       |   |  | 2005                      |   |                        | 2006 |   |                                     | 2005 |   |                                    |  | 
|Sales                        |  | 100                        | % |  | 100                       | % |                        | 100  | % |                                     | 100  | % |                                    |  |  | 30     | % |  | 14    | % 
|Cost of sales                |  | 71                         |   |  | 72                        |   |                        | 72   |   |                                     | 71   |   |                                    |  |  | 28     |   |  | 15    |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Gross profit                 |  | 29                         |   |  | 28                        |   |                        | 28   |   |                                     | 29   |   |                                    |  |  | 35     |   |  | 12    |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Research and development     |  | 8                          |   |  | 10                        |   |                        | 9    |   |                                     | 9    |   |                                    |  |  | 3      |   |  | 5     |   
|Sales and marketing          |  | 12                         |   |  | 12                        |   |                        | 12   |   |                                     | 12   |   |                                    |  |  | 32     |   |  | 21    |   
|General and administrative   |  | 6                          |   |  | 6                         |   |                        | 6    |   |                                     | 6    |   |                                    |  |  | 22     |   |  | 13    |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Total operating expenses     |  | 26                         |   |  | 28                        |   |                        | 27   |   |                                     | 27   |   |                                    |  |  | 20     |   |  | 13    |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Income from operations       |  | 3                          |   |  | 0                         |   |                        | 1    |   |                                     | 2    |   |                                    |  |  | 7,014  |   |  | (7    | ) 
|Other expense, net           |  | 0                          |   |  | 0                         |   |                        | 0    |   |                                     | 0    |   |                                    |  |  | 2,167  |   |  | 8,600 |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Income before income taxes   |  | 3                          |   |  | 0                         |   |                        | 1    |   |                                     | 2    |   |                                    |  |  | 10,650 |   |  | (20   | ) 
|Income tax expense (benefit) |  | 0                          |   |  | (1                        | ) |                        | 0    |   |                                     | 0    |   |                                    |  |  | 132    |   |  | 196   |   
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   
|Net income                   |  | 3                          | % |  | 1                         | % |                        | 1    | % |                                     | 2    | % |                                    |  |  | 612    | % |  | (27   | )%
|                             |  |                            |   |  |                           |   |                        |      |   |                                     |      |   |                                    |  |  |        |   |  |       |   

Sales

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

Total sales increased 30%
in the current quarter compared to the comparable quarter of the prior year and increased 16% compared to the previous quarter. These increased sales were due primarily to an increase in the number of units sold in all of our four product lines,
particularly filters for satellite radio applications. Sales were at record levels for both filters and Virtual Wire Short-range Radio products. We have devoted most of our product development efforts to those two product lines in recent years
and most of the sales increases were for newer products that are gaining market acceptance. Our new Virtual Wire Short-range Radio products include both custom and standard modules for our Wireless Systems, a new line of RFICs and the first
shipments of our third generation of our hybrid technology. The product line sales trends are discussed in more detail in the section entitled Product Line Sales Trends below.

Ongoing decreases in average selling prices have had a negative effect on our sales. On a year-to-date basis, our product lines experienced a decrease in
average selling prices of 1% to 11%. We compete in very price competitive markets in which customers have the power to require decreasing prices over time. In addition, we understand that as new products ramp up in volume our customers expect
economies of scale to result in lower pricing. For a discussion of strategies for sustaining gross profit, see Gross Profit below.

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.



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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 or that of our offshore 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. However, we believe
that having multiple approved offshore contractors provides some level of backup for such contingencies.

Year-to-Date Sales Trends

Sales for the current year-to-date period increased 14% over the prior comparable year-to-date period. Filter and Virtual
Wire Short-range Radio had increased sales due to an increase in the number of units sold, primarily for new products. The most significant change was a 41% increase in filter sales over the previous year, primarily related to an ongoing
increase in the number of units sold for the relatively new satellite radio application. Low-power components had decreased sales due to a decrease in the number of units sold. The 10% decrease in low-power component sales was primarily caused by
lower North American automotive production schedules. We have anticipated the decline in sales of low-power components products so we have focused our product and market development efforts on our other products for some time. In recent years we
have introduced many new products for several rapidly growing wireless markets. These include Virtual Wire Short-range Radio products for AMR applications, frequency control modules for optical timing and work station applications and filters
for satellite radio applications. Most of these products experienced an increase in sales as a result of increased market acceptance. Our ability to grow sales in the future will be largely dependent on our ability to develop and sell new products
in amounts great enough to more than offset the anticipated decline in sales for our older low-power components.

Product Line Sales Trends

Filters

Sales of filter
products in the current quarter increased 45% from the comparable quarter of the prior year and 35% from the previous quarter. Both sales increases were primarily due to an increase in the number of units sold as a result of greater market
acceptance of relatively new products for satellite radio applications. The unit increase from the prior comparable period was 74% and 55% from the previous quarter. Included in sales this quarter were approximately $1.3 million in sales for filters
that support a next generation chipset for one of the major providers. We believe sales for the current quarter were at very high levels due to promotions and the change over to a new chipset that were occurring at several contract manufacturers.
The current quarter also included increased sales for several new products serving the Chinese telecommunications market.

We provide
filters for both Sirius Satellite Radio Inc. (NASDAQ:SIRI) and XM Satellite Radio Holdings, Inc. (NASDAQ:XMSR) and we are working with them on future generations of product. We expect sales in units for the satellite radio application will continue
to increase as subscriptions for those services continue to increase. We have seen growth in both automotive and general consumer applications for satellite radio service develop. The consumer portion of the satellite radio market is characterized
by very short lead times as the firms manufacturing the radios wait for orders from retail customers before placing orders for components. As a result, forecasting is very difficult.



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The market for satellite radio filters appears to be more price competitive than we have seen for some of
the markets we serve. As a result, we reduced prices to maintain our market position, which partially offset the impact of an increase in number of units sold. The decrease in average selling price for the current year-to-date period was 11% in
comparison to the prior year-to-date period. We anticipate that this trend towards lower prices will continue or even accelerate as later generations of satellite radio products begin to ship in greater volume. At a result, although we expect the
trend for an increasing number of units sold to continue, this may be largely offset by the trend for lower average selling prices. Therefore, it is not clear that we can maintain the trend of increased overall filter sales.

Virtual Wire Short-range Radio products

Virtual Wire Short-range Radio products sales in the current quarter increased 35% from the comparable quarter of the prior year and 8% in comparison to the previous quarter. The sales increase in both periods
was primarily due to an increase in the number of units sold for industrial automated meter reading, or AMR, applications, due to production level increases on the part of those customers. This was partially offset by decreases in average selling
prices, due to the introduction of radio frequency integrated circuit, or RFIC, products, which have lower average selling prices and a reduction in sales for a medical application which has relatively high selling prices.

We have devoted significant resources to developing and marketing new 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 the current quarter we began shipping small quantities of our third generation of this product, which will add several new features. We expect
increased sales from the new third generation of Virtual Wire Short-range Radio products and the new line of RFIC products as they are more widely accepted in the market. However, it is difficult for us to predict when, or if, these new
products will have a significant impact on our sales.

Wireless Systems

During the prior year, we formed the Wireless Systems group as part of our long range strategic plan. We are investing considerable resources in product
and marketing development to support our strategic plan, amounting to approximately $200,000 in additional quarterly operating expense compared to the prior year. We intend to take advantage of our applications expertise and our core radio
technology and partner with others to develop and market higher level products that fit the low power consumption requirements of what we believe to be a very large potential market for us.

In the current quarter we qualified one of our offshore contract manufacturers to produce both our custom and our standard wireless modules. We also were
awarded our first patent for a Wireless Systems product. During the current year we have reached agreements for alternative radio technologies and software protocol to broaden our flexibility in meeting customer requirements and we have entered into
contracts that have the potential to result in more than a million dollars of sales deliverable in calendar year 2006. Sales for Wireless Systems products are included in Virtual Wire Short-range Radio products and technology development
sales. 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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Low-power Components

Low-power component sales in the current quarter increased 9% from the comparable quarter of the prior year, and 4% from the previous quarter. In both cases, the increase was mostly due to an increase in the number of
units sold. The increase in both cases was largely due to a seasonal increase in a ramping toy application. This is a temporary change from the trend we have seen in recent quarters for a reduction in the number of low-power components units sold in
comparison to the prior year primarily due to reduction in base production schedules at several of our customers, including the tire pressure monitoring, or TPM, application. Sales of low-power components have been significantly influenced in the
past by changing production schedules for automotive customers and we expect this to continue. We have seen a general reduction in the production schedules of most of our automotive customers. In addition, we are seeing declining sales for some of
our older products; including TO-39 package style products and surface mount products for remote keyless entry, or RKE, applications. This continues an ongoing trend for sales of these older products to decline as customers either convert their use
for these products to other technologies (phase lock loop technology without a requirement for a SAW element) or to other very low-priced competitors.

Since the end of the current quarter we have been informed by a key customer that most of the TPM applications we have been supporting have also been converted to alternate technology (an integrated RFIC total
solution). The delay in implementing the regulations of the six year old Tread Act allowed alternate technologies time to penetrate this application with a customized solution. Therefore we no longer believe the TPM application will be a significant
driver for future growth, although some level of sales will continue indefinitely.

The decline in sales of our TPM application in the
current quarter actually resulted in a slight increase in average selling prices for low-power components. However, we still face on an ongoing trend towards lower average selling prices because a primary market for these products is automotive,
which is very price competitive and we have had to reduce average selling prices significantly to maintain our market position. We expect the trend of lower average selling prices for low-power components to continue. As a result of lower average
selling prices and a trend toward lower sales for older products, we think sales of low-power components are unlikely to increase significantly and may continue to decline.

Frequency Control Modules

Sales of frequency control modules in the current quarter increased
14% from the comparable quarter of the previous year and decreased 2% from the previous quarter. The increase from the comparable quarter of the prior year was primarily due to an increase in the number of units sold for work station and internet
backbone applications. We believe most of the increase in sales was a result of a return to more normal economic conditions in the markets we serve, as the prior period was at historically low levels. Sales of frequency control modules have been
very volatile in prior periods, depending on economic conditions in the markets served. We believe economic conditions in relevant markets may stay at their current levels for the immediate future.



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Other Sales Trends

The following table provides additional data concerning our sales:



|                                           |  |                     |   |  |                    |   |  |                  |  
|------------------------------------------ |  | ------------------- | - |  | ------------------ | - |  | ---------------- | -
|                                           |  | Percentage of Sales |  
|                                           |  | Current Quarter     |   |  | Comparable Quarter |   |  | Previous Quarter |  
|Sales to top five customers                |  | 51                  | % |  | 45                 | % |  | 45               | %
|Distribution sales                         |  | 28                  | % |  | 28                 | % |  | 26               | %
|Number of customers with 10% or more sales |  | Four                |   |  | Two                |   |  | Two              |  
|Sales to 10% or more customer              |  | 47                  | % |  | 23                 | % |  | 22               | %
|International sales                        |  | 60                  | % |  | 64                 | % |  | 51               | %

There were four customers that each accounted for more than 10% of sales in the current quarter.
This compares to just two customers in the previous quarter and the comparable quarter of the prior year. The increase in the percentage of sales to the top five and ten customers and the number of customers with 10% or more of sales results from
the increase in sales to the manufacturers of satellite radio systems or to distributors that service them. One of those manufacturers is Delphi Corporation, which is currently in Chapter 11 bankruptcy and involved in negotiations with its labor
unions. While we are encouraged by the reported progress in those negotiations, a protracted strike in the North American automotive industry could have a significant adverse impact on our operations.

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 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 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.

Guidance

Based upon our strong bookings, we expect sales in our fourth quarter to increase 20% to 25% as compared to the fourth quarter of last year, and to decrease 2% to 6% compared to the current quarter. Most of our
customers are unable to forecast accurately the demand for their products beyond several months. As a result, we cannot make an estimate of sales beyond the next quarter.



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Stock Compensation Expense

At the beginning of the current year, we adopted FASB Statement 123(R). Most of the expense that was recorded related to the unvested portion of stock grants that were made in prior years. In addition, the
current quarter includes the impact of restricted stock units, or RSUs. We have switched to RSUs as our primary stock compensation vehicle in lieu of stock options in future periods to better match the employees perceived benefit with the
financial statement cost. Also, RSUs result in less dilution and less expense.

The adoption of FASB Statement 123(R) and change to RSUs in lieu of
stock options has resulted in recording additional stock compensation expense in the current fiscal year as follows:



|                                            |  |         |         |              |   |        
|------------------------------------------- |  | ------- | ------- | ------------ | - | -------
|                                            |  | Quarter |         | Year to Date
|Cost of Sales                               |  | $       | 29,000  |              | $ | 141,000
|Research and development expense            |  |         | 17,000  |              |   | 69,000 
|Sales and marketing expense                 |  |         | 30,000  |              |   | 110,000
|General and administrative expense          |  |         | 51,000  |              |   | 153,000
|                                            |  |         |         |              |   |        
|Total additional stock compensation expense |  | $       | 127,000 |              | $ | 473,000
|                                            |  |         |         |              |   |        

The adoption of FASB Statement 123(R) did not affect our accounting treatment of stock options
granted to consultants and is not reflected in the table above. Stock compensation expense for consultants stock options of $6,000 and $27,000 for the quarter and year-to-date, respectively, was recognized as it has been in prior years.

We expect to record slightly smaller amounts of stock compensation expense for the remainder of the fiscal year as the prior stock
compensation vehicles become vested and the new RSU grants become the primary vehicle.

We intend to continue to use various stock
plans as an important part of our compensation package. We are competing for talent with other companies that have stock plans in place and our work force values stock as a form of compensation. We have made some changes to our Employee Stock
Purchase Program to shorten the offering period and eliminate the look back provision, while retaining the 15% discount allowable for tax purposes. We intend to issue primarily RSUs in lieu of stock options in future periods to lessen dilution and
control expense.

Gross Profit

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

The current quarter gross margin of 29.0%
increased 100 basis points from 28.0% in the comparable quarter of the prior year and decreased 80 basis points from 29.8% in the previous quarter. The 1.0% increase in gross margin from the comparable quarter of the prior year was primarily due the
impact of increased sales volume on relatively significant fixed manufacturing overhead costs, reducing overhead cost on a per-unit basis. Fixed manufacturing costs include a significant amount of depreciation expense for manufacturing equipment.
This offset the impact of a decrease in average selling prices of most volume products, including a 16% decrease in filter average selling price compared to the comparable quarter of the prior year. As in



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prior periods, we were generally able to achieve cost reductions on our volume product lines on a per-unit basis, both in
comparison to the prior year and in comparison to the previous quarter. The cost reductions on a per-unit basis allowed us to improve margins on a year to year basis for each of the product lines, except for the filter products, for which the
decrease in average selling prices was slightly greater than the cost reductions. On a year-to-date basis, we have been able to maintain our filter margins, despite an 11% decrease in average selling prices.

The decrease in gross margin from the previous quarter was primarily due to a change in product mix towards filters, which have below-average margins.
Our higher-priced products, such as Virtual Wire Short-range Radio products and frequency control modules, have a greater long-term potential for strong gross margins than the very price-sensitive low-power components and filters. A shift in
sales away from these higher-priced products has a negative impact on margins. These products in the current quarter represented 33% of total sales, compared to 36% in the previous quarter. Our new product development efforts, such as modules that
incorporate our radio technology, are focused on higher-priced products.

The current year-to-date gross margin was 28.7%, which is a
decrease from the gross margin of 29.2% last year. The decrease from the comparable year-to-date period of the prior year was primarily due to a slightly unfavorable shift in product mix. The higher-margin Virtual Wire Short-range Radio
products and frequency control modules were only 33% of total sales compared to 35% in the comparable year-to-date period. The net impact between decreased average selling prices and lower per-unit manufacturing costs was almost neutral on a
year-to-date bases. The year-over-year decrease in average selling prices for our volume product lines ranged from almost 1% (for low-power components) to 11% (for filters). The two products that had an increase in the number of units shipped
(Virtual Wire Short-range Radio and filter products) were able to achieve reductions in manufacturing costs per unit that equaled or bettered the selling price impact. However, the low-power components product line had a decrease in unit
volume and had a small cost increase, resulting in lower margins for that product. In addition, the impact of the stock compensation expense mentioned in the separate section above was an increase in cost that equaled 0.2% of sales. The net effect
was that in the current year-to-date period overall costs did not decrease as fast as selling prices, so gross margins were slightly lower.

Factors
Influencing Gross Margins

Our gross margin continues to be influenced by several factors, some of which are favorable and some of
which are unfavorable.

There are two favorable factors that are the result of our long-term efforts to improve gross margins. First, each
of our product lines has achieved cost reduction on a year-over-year per-unit manufacturing cost basis for the past several years. The only exception has been the low-power component product line in the last year as unit volume has decreased,
resulting in higher overhead-per-unit 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. We intend to continue our efforts to reduce manufacturing costs in future periods. Second, we have generally had an improvement in product mix. Products such as Virtual Wire Short-range Radio products, Wireless Systems products
and frequency control modules have a greater long-term potential for gross margins than the very price-sensitive low-power component and filter products. A shift in sales to these products has a positive impact on margins. This was not evident in
the decrease in margins between the second and third quarters. However, our new product development, such as the Wireless Systems effort, is focused on higher value-added products and our plan is to rely heavily on these new products for future
sales growth and margin improvement. We expect this trend of favorable shifts in product mix to continue, although there may be some fluctuation in individual periods as we saw in the current quarter.



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As mentioned in the sales section, we face the continuing negative impact of declining average selling
prices as a result of competitive conditions in the markets we serve. We expect the trend of lower prices to continue, although the impact in the current quarter was moderate in some respects as described above in the discussion titled Overall Sales
Trends for the Current Quarter Compared to the Prior Year and Previous Quarter. Therefore, our ongoing efforts to reduce manufacturing costs are an important factor in maintaining gross margins. As mentioned above, the volume of units sold and
produced has a negative impact when the number of units is decreased and relatively high levels of fixed manufacturing costs are spread over fewer units. Another negative impact we experience from time to time relates to start-up costs for new
products entering the volume manufacturing process.

Guidance

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. In recent quarters we have seen the impact that an unexpected shift in product mix or product start-up cost has on us. This makes estimates of our gross margin very difficult. For the fourth quarter,
we expect to see a product mix that will be heavily weighted toward our filter and component products, including some filters for next generation satellite radio chipsets. As a result, we believe that gross margins in the fourth quarter of fiscal
2006 will be in the 27% to 29% range. It should be noted, however, that there is uncertainty as to whether our cost reduction efforts will be sufficient to offset the impact of lower average selling prices in any specific future period.

Research and Development Expense

Research and
development expense was $1.1 million in the current quarter, compared to $1.1 million in both the comparable quarter of the prior year and nearly the same amount as in the previous quarter. The $38,000 increase in research and development expense
compared to the comparable quarter of the prior year results from increases in personnel costs being partially offset by a decrease in outside consulting expenses due to completion of a wireless solutions project and a shift in expense of $47,000 to
cost of sales. The expense included in cost of sales in the current quarter is primarily related to relatively large contracts for which we are doing design engineering services for wireless systems customers. The increase in overall engineering
expense is consistent with our plan to increase research and development efforts to develop new products and new processes to manufacture them.

Year-to-date research and development expense was $3.5 million compared to $3.3 million in the prior year-to-date period. The research and development expense for the current year does not include the impact of a $223,000 increase in cost
of sales in comparison to the previous year-to-date period, also primarily to support Wireless Systems design services sales. On an overall basis, this is an 11% increase in spending, which reflects our decision to significantly increase our product
development efforts to bring new products to market. We believe that the continued development of our technology and new products is essential to our growth and success and are committed to continue to devote significant resources to research and
development. We expect that research and development expense will be comparable or slightly increased in absolute dollars in the next quarter; although some of these costs may be reflected in cost of sales related to technology development sales.

Sales and Marketing Expense

Current
quarter sales and marketing expense was $1.7 million, compared to $1.3 million in the comparable quarter of the prior year and $1.6 million in the previous quarter. The 32% increase from the prior year was primarily due to increased sales commission
expense related to increased sales, additional personnel and other costs related to our effort to increase sales, particularly for Wireless Systems products, as



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well as the recognition of stock compensation expense described in the discussion titled Stock Compensation Expense.
Year-to-date sales and marketing expense was $4.9 million compared to $4.0 million for the comparable year-to-date period. This 21% increase also occurred for the same reasons. We expect to incur comparable sales and marketing expense in absolute
dollars in the next quarter, including sales commission expense which will fluctuate in line with sales levels.

General and Administrative Expense

General and administrative expenses were $886,000 for the current quarter, compared to $726,000 for the comparable quarter of the prior
year and $810,000 in the previous quarter. This was a 22% increase from the comparable quarter of the prior year and a 9% increase from the previous quarter. This increase over the comparable period was primarily due to increased executive
compensation and the recognition of stock-based compensation expense described earlier, offset by the lower cost of implementing Section 404 of the Sarbanes-Oxley Act, or SOX. These SOX-related costs were high last year as we were implementing
our systems. Legal fees of approximately $100,000 related to a settled matter were unusually high in the current quarter. Year-to-date general and administrative expense was $2.4 million for the current year, compared to $2.2 million for the prior
year year-to-date period. The net 13% increase in expense resulted from the same factors that influenced the quarterly changes. We expect to incur slightly increased general and administrative expense in absolute dollars in the next quarter.

Total Operating Expenses

Operating
expenses increased $621,000 over the prior year and $197,000 over the previous quarter. The primary reason for the increase over the prior year is the recognition of $98,000 in stock compensation expense in the current quarter, increased sales
commission expense of $226,000 related to increased sales and the impact of our program to make selected personnel additions to support our strategic business plan. These headcount additions resulted in approximately $244,000 in additional cost in
the current quarter compared to the comparable quarter of the prior year. Total operating expenses were 26% of sales for the current quarter, compared to 28% for both the previous quarter and the comparable quarter of the prior year. The reduction
in operating expense in the current quarter was due to the rapid increase in sales that was not matched by comparable spending levels.

Year-to-date operating expenses were 27% of sales, the same percentage as for the prior year-to-date period. In this case, spending levels increased at approximately the same rate as sales. In absolute dollars, operating expenses increased
$1.3 million or 13% on a year-to-date basis, which consisted of $332,000 due to increased stock compensation expense, $338,000 due to increased sales commission expense related to increased sales and approximately $700,000 due to our support of
strategic programs. Other expenses, such as SOX-related costs, were slightly lower.

Guidance on Operating Expenses

Our third quarter operating expense is expected to increase as we continue to execute our Wireless Systems strategy. In addition, we expect sales
commission expense to fluctuate in line with sales.

Other Income (Expense)

Total other income (expense) was $68,000 of expense in the current quarter, compared to $3,000 in expense for the comparable quarter of the prior year and
$69,000 in expense the previous quarter. The increase in expense from the prior year was primarily related to start-up costs for a wireless systems investment that we account for as minority interest. Partially offsetting this was an increase in
interest income due to increasing interest rates and increased cash balances. Year-to-date total other income



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(expense) was $85,000 in expense, compared to $1,000 in income in the prior year. The increase in expense from the prior
year was primarily related to start-up costs for a wireless systems investment that we account for as minority interest. This was partially offset by an increase in interest income from cash investments. We believe that other income (expense) will
remain at comparable levels of expense due to wireless systems investments for the next quarter.

Income Tax Expense

In both the current and prior years we recorded small provisions for state income tax. In the current year, because of an NOL carry-forward, we had a
small provision for net alternative minimum federal tax. We expect to record relatively small income tax provisions in the near future relating to operations. In fiscal 2006 the net alternative minimum federal tax is expected to cause a tax expense
of approximately 3% of taxable income.

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 last fiscal year, we had income tax carry-forwards and other potential tax benefits available to reduce future federal taxable income by approximately
$17.8 million. The net operating loss carry-forward begins to expire on August 31, 2020.

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.

Earnings Per Share

Net income was $413,000, or $0.05 per diluted share, in the current quarter, compared to $58,000, or $0.01 per diluted share, for the comparable quarter
of the prior year and net income of $140,000 or $0.02 per diluted share for the previous quarter. The increases in both periods were largely a result of increased sales and resulting increased gross margins that were partially offset by increased
operating expense.

Year-to-date net income was $504,000 or $0.06 per diluted share compared to $686,000 or $0.08 per diluted share. This
is despite the impact of a 14% increase in sales and the resulting increase in gross margin. Two factors were primarily responsible for the decrease in net income: (1) approximately $700,000 in additional operating expenses related to headcount
additions to support our strategic plan and (2) a $473,000 increase in stock compensation expense as a result of the adoption of FASB Statement 123(R) and our change to RSUs in lieu of stock options.

Financial Condition

Financing Arrangements

Our banking agreement and its status at the end of the current quarter are described in Note 4 to our Financial Statements included in this report.

Our revolving line of credit agreement contains customary financial covenants. We were in compliance with all covenants as of May 31,
2006. Although we believe that we will be able to continue to comply with such covenants, there is no assurance that this will occur. Should there be a covenant violation when we have outstanding borrowings and there is not 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 on December 31, 2006.



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At May 31, 2006, we maintained access to the revolving line-of-credit. There have been no borrowings
against the line of credit during the current year. Loan advances of approximately $6.1 million were available under our current borrowing base.

Liquidity

The major source of liquidity at May 31, 2006, consisted of $5.8 million of cash and $6.1 million
available under the banking agreement. Net cash provided by operating activities was $1.9 million for the current year-to-date period as compared to $3.5 million for the comparable period of the prior year. While net income was $182,000 lower in the
current year, it was more than offset by a $220,000 increase in noncash items included in net income. Non-cash items included in net income, such as depreciation and stock-based compensation, totaled $2.1 million in the current year-to-date period,
compared to $1.8 million in the prior year. The increase in noncash items was primarily due to an increase in stock-based compensation of $449,000.

The decrease in net cash provided by operations was primarily due to a $0.9 million increase in working capital needed to support our increase in sales this year, compared to a $1.1 million decrease in working capital on slightly decreased
sales in the prior year. The biggest change was a $1.8 million in increased trade receivables resulting from the large sales increase. Collections of our receivables on a days-sales-outstanding measurement remained in the mid 50s in the
current quarter. Past due accounts continued to be insignificant. Trade receivables decreased $262,000 in the prior year, reflecting lower sales. Liabilities like accounts payable and accrued expenses increased $1.6 million due to an increased scope
of operations in the current year, compared to only $550,000 in the prior year. This partially offset the increase in receivables in the current year. We continued to be within payment terms with our vendors in fiscal 2006. Another factor resulting
in reduced operating cash flow was increased inventory of $389,000 in the current year to support the new product lines that we have introduced.

As we have done in the last four fiscal years, we expect to maintain positive cash flow from operations for fiscal 2006. 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 $1.8 million for the current year-to-date period, as
compared to $1.2 million for the prior year-to-date period. In each case, the primary investing activity was capital spending. We expect to acquire up to $2.2 million of capital equipment by the end of fiscal 2006, primarily related to the
development of new software systems and new products.

Net cash provided from financing activities was $298,000 in the current year-to-date
period, compared to $214,000 in the prior year-to-date period. In the current year, $396,000 was generated from sales of stock related to our stock compensation programs, compared to $302,000 in the prior year.

As of May 31, 2006, we had approximately $6.1 million available in cash under our banking arrangement based upon the borrowing base, which is
derived from trade accounts receivable. In addition, approximately $3.9 million may become available under the revolving credit facility if our borrowing base were to increase sufficiently to support the increased borrowing. We are not able to say
when or if an increase in our future borrowing base will happen because of our inability to project sales levels very far into the future due to limited lead times on orders placed with us by our customers.



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Operating cash flow turned strongly positive in the current quarter at $1.4 million, offsetting the
previous quarters first negative operating cash flow in the last twenty one quarters. We expect operating cash flow to continue to be strongly positive for the year. Despite our recent history of positive cash flow, 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.

Stock Options

(a) Stock Option Program Description

Our
stock compensation 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 or have granted stock options to employees, directors and consultants. The options generally vest at a rate of one forty-eighth each month. 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 also use the 1997 Plan to grant RSUs. The grants are not considered issued stock when granted and certificates are issued to the grantee only as vesting occurs. We record unearned compensation based on the share price on the date of grant, and
expense that compensation over the vesting period.

We adopted a recent accounting pronouncement, FASB Statement 123(R) for employees and
directors for our fiscal year beginning September 1, 2005. In compliance with the standard, we recorded stock-based compensation expense in the current fiscal year relating to stock options for employees and directors and our Employee Stock
Purchase Plan. Prior to the current fiscal year, we accounted for our option plans under APB 25 and, accordingly, did not recognize compensation expense for options granted to employees and directors. Options granted to consultants are accounted for
under FASB Statement 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. Footnote 5 to our condensed
consolidated financial statements sets forth the stock compensation expense recognized in the current quarter and year to date.



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(b) General Stock Option Information

Summary of Stock Option Activity

The following is a summary of stock option
activity for the fiscal year ended August 31, 2005 and the nine months ended May 31, 2006:



|           |  |                                        |  |                                  |   |  |                      |   |  |                                     |     
|---------- |  | -------------------------------------- |  | -------------------------------- | - |  | -------------------- | - |  | ----------------------------------- | ----
|           |  |                                        |  | Options Outstanding             
|           |  |                                        |  | Shares Available for Options (#) |   |  | Number of Shares (#) |   |  | Weighted Average Exercise Price ($)
|Balance at |  | August 31, 2004                        |  | 466,852                          |   |  | 2,069,003            |   |  | $                                   | 6.30
|           |  | Grants                                 |  | (292,296                         | ) |  | 292,296              |   |  | $                                   | 5.71
|           |  | Exercises                              |  |                                 |   |  | (102,558             | ) |  | $                                   | 4.12
|           |  | Cancellations                          |  | 31,666                           |   |  | (31,666              | ) |  | $                                   | 8.77
|           |  | Cancel shares reserved in expired Plan |  | (28,542                          | ) |  |                     |   |  |                                     |    
|           |  |                                        |  |                                  |   |  |                      |   |  |                                     |     
|Balance at |  | August 31, 2005                        |  | 177,680                          |   |  | 2,227,075            |   |  | $                                   | 6.29
|           |  | Grants-stock options                   |  | (6,000                           | ) |  | 6,000                |   |  | $                                   | 5.01
|           |  | Grants-restricted stock units          |  | (110,700                         | ) |  |                     |   |  |                                     |    
|           |  | Exercises                              |  |                                 |   |  | (71,021              | ) |  | $                                   | 3.47
|           |  | Cancellations-stock options            |  | 76,262                           |   |  | (76,262              | ) |  | $                                   | 7.16
|           |  | Cancellations-restricted stock units   |  | 800                              |   |  |                     |   |  |                                     |    
|           |  | Additional shares reserved             |  | 400,000                          |   |  |                     |   |  |                                     |    
|           |  |                                        |  |                                  |   |  |                      |   |  |                                     |     
|Balance at |  | May 31, 2006                           |  | 538,042                          |   |  | 2,085,792            |   |  | $                                   | 6.35

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

The following table compares the number of shares subject to stock option grants with exercise prices below the closing price of our common stock at
May 31, 2006 (referred to as In-the-Money) with the number of shares subject to stock option grants with exercise prices equal to or greater than the closing price of our common stock at May 31, 2006 (referred to as
Out-of-the-Money). The closing price of our common stock at May 31, 2006 was $6.00 per share.



|                          |  |             |  |                              |      |            |         |                              |   |            |  |                              |  |   |     
|------------------------- |  | ----------- |  | ---------------------------- | ---- | ---------- | ------- | ---------------------------- | - | ---------- |  | ---------------------------- |  | - | ----
|                          |  | Exercisable |  | Unexercisable                |      | Total     
|As of End of Quarter      |  | Shares (#)  |  | Wtd. Avg. Exercise Price
($) |      | Shares (#) |         | Wtd. Avg. Exercise Price
($) |   | Shares (#) |  | Wtd. Avg. Exercise Price
($)
|In-the-Money              |  | 850,266     |  | $                            | 3.66 |            | 61,575  |                              | $ | 3.56       |  | 911,841                      |  | $ | 3.65
|Out-of-the-Money          |  | 1,128,290   |  | $                            | 8.47 |            | 45,661  |                              | $ | 7.66       |  | 1,173,951                    |  | $ | 8.44
|                          |  |             |  |                              |      |            |         |                              |   |            |  |                              |  |   |     
|Total Options Outstanding |  | 1,978,556   |  | $                            | 6.40 |            | 107,236 |                              | $ | 5.30       |  | 2,085,792                    |  | $ | 6.35
|                          |  |             |  |                              |      |            |         |                              |   |            |  |                              |  |   |     



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Forward-looking Statements

This report and other presentations made by us contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We believe that these statements are based
on reasonable assumptions and our expectations at the time. Our actual results could and will differ materially from the statements and assumptions discussed in this report. However, these statements involve risks and uncertainties and are
completely qualified by reference to several important factors. These factors include, but are not limited to, the items listed below, as well as those included in the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations in this report. Any and all of these factors could cause our actual results to differ materially from the forward-looking statements and assumptions that we made:



| | 1. | The impact of competitive products and pricing. We do business in markets that are noted for fierce competition and generally declining average selling prices. Most of our
significant competitors are much larger and better financed than we are. These competitors could execute sales strategies that could take a considerable amount of our business very quickly. This could have a material adverse impact on both our sales
and gross margins.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The timely development, acceptance and pricing of new products. We have a large amount of continuing sales of older products that tend to decline in popularity and average selling
price over time. Only by developing new products can we replace sales for declining products and partially offset the impact of lower average selling prices.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The impact of competing technologies including the obsolescence of existing products. Our business has a considerable amount of technological risk. We are vulnerable to competitors
that have much greater resources than we do that are trying to develop products that are technologically superior to ours. If customers believe those products are superior to ours, they may shift their purchases to them.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The ability to obtain production material and labor and capacity to meet product demand. Shortages could occur that make us unable to take advantage of a sudden increase or even
stable level of demand.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | The potential transition to higher value-added products. Our historical base business is declining. Only by successfully developing and introducing value added products to our
customers can we offset this impact. The transition to Wireless Systems products involves new technologies and markets that are not similar to other businesses. We anticipate that there may be many things we will need to learn and master to be
successful in this new line of business.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | The timely implementation of improved manufacturing processes. We need to continually reduce our costs to offset the impacts of a reduction in our average selling prices. We need to
do this through continuous cost reduction in both our facilities and those of our contractors. In addition, our manufacturing processes are complex and involve difficult to maintain procedures that if not carried out properly could result in
incremental cost.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. | General economic conditions as they affect our customers and manufacturing contractors. Our customers and contractors do business in markets that are vulnerable to changes in
economic conditions, including potential labor stoppages or other labor related issues. The future success of a major customer, Delphi, could depend on labor cost negotiations currently taking place. Adverse economic conditions can adversely impact
the demand and/or the ability to supply our products.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 8. | The availability to obtain required financing on favorable terms. If we have unanticipated difficulties, our banking relationships and other means of financing could be jeopardized.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 9. | General industry trends. Markets or customer preferences could move away from our products.
| | -- | -------------------------------------------------------------------------------------------



| | 10. | Acts of war or terrorism as they affect us, our customers or our contract manufacturers.
| | --- | ----------------------------------------------------------------------------------------

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 anticipated 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 May 31, 2006 and accordingly have not hedged any such risk.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon
that evaluation, our principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported in a timely manner. There have been no changes in our internal control over financial reporting during the quarter ended May 31, 2006 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

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, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(b) | Exhibits included:
|--- | ------------------



|        |  |                                                                           
|------- |  | --------------------------------------------------------------------------
|Exhibit |  | Description                                                               
|10.3    |  | Executive Compensation  Base Salaries.                                   
|        | 
|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 Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                      |  |                            
|-------------------- |  | -------------------- |  | ---------------------------
|                     |  | RF MONOLITHICS, INC.
|                     |  |                     
|Dated: July 14, 2006 |  | By:                  |  | /s/ David Kirk             
|                     |  |                      |  | David Kirk                 
|                     |  |                      |  | CEO, President and Director
|                     |  |                     
|Dated: July 14, 2006 |  | By:                  |  | /s/ Harley E Barnes III    
|                     |  |                      |  | Harley E Barnes III        
|                     |  |                      |  | CFO                        



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INDEX TO EXHIBITS



|        |  |                                                                              
|------- |  | -----------------------------------------------------------------------------
|Exhibit |  | Description                                                                  
|10.3    |  | Executive Compensation  Base Salaries.(1)                                   
|        | 
|31.1    |  | Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO.(1)
|        | 
|31.2    |  | Certificate Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CFO.(1)
|        | 
|32.1    |  | Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CEO.(1)
|        | 
|32.2    |  | Certificate Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 for CFO.(1)

---

|(1) | Filed as an exhibit to this Form 10-Q.
|--- | --------------------------------------