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, 2008, filed with the Securities and Exchange Commission.

General

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

Our Wireless Solutions business includes Virtual Wire® Short-range Radios, Radio Frequency Integrated Circuits, or RFIC's, and wireless module products. The products are various types of radios and the networks that manage and use these radios. Our goal is to provide customers with a wide variety of alternative products for their wireless network applications. Our product offerings include miniature radios that are very short range and ultra low-power. We also market standard and custom OEM radio modules as well as packaged radio products that have longer range and increased data rates.

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

Executive Summary

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

Our strengths include: (a) our ability to identify and capitalize on trends in a rapidly growing wireless marketplace; (b) our capability to develop products and services that have superior technical characteristics; (c) our expertise to assist our customers in incorporating our products into their applications; and
(d) our demonstrated ability to manufacture high quality cost-effective products made by our contract manufacturers in volume with short lead times. Our manufacturing capabilities are greatly enhanced by our relationships with several domestic and offshore contractors.

Our Wireless Components business, which historically was our core business, has declined in sales due to decreased average selling prices in several intensely competitive markets and due to our loss of market share to competing technologies. In addition, the Wireless Component business will likely be negatively impacted by recent economic difficulties, especially for the automotive market. As a result, we have focused our product and market developments on products for our Wireless Solutions business which we feel offer a technical edge and have greater gross margin potential.

A key factor in our combined sales performance is successfully developing and selling new products in volumes adequate to offset the decline in prices and unit sales volumes of our older products. A key factor in our combined gross margin performance is reducing our costs (through innovation, assisting our contractors in achieving lower costs of manufacture, and increased volume) and improving our product mix towards higher margin products to offset expected declines in average selling prices. The Cirronet acquisition was a key part of our strategy to grow sales with new products that have higher margin potential.

With only three exceptions, we generated positive operating cash flows in the nine most recent quarters, including our current quarter and our last two fiscal years since our acquisitions to expand our Wireless Solutions business. See the section below entitled Actions to Improve Liquidity for discussion of cash flows for the current period. Our ability to maintain positive cash flows is dependent on our success in restructuring our expense levels in relation to sales. See the next section below entitled Current Business Conditions and Actions to Improve Profitability for discussion of our restructuring program. In any case, the amount of positive cash flow may decrease or occasionally turn negative due to fluctuating revenues, declining margins, escalating operating costs, the need for increased working capital to support increased sales, or increased spending to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.

Current Business Conditions and Actions to Improve Profitability

As we expected, the worsening economic situation had an enormous effect on us in our second quarter, resulting in significantly lower sales, gross margins and a significant net loss from operations. Many of our markets, particularly the automotive sector, were severely impacted. Historically the automotive market has represented 25% to 30% of our quarterly sales. This quarter, our percentage of sales from automotive markets fell to 18% of much lower total sales. We believe that our sales to automotive markets will continue to be materially adversely affected for at least the next few quarters. While we believe some of our markets, including medical and industrial, may weather the recession better than other markets, it is clear that there will continue to be weakness in many of our markets, especially the automotive market. Economic conditions in several markets remain difficult to predict, so we cannot say when or how much any recovery might be, or even whether or not there could be a further decline in sales.

In response to expected sales declines and economic uncertainties, we took aggressive actions in our second quarter to align expense levels with anticipated lower sales levels. As we continue to restructure the Company, we are committed to the following actions:

a. Continue to actively manage our inventory levels, achieving a significant decrease in inventory in our first quarter, a slight decrease in the second quarter and targeting an additional decrease in our third quarter.

b. In our current quarter ended February 28, 2009, we reduced our workforce by approximately 36% and implemented a 10% across-the-board salary reduction. A vast majority of the workforce reduction took place at the end of the first month of the quarter, so the current quarter saw approximately two thirds of the planned effect.

c. Suspended our 401(k) match and we have suspended cash compensation in the form of quarterly retainers and meeting fees for our outside directors.

d. We continue to focus our sales efforts on markets that face less economic pressure, such as the medical market. This has the effect of improving our overall gross margins, since these markets have higher gross margin potential than more competitive markets such as the automotive or consumer markets.

e. In addition to personnel-related reductions, we took other cost reduction measures and will further adjust our business structure.

These actions were in addition to a series of actions that we had taken in the previous two years to reduce our costs by approximately $9 million on an annual basis. As management expected, our second quarter actions resulted in a net reduction in recurring operating expenses of approximately $1 million in our second quarter. Further, we thought that this would reduce our overall breakeven sales point for profitability by up to 30% from our first quarter and we believe that it has. Also as expected, our cash flow breakeven sales point was at least 5% below the profitability breakeven point due to some continuing noncash expenses. The associated restructuring expense for severance and other nonrecurring costs in our second fiscal quarter were approximately $530,000, which were slightly less than expected.

We will continue to take the actions required to restructure our business to produce significant positive operating cash flow and to return to overall profitability when economic conditions permit. While our cost reductions have resulted in a much lower cost business model, current economic conditions make forecasting future profitability very difficult.

Actions to Improve Liquidity

Our operating results for the second quarter resulted in a violation of the financial covenants in our Credit and Security Agreement dated August 29, 2007 as amended, or Credit Agreement. Under the terms of the Credit Agreement, we were required, for the quarter ended February 28, 2009, to achieve certain standards for net income (as adjusted per the Credit Agreement) and debt service coverage which were not attained. The Credit Agreement provides that, upon non-compliance with such financial covenants, the bank may take various actions, including among other things any one or more of the following: (i) terminate its commitment to make advances to the Company, (ii) declare the balance of the indebtedness, in the amount of approximately $4.7 million as of March 31, 2009, due and payable, or (iii) exercise its rights as a secured creditor by taking possession of or otherwise liquidating some or all its collateral.

Additionally, the Credit Agreement allows the bank to increase the interest rate on unpaid balances by four percentage points while we are not in compliance with the Credit Agreement. This has increased our current interest rate from 5.25% to 9.25%. Pursuant to the Credit Agreement the bank has done this retroactively to March 1, 2009. We estimate this will increase interest expense approximately $18,000 per month until the violations are waived.

We continue to work with the bank toward resetting our financial covenants under an amendment. So far, other than increase the interest rate, the bank has chosen not to exercise its rights under the Credit Agreement listed above. We continue to have access to available funds under the revolver. Based on discussions with the bank and our prior history of obtaining waivers or amendments, we remain cautiously optimistic that we can enter into agreements with the bank and/or others that will allow our operations to continue without disruption. While we hope that our continuing discussions prove successful, there can be no assurance that the bank will not pursue some or all of its remedies under the Credit Agreement.

As part of the bank loan collateral measurement, we had various appraisals performed on our collateral property in the current quarter. Given current economic conditions, the appraisals were at lower levels than in better economic times, and our advance rates have been reduced accordingly.

The change in advance rates has resulted in a significant reduction in our cash availability of approximately $600,000, and put pressure on our operations. We have continued to meet the payment requirements of our Credit Agreement since the change in advance rates went into effect in the month of March, including a payment on our term loan of $333,000. However, we are working with our suppliers to extend payments while we transition to the new advance rates. So far we have been able to do this, but there can be no assurance that this can continue to be done. A significant interruption in the flow of material from our suppliers due to credit term issues would have a material adverse effect on our operations and, in the absence of additional financing, result in our insolvency.

One objective of our actions discussed in the preceding section was to generate positive operating cash flow during this period of economic downturn. Those actions have generated positive operating cash flow of approximately $4.0 million during our last three quarters, including $2.2 million in the current quarter. A significant portion of that positive operating cash flow was derived from collecting accounts receivable in excess of declining sales, which was achieved due to very favorable collection rates from our customers. However, should sales level out at current levels, collections will no longer exceed sales and no longer can be a significant source of funds. We believe that our inventory levels are relatively high in relation to our current business levels, so we are targeting further contributions to positive operating cash flow from further decreases in inventory in future quarters. We were very successful in doing this in our first quarter, with a $2 million dollar reduction, and even reduced inventory in our second quarter, despite the sudden decrease in sales of 42% from the previous quarter. We believe that we can reduce inventories in our next quarter by approximately $500,000 or more.

Another action that we are pursuing is to refinance our remaining term loan debt with our primary lender by arranging a new loan with another financial institution secured by a mortgage on our Dallas headquarters. The refinancing would reduce quarterly payments to service the debt and provide some additional funds for operations. We believe this can be achieved in our third quarter.

We believe we have put in place a cost structure that is capable of generating positive earnings before taxes, interest, depreciation and amortization ("EBITDA") at current sales levels when the other measures described above under this heading become less effective. It is our objective to continue to generate positive cash flow, service our bank debt and keep in good standing with our suppliers in the immediate future, although this cannot be assured due to the economic uncertainties we face.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the periods presented. We described our most significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating reported financial results, in our Annual Report filed with the Securities and Exchange Commission on November 24, 2008 on Form 10-K. Those policies continue to be our most critical accounting policies for the period covered by this filing.

Results of Operations

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

• The current quarter and current year-to-date period, each ended February 28, 2009, of the fiscal year ending August 31, 2009, in comparison to the comparable quarter of the prior year and prior year-to-date period, each ended February 29, 2008 of the fiscal year ended August 31, 2008.

• Certain comparisons with the three months ended November 30, 2008 (previous quarter) are provided where we believe it is useful to the understanding of trends.

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

The following table illustrates operating results for the four quarters of fiscal 2008 and the first two quarters of fiscal 2009 (in thousands, except percentage data). These figures will be used when discussing trends in the following section. The reported amounts for fiscal 2008 have been adjusted from previous quarterly reports because of classification of discontinued operations.

                                                           Fiscal 2008                             Fiscal 2009
                                                          Quarter Ended                            Qtr. Ended
                                         Nov. 30      Feb. 29       May 31       Aug. 31      Nov. 30      Feb. 28
Sales by product area:
Wireless Solutions Group:
Virtual Wire® Radio products             $  3,642     $  3,773     $  3,061     $   2,799     $  2,937     $  2,502
Cirronet modules                            3,330        2,754        2,457         3,154        2,766        1,924

Subtotal                                    6,972        6,527        5,518         5,953        5,703        4,426
Wireless Components Group:
Filters                                     5,880        3,895        4,830         4,141        3,939        1,259
Frequency control modules                     651          506          951           796          574          223
Low-power components                        2,264        2,803        1,480         1,494        1,151          690

Subtotal                                    8,795        7,204        7,261         6,431        5,664        2,172

Total Sales                                15,767       13,731       12,779        12,384       11,367        6,598
Cost of sales                               9,868        8,279        8,136         7,816        7,150        4,342


Gross profit                                5,899        5,452        4,643         4,568        4,217        2,256
% of sales-Wireless Solutions                52.2 %       50.7 %       47.9 %        49.6 %       49.6 %       38.5 %
% of sales-Wireless Components               25.7 %       29.7 %       27.5 %        25.1 %       24.5 %       25.5 %
% of sales-Total                             37.4 %       39.7 %       36.3 %        36.9 %       37.1 %       34.2 %

Operating expenses:
Research and development                    1,789        1,842        1,803         1,667        1,266        1,046
Sales and marketing                         2,196        2,185        2,092         1,930        1,814        1,140
General and administrative                  1,183        1,066          984         1,068        1,011          910
Restructuring and impairment                   99          (44 )        265        16,192          (67 )        460

Total                                       5,267        5,049        5,144        20,857        4,024        3,556


Income from operations                        632          403         (501 )     (16,289 )        193       (1,300 )
Other income (expense), net                   (65 )       (169 )       (160 )        (174 )       (173 )       (154 )


Income before income taxes                    567          234         (661 )     (16,463 )         20       (1,454 )
Income tax expense (benefit)                    8            5           25          (163 )          5            8


Income(loss)-continuing operations            559          229         (686 )     (16,300 )         15       (1,462 )
Loss-discontinued operations                 (446 )       (331 )       (733 )      (3,181 )        (61 )        (31 )


Net Income (loss)                        $    113     $   (102 )   $ (1,419 )   $ (19,481 )   $    (46 )   $ (1,493 )

The following table sets forth, for the three and six months ended February 28, 2009 and February 29, 2008, (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                         Six Months Ended                  Three Months            Six Months
                                       February 28,         February 29,         February 28,         February 29,        Ended February         Ended February
                                           2009                 2008                 2009                 2008             2008 to 2009           2008 to 2009
Sales                                           100 %                100 %                100 %                100 %                 (52 )%                 (39 )%
Cost of sales                                    66                   60                   64                   61                   (48 )                  (37 )

Gross profit                                     34                   40                   36                   39                   (59 )                  (43 )

Research and development                         16                   13                   13                   12                   (43 )                  (36 )
Sales and marketing                              17                   16                   16                   15                   (48 )                  (33 )
General and administrative                       14                    8                   11                    8                   (15 )                  (15 )
Restructuring and impairment                      7                    0                    2                    0                 1,145                    615

Total operating expenses                         54                   37                   42                   35                   (30 )                  (27 )

Income from operations                          (20 )                  3                   (6 )                  4                  (423 )                 (207 )
Other expense, net                               (2 )                 (1 )                 (2 )                 (1 )                  (9 )                   40

Income before income taxes                      (22 )                  2                   (8 )                  3                  (721 )                 (279 )
Income tax expense                                0                    0                    0                    0                    60                      0

Net income (loss)-continuing ops.               (22 )                  2                   (8 )                  3                  (738 )                 (284 )
Net loss-discontinued operations                 (1 )                 (3 )                 (1 )                 (3 )                 (91 )                  (88 )

Net income (loss)                               (23 )%                (1 )%                (9 )%                 0 %              (1,364 )%             (14,091 )%

Sales

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

Total sales decreased 52% in the current quarter compared to the comparable quarter of the prior year and 42% from the previous quarter. The primary reason for the changes in both periods were corresponding changes in the number of units sold for most of our volume product lines. Wireless Components sales were down 70% from the comparable quarter of the prior year and 62% from the previous quarter. Wireless Solutions sales were down less than that at 32% and 22% respectively from those same periods.

As we expected, the economic downturn has had a material adverse effect on our sales, particularly for automotive and consumer products. Sales to automotive markets were down approximately 70% from the comparable quarter prior year and almost 50% from the previous quarter. Automotive production was at very low levels all around the world in the current quarter, which included extended holiday shut downs. Sales to consumer markets were down approximately 90% and 75% for the same time periods. Both markets have been adversely affected by economic conditions, as well as inventory levels at various points in the supply chain that needed to be sold down to more appropriate levels. A significant portion of sales to both markets are normally for the satellite radio application, which is why filter sales were down approximately 68% in comparison to both periods. Low-power components sales also were affected adversely by the automotive market trends, as those sales were 75% lower than the comparable quarter of the prior year and 40% from the previous quarter. The decrease in automotive sales was the primary reason for the substantial decline in Wireless Components. For further information, see the sections below entitled Product Line Sales Trends - Wireless Components Group.

For several years, we have focused our product and market development efforts on our Wireless Solutions products. The primary markets for these products are industrial and medical. Sales to industrial markets were significantly lower, decreasing approximately 40% from the comparable quarter of the prior year. This is the primary reason why sales of Cirronet products were 30% lower in both the three and six month periods than for the comparable periods of the prior year, especially for European surveying and telemetry applications. Virtual Wire® Short-range Radio products were also affected, as those sales decreased 34% from the comparable quarter of the prior year and 15% from the previous quarter. Our primary customers for Wireless Solutions products are OEM customers and contract manufacturers and distributors. These customers order product based upon their own production schedules or the production schedules requested by their customers, which have historically shown considerable volatility. Production levels were generally low in the current quarter, although not quite as low as they were for Wireless Components products. For further information on these products see the section below entitled Product Line Sales Trends - Wireless Solutions Group.

The biggest exception to these negative trends was sales to medical applications for Virtual Wire® Short-range Radio and Cirronet module products. Sales for the medical market actually increased approximately 30% over the comparable quarter of the prior year and 15% over the previous quarter. In contrast to other markets, medical products, a market that we have been developing for years, continues to have products introduced into production. We believe sales for medical applications may continue at high levels or may even increase, despite overall economic conditions.

Our strategy has been to grow our Wireless Solutions business to offset an expected decline in the Wireless Components business. We have focused our product and market development efforts on products with higher technical content, which allows them to be sold with higher gross margins. Total Company sales will expand only if the anticipated growth in Wireless Solutions sales . . .