Summary of R F INDUSTRIES LTD

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements. These statements relate to future events or the Company's future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. The Company is under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.

The following discussion should be read in conjunction with the Company's financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including without limitation the disclosures made under the caption "Management's Discussion and Analysis and Plan of Operation," under the caption "Risk Factors," and the audited financial statements and related notes included in the Company's Annual Report filed on Form 10-K for the year ended October 31, 2008 and other reports and filings made with the Securities and Exchange Commission.

Critical Accounting Policies

The financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires the Company's management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. The Company's significant accounting policies are summarized in Note 1 to the financial statements contained in its Annual Report on Form 10-K filed for the fiscal year ended October 31, 2008.

Executive Overview

The Company markets connectors and cables to numerous industries for use in thousands of products, primarily for the wireless marketplace. In addition, to a limited extent, the Company also markets wireless products that incorporate connectors and cables. Since sales of RF connectors and cable assemblies represented 84% and 85% of the Company's net sales during the three and nine month periods ended July 31, 2009 respectively, the Company's results of operations and liquidity are principally dependent upon the results of its RF connector and cable operations.

Liquidity and Capital Resources

Management believes that existing current assets and the amount of cash it anticipates it will generate from current operations will be sufficient to fund the anticipated liquidity and capital resource needs of the Company for at least twelve months. The Company does not, however, currently have any commercial banking arrangements providing for loans, credit facilities or similar matters should the Company need to obtain additional capital. Management's beliefs that its existing assets and the cash expected to be generated from operations will be sufficient during the current fiscal year are based on the following:

· As of July 31, 2009, the amount of cash and cash equivalents was equal to $2,492,045 in the aggregate and the Company had $4,502,074 of investments in certificates of deposit.

· As of July 31, 2009, the Company had $15,308,406 in current assets, and $776,881 in current liabilities.

· As of July 31, 2009, the Company had no current or long-term outstanding indebtedness (other than accounts payable and accrued expenses).

The Company does not anticipate needing material additional capital equipment in the next twelve months as it purchased most of the necessary additions during the first quarter of fiscal 2009. In the past, the Company has financed some of its equipment and furnishings requirements through capital leases. No additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve months. Management also believes that based on the Company's current financial condition, the absence of outstanding bank debt and recent operating results, the Company would be able to obtain bank loans to finance its expansion, if necessary, although there can be no assurance any bank loan would be obtainable or, if obtained, would be on favorable terms or conditions.

The Company earned net income of $387,630 for the nine months ended July 31, 2009. The Company used $450,000 of cash to pay income taxes, $95,329 to further reduce its accounts payable and $388,411 for prepaid expenses and deposits, all of which further reduced the Company's cash. However, because the Company generated $650,628 by reducing its inventories and $190,374 from increased collections of its accounts receivable, the Company had a positive net cash flow of $931,903from operating activities during the nine months ended July 31, 2009. Also, during the nine months ended July 31, 2009, the Company liquidated $4,478,821 of certificates of deposit, invested $2,117,184 of those funds in other certificates of deposit, and purchased $158,403 of new assets. As a result of these investing activities, the Company realized $2,203,234 of net cash from investing activities. During the nine month period, the Company also used $1,609,151 to repurchase shares of its outstanding common stock pursuant to the publicly announced stock repurchase program and used $94,780 to pay dividends in January 2009. As a result of the $931,903 of net cash provided by its operating activities and the $2,203,234 of net cash provided by investing activities, the Company's overall cash position increased by $1,431,207 during the nine month period ended July 31, 2009 despite the use of $1,703,931 for financing activities.

Trade accounts receivable (net of allowances for doubtful accounts) at July 31, 2009 decreased approximately 10% or by $204,096 to $1,867,253 compared to the October 31, 2008 balance of $2,071,349. The decrease in accounts receivable is due to improved receivables management, tighter credit policies, increased collection efforts by the Company and lower sales.

Inventories at July 31, 2009 decreased 11% or $650,628 to $5,299,080 compared to $5,949,708 at October 31, 2008. The decrease in inventories is the result of lower inventory purchases as the Company adjusted its inventory levels in anticipation of anticipated lower levels of sales in the near future. In addition, because of the uncertain future global economic and financial conditions, the Company took efforts to lower its inventory balances including restocking inventories at slightly lower levels compared to prior periods.

Other current assets, including prepaid expenses and deposits, increased $388,411 to $605,854 as of July 31, 2009, from $217,443 on October 31, 2008 mainly as a result of the renewal of certain insurance contracts as well as the addition of prepaid inventory purchases.

Accounts payable at July 31, 2009 decreased $95,329 to $234,180 from $329,509 on October 31, 2008. The change in accounts payable is related to a decrease in sales and a decrease in the purchase of inventories during the current period.

Net cash provided by investing activities was $2,203,234 for the nine months ended July 31, 2009 and was attributable to the sale of $4,478,821 of certificates of deposit, which funds were partially reduces by the Company' purchase of $2,117,184 of certificates of deposit securities and the use of $158,403for capital expenditures.

Net cash used in financing activities was $1,703,931 for the nine months ended July 31, 2009, and was attributable to the purchase of $1,609,151 of treasury stock and $94,780 to pay cash dividends.

As of July 31, 2009, the Company had a total of $2,492,045 of cash and cash equivalents compared to a total of $1,060,838 of cash and cash equivalents as of October 31, 2008. However, the amount of investments in available-for-sale securities decreased by $2,361,637 to $4,502,074 from $6,863,711 on October 31, 2008 due to certain of the Company's certificates of deposit maturing. Collectively, the amount of cash, available-for-sale securities and certificates of deposit that the Company held on July 31, 2009 decreased by $930,430 from the amount held on October 31, 2008 due primarily to the use of $1,609,151 to repurchase and retire outstanding shares of common stock. As of July 31, 2009, the Company had working capital of $14,531,525 and a current ratio of approximately 20:1.

Results Of Operations

Three Months Ended July 31, 2009 vs. Three Months Ended July 31, 2008

Net sales in the current fiscal quarter ended July 31, 2009, decreased by 29%, or $1,373,348, to $3,294,290 from $4,667,638 in the comparable fiscal quarter of prior year, as a result of decreased sales in all three of the Company's business segments. The RF Connectors and Cable Assembly segment, the Company's largest business unit, experienced a $931,928 decrease in sales during the July 31, 2009 fiscal quarter compared to the sales in the comparable quarter in 2008. Sales at the Medical Cabling and Interconnector segment decreased by $194,770 while sales at the RF Wireless segment decreased by $246,649. Sales decreased in all segments compared to the same prior year period due to current weak economic conditions, which has caused some of the Company's distributors to carry lower inventory levels and in turn resulted in lower sales to these distributors in the second quarter of fiscal 2009. The Company believes that the decrease in sales is the result of a general slowdown of economic activity as a result of the worldwide recession and financial crisis, and not due to any shift in demand for the Company's products.

Foreign sales during the fiscal quarter ended July 31, 2009 decreased by $368,385 to $403,575 compared to foreign sales of $771,960 during the fiscal quarter ended July 31, 2008. Foreign sales represented approximately 12% and 17% of the Company's net sales during the fiscal quarters ended July 31, 2009 and 2008, respectively. The decrease in foreign sales is primarily due to a decrease in cable assembly sales to one major international customer.

The Company's gross profit as a percentage of sales decreased slightly to 49% during the current fiscal quarter compared to the fiscal quarter of prior year. The Company operates in three segments. While the gross profit margin of the RF Connector and Cable Assembly segment remained consistent at 53% with that of the prior year's three month ended period, decreases in gross profits occurred in the RF Wireless segment and in the Medical Cabling and Interconnector segment. The gross profit margin of the RF Wireless segment decreased by 13% to 27% compared with 40% in the prior comparable quarter due to a decrease in sales of wireless radio modems. The Company was unable to reduce its fixed cost of goods in the RF Wireless segment to match the decrease in sales in that segment. The gross profit margin of the Medical Cabling and Interconnector segment decreased by 5% to 31% compared with 36% in the prior comparable quarter. This was due to a decrease in sales of $194,770 from the prior comparable quarter and a decrease of $106,928 in cost of goods sold from the prior comparable quarter. During the third quarter of fiscal 2009, the Company's fixed component cost of labor was higher than in the prior comparable quarter of fiscal 2008, which caused a decrease in gross margins in its segments. Sales of the RF Connector and Cable assembly segment accounted for approximately 84% of the Company's total sales and 78% of the total cost of goods sold in the current three month period, compared to 79% of the Company's total sales and 74% of the total cost of goods sold in the comparable quarter of prior year.

Engineering expenses decreased 8%, or $22,918, to $255,682 from $278,600 in the comparable quarter of the prior year due to decrease in projects at the RF Wireless segment started in the second quarter of fiscal 2009. Notwithstanding the decrease in engineering expenses, the Company intends to continue to invest in the development of new and improved products in its RF Wireless business segment.

Selling and general expenses decreased by 3% in the 2009 fiscal quarter to $1,339,847 from $1,381,549 in the comparable quarter of the prior fiscal year. Excluding a non-cash impairment charge of $209,763 recorded during the fiscal quarter ended July 31, 2009, the selling and general expenses for the July 31, 2009 fiscal quarter decreased by 18% compared to comparable 2008 fiscal quarter. The decrease in selling and general expenses was due primarily to a decrease in accounting and legal fees and stock option expense from the comparable period in 2008 and to other cost cutting initiatives that the Company commenced implementing as a result of future market uncertainties. These decreases were partially offset by the recognition of $209,763 in total impairment charges relating to the Radiomobile and Worswick division's goodwill balances determined by management to be fully impaired as of July 31, 2009.

Other income for the third quarter of 2009 decreased $18,004 compared to the same period in the prior year as a result of lower investment balances and lower rates of return.

As a result of the decrease in revenues and the decrease in gross profit as a percentage of sales, income before the provision for income taxes during the fiscal quarter ended July 31, 2009 decreased by $645,369 to $51,167. Income before provision for income taxes for the fiscal quarter ended July 30, 2008 was $696,536.

The provision for income taxes during the third fiscal quarter of 2009 was $40,590 (or a combined estimated Federal and state income tax rate of approximately 37%), compared to $296,824 in the fiscal quarter ended July 31, 2008 (or a combined estimated Federal and state income tax rate of approximately 43%). The 79% tax rate for the third quarter resulted from recording our expected annual tax rate of approximately 38% (before the effects of a $39,000 expense reduction related to a domestic product activity). The rate was unusually high as pretax income was low for the quarter.

The combination of an overall decrease in sales compared to prior period and a decrease in gross margins resulted in a $691,985 decrease in gross profits. Although the decrease in gross profits was partially offset by decreases in selling and general expenses, the Company's operating income for the third fiscal quarter of 2009 decreased from $655,768 to $28,403 in the 2009 period. The decrease in operating income was partially offset by lower income taxes. Accordingly, net income for the fiscal quarter ended July 31, 2009 was $10,577 compared to net income of $399,712 for the comparable period of prior year.

Nine Months Ended July 31, 2009 vs. Nine Months Ended July 31, 2008

Net sales in the nine months ended July 31, 2009, decreased 20%, or $2,600,494 to $10,401,589 from $13,002,083 in the comparable fiscal quarter of prior year, due to decreased sales of the Company's connectors and radio modems. Sales decreased during the nine month period ended July 31, 2009 from the prior year's period due to lower sales in all three of the Company's business segments as a result of the current weak economic conditions, which caused some of the Company's distributors to carry lower inventory levels and in turn resulted in lower sales to these distributors. The largest decreases in sales as a percentage of sales occurred in the RF Wireless segment, whose sales decreased by $876,671 (or 58%) in the nine-months ended July 31, 2009. Sales of RF Wireless products in the 2008 nine-month period reflected revenues from a large sales order of wireless transponders from the US Military, which order was substantially filled during the 2008 period. The RF Connector and Cable Assembly segment also had a significant decrease in net sales during the 2009 fiscal period (a decrease of $1,474,657 or 14%), which was attributable to a general industry wide slowdown due to the worldwide recession.

Foreign sales during the nine-month period ended July 31, 2009 decreased by $18,593 to $1,778,716 compared to foreign sales of $1,797,669 during the nine-month period ended July 31, 2008. Foreign sales represented approximately 17% and 14% of the Company's net sales during the nine-month period ended July 31, 2009 and 2008, respectively.

The Company's gross profit as a percentage of sales decreased 2% to 48% during the nine-month period ended July 31, 2009 compared to 50% in the comparable nine-month period of prior year. The Company operates in three segments. While the gross profit margin of the RF Connector and Cable Assembly segment remained consistent at 52% with that of the prior comparable nine-month period ended, decreases in gross profits occurred in the RF Wireless segment and in the Medical Cabling and Interconnector segment. The gross profit margin of the RF Wireless segment decreased 13% to 36% compared with 49% in the prior comparable nine-month period ended. This was due to a decrease in sales of wireless radio modems, which caused net sales to decrease by $876,671 to $646,533 from $1,523,204 in the prior comparable period. The Company was unable to reduce its fixed cost of goods in the RF Wireless segment to match the decrease in sales in that segment. The gross profit margin of the Medical Cabling and Interconnector segment decreased by 14% to 21% compared with 35% in the prior comparable quarter. This was due to a decrease in sales of $249,165 from the prior comparable nine months ended coupled with a decrease of $39,958 in cost of goods sold from the prior comparable quarter. During the nine-month period ended July 31, 2009, the Company's fixed component cost of labor was higher than in the prior comparable period of fiscal 2008, which caused a decrease in gross margins in its segments. Sales of the RF Connector and Cable assembly segment accounted for approximately 85% of the Company's total sales and 79% of the total cost of goods sold in the current nine-month period, compared to 79% of the Company's total sales and 76% of the total cost of goods sold in the comparable nine-month period of prior year.

Engineering expenses increased 4% or $30,458 to $805,921 from $775,463 in the comparable nine-month period of the prior year due to increased investment in the development of products for the RF Wireless segment.

Selling and general expenses decreased 8% or $307,051 to $3,736,126 from $4,043,177 in the comparable nine-month period of the prior year. The decrease in selling and general expenses was due primarily to a decrease in accounting and legal fees and stock option expense from the comparable period in 2008 and to other cost cutting initiatives that the Company commenced implementing as a result of future market uncertainties. These decreases were partially offset by a goodwill impairment relating to the Radiomobile and Worswick divisions in the amount of $209,763 as management determined these balances to be fully impaired during the third quarter of fiscal 2009.

Other income for the nine months ended July 31, 2009 decreased $29,934 compared with the same nine-month period of the prior year due to lower rates of return on the Company's investment portfolio and also lower investment balances compared with prior period.

As a result of the decrease in revenues, the decrease in gross profit as a percentage of sales and the increase in engineering expenses, income before provision for income taxes during the nine months ended July 31, 2009 decreased by 69% or $1,308,661 to $599,115 from $1,907,776 in the comparable nine-month period of the prior year.

The provision for income taxes during the nine months ended July, 31 2009 was $211,485 (or a combined estimated Federal and state income tax rate of approximately 35%), compared to $794,071 in the nine months ended July 31, 2008 (or a combined estimated Federal and state income tax rate of approximately 42%). The decrease in the tax rate in the nine-month period of fiscal year 2009 compared to the prior year comparable period is the result of a one-time tax benefit of approximately $39,000 related to a domestic product activity. Without this adjustment, the effective tax rate would have approximated the projected rate for fiscal 2009.

The combination of an overall decrease in sales compared to prior period and a decrease in gross margins resulted in a $1,555,320 decrease in gross profits. Although the decrease in gross profits was offset slightly by decreases in selling and general expenses, the Company's operating income for the nine months ended July 31, 2009 decreased by $1,278,727 to $450,238 from the prior comparable nine-month period. The decrease in operating income was partially offset by lower income taxes. Accordingly, net income for the nine month period ended July 31, 2009 was $387,630 compared to $1,113,705 for the same period last year.