10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

- OR -

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

For the Fiscal Year Ended August 31, 2006

Commission File No. 0-24414

RF Monolithics, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	75-1638027
(State or other jurisdiction of incorporation or 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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK .001 PAR VALUE and PREFERRED SHARE PURCHASE RIGHTS (Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

¨  Large accelerated filer            ¨  Accelerated filer            x  Non-accelerated filer

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

The aggregate market value of our Common Stock held by nonaffiliates as of October 31, 2006, based on the last reported sale price on the NASDAQ Stock Market composite tape on February 28, 2006 (the last trading date of the registrant’s most recently completed second fiscal quarter), was $41,792,793. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of our outstanding Common Stock have been excluded because such persons may be deemed to be affiliates.

Common Stock outstanding at October 31, 2006: 8,816,229 shares, par value $0.001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, which will be filed with the Commission on or about December 11, 2006, is incorporated by reference into Part III of this report.

RF MONOLITHICS, INC.

FORM 10-K

YEAR ENDED AUGUST 31, 2006

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	13
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk .	43
Item 8.	Financial Statements and Supplementary Data	43
Item 9A.	Controls and Procedures	43
PART III
Item 10.	Directors and Executive Officers of the Registrant	43
Item 11.	Executive Compensation	44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	44
Item 13.	Certain Relationships and Related Transactions	44
Item 14.	Principal Accountant Fees and Services	44
PART IV
Item 15.	Exhibits and Financial Statement Schedules	44

1

PART I.

ITEM 1. BUSINESS

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 a broad range of wireless products that are solution-driven and technology-enabled. We have two lines of business - Wireless Solutions and Wireless Components.

Our Wireless Solutions business includes Virtual Wire™ Short-range Radio, Radio Frequency Integrated Circuits, or RFIC, and Module Products. These are wireless radios and the networks that manage and use them. Our goal is to provide customers with a comprehensive solution with a wide variety of alternative products and services for their wireless network applications. These product offerings will be enhanced in our next fiscal year by two acquisitions that were consummated in September, 2006. RFM acquired Cirronet, Inc., or Cirronet, and the business of Caver-Morehead Systems, Inc., or Caver-Morehead (which was acquired by Aleier, Inc., or Aleier, a wholly-owned subsidiary of RFM). See the section below entitled Acquisitions- Subsequent Events at the end of Item 1 for additional information on these transactions. Wireless radios are marketed under the RFM brand. Standard and custom radio modules and packaged radio and network gateway products will be marketed under the Cirronet brand. Asset management platform software and end-applications formerly sold by Caver-Morehead will be marketed under the Aleier brand.

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

We focus our component and radio product development in the frequency range of 50 megahertz, or MHz, to 5.8 gigahertz, or GHz. We market our line of more than 400 radios, radio modules, resonators, filters, clocks and oscillators to distributors, electronic manufacturing service companies and original equipment manufacturers world-wide. Our customers include Acal plc, Avnet Inc., Celestica Inc., Delphi Corporation, Flextronics International, Holy Stone Enterprises, Ki Ryung Electronics Co. Ltd., Schrader Electronics Ltd., Solectron Corporation and Walasey, Ltd.

* Certain names or marks mentioned herein may be claimed as the property of others.

Advantages of Our Solutions

Our knowledge of various low power radio technologies, microprocessors, link and MESH protocols, antennas, and certification requirements help us meet specific customer requirements in the evolving Wireless Solutions marketplace. Our recent acquisition of Cirronet increases our knowledge of radio systems, RF, or radio frequency, design, protocols, gateway technology, and product packaging. In particular, RFM will gain expertise in products utilizing leading industry technology including Zigbee™, 802.15.4, Bluetooth™, and WiFi. The acquisition of the Caver-Morehead business adds enterprise application and web delivery design capability and specific understanding of the requirements of asset management applications.

The core technology we utilize for our Wireless Component business is surface acoustic wave, or SAW, technology. We believe that our SAW-based products, coupled with our RF design and manufacturing expertise, offer potential customers certain fundamental advantages over alternative technologies.

As electronics applications including automated meter reading, or AMR, and satellite radio migrate to lower power consumption and reduced size, we think demand for RF modules and SAW-discrete components will increase.

2

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

Markets and Applications

We focus on specific market opportunities where our broad base of Wireless Solutions and Wireless Component technology address application requirements. Our products are primarily incorporated into application designs in five markets: industrial, automotive, consumer, medical and telecommunications.

Industrial

The industrial market includes applications such as AMR, process control, monitoring, security systems, active RF identification, or RFID, tags, bar code reading devices, and custom data link equipment. We believe that the industrial market for wireless module products has enormous growth potential. In published reports (On World report, July 2005), it was estimated that the total market for embedded modules in the industrial segment would grow from an emerging market to approximately $5 billion dollars by 2010. The same study estimated the total market for all embedded modules at $8 billion in 2010. For years we have been a leader in providing energy-efficient Virtual Wire™ Short-range Radio products for the AMR market. In recent years, we have established a Wireless Solutions Group which has developed several proprietary modules, several of which have received FCC certification. We have also entered into contracts with customers for custom products that should result in total shipments of approximately $1 million over a twelve month period. Our recent acquisitions are intended to further increase our capabilities in this targeted market. We intend to be a major player in the emerging machine-to-machine market that is driving towards what has been called the “pervasive internet”. Our Wireless Solutions modules and Virtual Wire™ Short-range Radio products are focused on industrial applications. There are also low-power components and filters sold to this market, primarily for security applications.

Automotive

The automotive industry utilizes SAW-based components in transmitter and receiver designs for remote keyless entry, tire pressure monitoring and satellite radio applications. Satellite radio currently has approximately 14 million subscribers and published reports predict that by 2010 there could be as many as 30 million subscribers. From a technological standpoint, the digital modulation used in satellite radio systems is more efficient than traditional analog AM or FM and achieves near CD quality audio.

Automotive electronic applications continue to grow with the ongoing drive toward smaller size, reduced cost and improved system performance. Our low-power components, Virtual Wire™ Short-range Radio products and filters meet many of the requirements of this automotive market. This market is characterized by fierce competition due to commodity pricing by competitors.

Consumer

The consumer market for our products has increased recently due to the introduction of aftermarket satellite radio products. We believe that there is significant growth potential for other consumer products using our technology such as electronic toys, home security, internet appliances, garage doors, cable TV and a wide variety of other wireless applications. Low-power components, Virtual Wire™ Short-range Radio products and filters may be designed into these and many other consumer applications.

3

Medical

Emerging standards such as Medical Implant Communications Systems, or MICS, and Wireless Medical Telemetry Systems, or WMTS, have created opportunities for wireless applications in the medical marketplace. These standards are for wireless communication devices outside the body as well as implanted. Our Virtual Wire™ Short-range Radio products are well suited for these applications. Low power consumption and high reliability are critical for device-implanted applications such as insulin pumps, pacemakers and defibrillators. Radio module products are used in medical telemetry applications including real-time wireless ECG monitors, where high transmission reliability and data rate are essential. Our products are only used in data acquisition mode and not in a life-critical function of the device.

Telecommunications

We believe that a number of dynamics within the telecommunication and wireless communications market are opening new applications for SAW technology. The deployment of digital cellular telephone standards, such as Global System for Mobile Communications, or GSM, Code Division Multiple Access, or CDMA, Enhanced Digital Global Evolution, or EDGE, Wideband Code Division Multiple Access, or WCDMA, and Time Division Synchronous Code Division Multiple Access, or TD-SCDMA, has been initiated worldwide. All of these digital cellular telephone standards entail digital modulation, which requires SAW filters that minimize distortion and conform to international cellular telephone standards. RFM’s focus is in providing intermediate filters for the base station infrastructures of this growing market.

Other markets, such as wireless internet access (for example, WiFi) and emerging broadband multimedia (for example, WiMax) will continue to use SAW-based filter and frequency control products. We believe that as broadband wireless communication systems demand more performance to support internet requirements, bandwidth will become the key element that allows information to flow efficiently. This will create a requirement to minimize systems noise present in broadband wireless communication and provide clean timing to maximize throughput around the system’s backbone, which requirements can be met with our filter and frequency control products.

Analog communications, internet infrastructure, high-end computer work station and military applications also create markets for SAW-based frequency control products. Timing integrity and elimination of system noise in circuits are critical for these applications.

Our Wireless Solutions Business

Virtual Wire™ Short-range Radio and RFIC Products

Our hybrid transmitter, receiver and transceiver modules are the primary products included in Virtual Wire™ Short-range Radio products. Our transceiver module, based on our patented Amplifier Sequenced Hybrid, or ASH, technology, offers two-way data communication in a single small module, with performance identical to the separate transmitter and receiver modules, at a lower total cost. Inside the Virtual Wire™ product is a custom RFIC. We recently introduced our third generation of these products, which adds features such as longer range and multi-channel capability. All of these products feature small size, very low power consumption, and excellent RF performance, and provide the system designer flexibility and fast time-to-market for emerging applications. The ASH receiver’s architecture provides exceptional performance with extremely low harmonic radiation and exceptional resistance to electromagnetic interference, which have resulted in our customer’s products receiving international standards certification.

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

4

The markets for Virtual Wire™ Short-range Radio products include remote bar code data entry, AMR, point of sale terminals, medical monitoring systems, home automation, consumer sports, data link equipment and wireless thermostats.

This year we introduced a separate line of RFICs to complement the Virtual Wire™ product family for our customers. These chips include transmitter, receiver and transceiver versions to assist customers and provide additional radio alternatives in building their own circuits.

Module Products

Our Wireless Solutions business is focused on the $8 billion embedded modules and similar markets. We believe the key to capturing this market will be the ability to provide a wide variety of products, protocol firmware, software and design services to select and deliver the optimum solution for a given customer’s application.

We have developed both proprietary and custom modules that address this market and have started shipping initial quantities of these products. Besides a variety of radio products, we use several communication protocol systems to manage point-to-point, point-to-multipoint or mesh wireless sensor networks. We also provide gateway and network bridge products to connect different network types to one another. With the Cirronet acquisition, we believe we are in position to offer the broadest ranges of radios, modules and protocols in the industry.

To our knowledge, no one else combines such a broad line of radio offerings with a value added software application. To help customers take full advantage of the wealth of new data provided by low-power radio systems, Aleier provides enterprise level software for tracking assets and managing workflows related to those assets. The Aleier platform is web architected and modularized for maximum flexibility in adapting it to specific customer requirements.

Our Wireless Components Business

Filters

We pioneered the development of several SAW technologies related to the implementation of high performance band-pass filters having low insertion loss. Our filter products are primarily intended for emerging satellite radio, Global Positioning Systems, or GPS, and various telecommunications applications such as TD-SCDMA, Personal Handy-phone System, or PHS, and WiMax. Our products are well suited for satellite radio and the base station infrastructure of these applications. We have focused on intermediate frequency SAW filters based on new SAW structures that provide the best performance. However, we also offer a variety of RF filters.

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

Frequency Control Modules

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

5

Our high-frequency clock modules are used in high-bandwidth, high-performance computer systems. Our “Diff Sine” clocks allow network applications to realize improved performance by providing a highly stable frequency source, which results in very low timing variations from one cycle to the next (commonly referred to as “jitter”) and good symmetry across each cycle. We produce commercial and military fixed-frequency and voltage-controlled SAW oscillators. These products are supplied in surface mount or leaded metal packages and are used in applications such as microwave radios, identification-friend-or-foe transponders for commercial and military avionics and precision instrumentation. We have a line of oscillators that uses our patented technology to serve the Optical Dense Wave Division market. These products are targeted for customers in the optical network market, including high-speed routers and the OC768 backbone system.

Low-power Components

Our resonators are used in low-power wireless transmitter and receiver applications, including automotive remote keyless entry and tire pressure monitoring systems, wireless security systems and consumer toys. Our coupled-resonator filters are well suited for radio frequency filter applications, such as the receiver portion of remote keyless entry systems, and input and output filters for other products manufactured by us.

We offer low-power components in both three-lead metal packages, or TO-39 and surface mount packages. We offer a variety of smaller surface mount package styles for these products. The market for low-power components is intensely competitive and subject to price erosion, rapid technological change and product obsolescence.

Manufacturing

We have manufacturing operations in Dallas, Texas and have contractual relationships with a manufacturer in the Philippines (Infiniti Solutions (Phil.) Inc.); a manufacturer in Taiwan (Tai-Saw Technology Co., Ltd.); and a manufacturer in Japan (Morioka Seiko Instruments Inc., a subsidiary of Seiko Instruments, Inc.). These multiple sites provide some back-up capability for our products and operations. The Cirronet acquisition gives us access to four additional contract manufacturers, both domestic and foreign.

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

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

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

6

Our offshore manufacturing arrangements have created additional logistical complexities. However, we are working to reduce these complexities, and have developed the capability to ship directly to our customers from offshore locations to reduce our lead times. We believe that we offer competitive lead times to our customers.

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

Wafer Fabrication

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

Domestic Pilot Assembly

The domestic pilot assembly line is primarily focused on frequency control products, but can manufacture a limited quantity of most product types. Because of this flexibility, it provides additional backup production capability in case of offshore manufacturing disruption. This manufacturing capability also supports customers’ short-term delivery requirements, engineering requirements and new product development.

Offshore Assembly

As noted above, we have manufacturing arrangements with Infiniti Solutions (Phil) Inc., Morioka Seiko Instruments Inc. and Tai-Saw Technology Co., Ltd. Each of these organizations offers a variety of packaging capabilities, including hermetic packaging, which are essential to the manufacture of SAW devices. Each one also possesses an understanding of the unique aspects of SAW component assembly and testing. Module products can also be built at these assembly factories.

Source of Components/Labor

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

Quality

Our customers demand an ever-increasing level of quality in our products. We, as well as our partners in the Philippines and Taiwan, have achieved ISO 9001 certification. We have also been certified to the TS 16949 International Quality Standard, as have our Philippine and Taiwan based manufacturing partners. Our Dallas location was also certified to the ISO14001 environmental standard. In addition to continually improving the efficiency and effectiveness of all of our operations, we strive to assure that the features and benefits of our products meet or exceed customer expectations for performance and reliability.

7

Sales and Marketing

Sales in foreign and North American markets were:

	2006		2005		2004
	Sales		Sales		Sales
International sales:
Europe	$	8,326	$	9,301	$	13,203
Asia		19,457		16,503		14,268
Other		2,159		2,168		2,204
Total International Sales		29,942		27,972		29,675
U.S. and Other North America		24,220		18,250		18,831
Total Sales	$	54,162	$	46,222	$	48,506

We distribute our products in the United States through manufacturers’ representatives managed by our area sales management team (internal sales force). We have authorized three North American distributors (Avnet Inc., Richardson Electronics and Nu Horizons) to stock and sell all of our products. International sales are handled on a nonexclusive basis through manufacturers’ representatives, manufacturers’ representatives acting as distributors and direct sales. With the Cirronet and Caver-Morehead acquisitions, we will have additional sales representative and distribution firms, as well as additional sales and marketing personnel.

The decrease in sales to European customers represents decreases in sales of low-power components and other products into older applications, most of which converted to alternative technologies such as multiple function integrated circuits and phase locked loops. The increase in sales to customers in Asia results both from an increase in business to Asian based customers as well as an increase in sales to contract assemblers in that region that manufacture for end-users all over the world, such as for satellite radio applications. The increase in sales to North American customers in the current year results from additional sales from both the satellite radio and telecommunications applications.

Our international sales are primarily denominated in U.S. currency. We have set up a limited capability to allow customers to buy products at prices denominated in Euros. An increase in the value of the U.S. dollar relative to foreign currencies could have the effect of making our products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing international operations, potentially adverse tax consequences, repatriation of earnings and the burdens of complying with a wide variety of foreign laws. These factors could have a material adverse effect on our sales.

A number of factors may limit or discourage customers from using our products. We assist customers in designing our products into their applications. We often assist our customers under custom product development programs. Both types of assistance can last from six to eighteen months. We cannot predict when or whether a particular customer’s product will be designed and reach volume production status. Furthermore, we cannot predict whether a particular customer will be commercially successful in selling its product. In addition, customers may require their products to be certified with various regulatory agencies, which can further delay introductions of their products into the marketplace. We offer our customers various types of assistance in obtaining certification. However, those customers may not obtain required certifications in a timely manner, or at all. Any one of these factors could result in significant loss or delay of potential sales.

8

Competition

Wireless Solutions

The markets for our Virtual Wire^TM and RFIC products are very competitive and are characterized by price erosion, rapid technological change and product obsolescence. With these products, we compete with very large, vertically integrated, international companies, including Texas Instruments, Analog Devices, Infineon, and Maxim along with a larger community of niche suppliers including Nordic, Melexis, and Micrel. The large competitors have substantially greater financial, technical, sales, marketing, distribution and other resources, as well as broader product lines, than we do. Our competitors who have greater financial resources or broader product lines may also be able to engage in sustained price reductions in our markets to gain market share.

The market for radio modules targeting the wireless sensor network market is much less mature and is therefore highly fragmented among a large community of competitors, very few of whom are as large as we are. Due in part to its early state of development, this market is undergoing rapid technological change but without the degree of price erosion experienced in our component business. Some of the more noteworthy competitors include Dust, Sensicast, Crossbow, and now Digi International with its recent acquisition of Maxstream. Of these, we think we currently have the most comprehensive line of products targeting this market segment.

The market for our Aleier asset management solutions is undergoing a dramatic transition from the relatively mature Computerized Maintenance Management System, or CMMS, market to a more comprehensive offering referred to as Enterprise Asset Management, or EAM. The CMMS market is populated by a large number of vendors of all sizes including notable large competitors such as MRO, recently purchased by IBM, Hansen, and Indus and new entrants Questra and Axeda. Through this transition, the market is expected to grow from approximately $3.5 billion today to over $30 billion in the next five years according to a report in Harbor Research. At this time, it is unclear how many and which of the existing vendors will attempt to transition to the EAM market, but it is reasonable to assume many of our larger competitors will do so. Although we believe our products stack up well against even the largest competitors in terms of quality and functionality, our large competitors have substantially greater financial, technical, sales, marketing, distribution and other resources, than we do.

Wireless Components

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

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

We believe that our ability to compete in our target markets depends on factors both within and outside of our control. These factors include: (a) the timing and success of new product introductions by us and our competitors; (b) our ability to support decreases in selling prices through reduction in manufacturing cost of sales; (c) the pace at which our customers incorporate our products into their end products; and (d) other factors listed under the section below entitled Risk Factors.

9

Research and Development

Our research and development efforts are primarily aimed at creating new wireless systems, as well as proprietary and innovative SAW device structures and SAW-based hybrid modules that uniquely address market needs. Our recent development efforts are aimed at supporting the Wireless Solutions business and include the development of proprietary software in the form of embedded “firmware” used to control wireless communications modules and user interface programs used for wireless network diagnostic or system management purposes. The addition of Aleier will extend our software development programs to include enterprise software systems, especially those designed for delivery over the internet.

While we cultivate internal expertise in software development areas, it is sometimes more economically efficient to license software from commercial developers in order to decrease time-to-market. This is particularly true for the special embedded programs that define the protocols used to organize wireless networks. We have initiated software development agreements with external contractors to provide network protocol “firmware” for our wireless modules. Similarly, we may license radio technology developed by an RF integrated circuit provider in order to accelerate product development schedules and expand the technical capabilities of our products. To this end we have entered negotiations for product licensing agreements with several RF integrated circuit suppliers.

Another example of our research and development efforts is the work recently completed to develop a third generation of Virtual Wire™ Short-range Radio products. Our development efforts also include process improvements in wafer fabrication involving better line width and metal thickness control as well as improvements in device packaging.

We employ a number of highly qualified individuals in engineering and product and process development, including scientists, design engineers and technicians. World-class filter design capabilities are provided by our team of filter design employees and consultants located in Dallas, Texas and Moscow, Russia. Their state-of-the-art filter designs are transformed into highly manufacturable product configurations by our process engineering staff in Dallas, Texas. Our two recent acquisitions come with a number of highly qualified technical people, both in hardware and software development. Our research and development teams are responsible for new products and new processes from inception to the commencement of volume manufacturing. We believe that the efforts of these individuals help to ensure that our products provide an optimum system solution for the customer and are manufacturable at a competitive cost.

From time to time we have entered into agreements with customers to develop a product that is custom designed for the customer’s end product. In addition, we have participated in government-sponsored research and development programs. We treat sales derived from engineering design services as technology development sales and their associated costs are included in cost of sales. Total technology development sales during fiscal years 2006, 2005 and 2004 were $440,000, $472,000 and $334,000 respectively. Costs related to these sales were included in our cost of sales during these years. We consider the development of new products essential to maintaining and increasing sales.

Proprietary Rights

Wireless Solutions network protocols and the related software that implements the protocols on specific microcontroller chips demonstrate the risk of proprietary rights claims and their potential effects on us. Many standard and proprietary protocols exist, each with its unique strengths and features. The risk is that one or more major software suppliers may assert intellectual property claims that could affect the sales of our modules containing either internally developed proprietary software or software that has been licensed from another external developer.

10

We rely on a combination of patents, copyrights and nondisclosure agreements in order to establish and protect our proprietary rights. We have received 44 patents for various inventions that include both SAW devices and innovative RF circuits that employ SAW devices. We have applied for an additional 14 patents. Our policy is to file patent applications to protect technology, inventions and improvements that are important to our business.

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

We also seek to protect our trade secrets and proprietary technology through confidentiality agreements with employees, consultants and other parties. However, these agreements could be breached and we may not have adequate remedies. Further, our trade secrets could otherwise become known to, or independently developed by others. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States.

The electronics industry is characterized by uncertainty and conflicting intellectual property claims that represent a risk to us. It may be alleged that our products infringe patents and/or intellectual property rights of third parties. In the event of such alleged infringement, a license to the technology in question may not be available on commercially reasonable terms, if at all. Litigation could ensue and the outcome of such litigation might be adverse to us. The cost of defending ourselves from such litigation could have a material adverse effect on our business, regardless of its outcome.

Regulations

We are subject to a variety of federal, state and local laws and regulations related to the use, storage, emission, treatment, disposal, transportation and exposure to certain toxic, volatile and other hazardous chemicals used in our manufacturing process. We continue our corporate responsibility as demonstrated by our certification under ISO 14001 environmental system standards as well as our compliance with the European Union’s Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS. We are also complying with the Waste Electrical and Electronic Equipment, or WEEE, regulation. The failure to comply with present or future regulations could result in fines, suspension of production or a cessation of operations. Such regulations could also require us to acquire costly equipment, to make changes to our manufacturing process, or to incur other substantial expenses to comply with environmental regulations. Any past or future failure by us to control the use of or to restrict adequately the discharge of, hazardous substances could subject us to future liabilities. Any of these situations could have a material adverse effect on our business, operating results and financial condition.

Personnel

As of August 31, 2006, we had a total of 205 employees and full-time consultants. Most of our personnel work at our headquarters in Dallas, Texas. We have one person at each of our U.S. sales offices, which are located in Georgia, Minnesota and California. We have three sales support individuals in Europe and two in Asia. Our two recent acquisitions will result in approximately 50 additional employees. Our future success depends to a significant degree upon the continued service of our key technical and senior management personnel and our continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such individuals can be intense. We may not be able to retain or continue to attract key managerial and technical personnel. Failure to retain or continue to attract key managerial and technical personnel could have a material adverse effect on our business, operating results and financial condition. None of our employees are represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be very good. The availability of offshore production tends to mitigate the impact of skilled labor shortages in Dallas, Texas.

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Potential Fluctuations in Results of Operations and Order Trends

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

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

Backlog

Our backlog at August 31, 2006 was approximately $11.2 million as compared to $10.5 million as of August 31, 2005. The increase is related to our overall increase in sales activity. Our backlog includes all purchase orders scheduled for delivery within the subsequent 12 months. We think the relatively low level of backlog in comparison to annual sales is a reflection of general economic uncertainty and reflects the reluctance of our customers to commit to purchase products when they have limited visibility of their own requirements. Customers require us to respond on increasingly shorter lead times when their demand materializes. Our backlog, although useful for scheduling production, should not be used as a measure of future sales. All orders in backlog are subject to cancellation or change in delivery schedule more than 30 days before shipment without penalty at the option of the customer. We expect that our backlog will increase as a result of the Cirronet and Caver-Morehead acquisitions.

Acquisitions – Subsequent Events

Aleier, Inc.

On September 1, 2006, we completed our acquisition of Caver-Morehead Systems, Inc., a Texas corporation, or Caver Morehead, pursuant to an Agreement and Plan of Merger, or Merger Agreement. Aleier, Inc., a newly created Texas corporation and wholly-owned subsidiary of RFM, through a merger acquired substantially all of the assets and assumed substantially all of the liabilities of Caver-Morehead in an all cash transaction valued at $4.0 million. $2.0 million of the purchase price is subject to an earn-out agreement that entitles Caver-Morehead’s former shareholders to receive additional consideration upon the achievement by Aleier of certain margin targets and is expected to be paid in cash in two installments in February 2007 and February 2008, subject to reduction as described in the Merger Agreement. Aleier also assumed liabilities estimated to be $708,000 and incurred certain transaction costs. The asset management software, acquired from Caver-Morehead, is marketed by Aleier under the brand name Aleier.

Cirronet Inc.

On September 15, 2006, we completed our acquisition of Cirronet Inc., a Georgia corporation, or Cirronet, pursuant to an Agreement and Plan of Merger, or Cirronet Merger Agreement, by and among RFM, Cirronet and certain other parties thereto. Pursuant to the Cirronet Merger Agreement, Cirronet continued after the merger as a wholly-owned subsidiary of RFM.

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The purchase price was a total of $24 million, assuming all potential payouts, plus the assumption of Cirronet’s liabilities as of the closing estimated at $1.8 million and transaction costs. The consideration included payment of approximately $7,451,000 in cash, the issuance of approximately 709,000 shares of our common stock to Cirronet’s former shareholders and the exchange by RFM of Cirronet’s stock options that entitle the holders to purchase an aggregate of 1,089,468 shares of our common stock. We also (a) issued an unsecured, subordinated promissory note in the principal amount of $3.0 million, which is payable to Cirronet’s former shareholders on November 1, 2007, subject to reduction as described in the Cirronet Merger Agreement and (b) entered into an earnout agreement that entitles Cirronet’s former shareholders and option holders to receive an additional milestone payment of up to an aggregate amount of $4.8 million upon the achievement by Cirronet of certain sales and margin targets. The earnout payment is scheduled to be paid in cash on November 1, 2007, subject to reduction as described in the Cirronet Merger Agreement.

The cash portion of the purchase price was funded with a portion of the proceeds from our $15 million credit facility with Wells Fargo Bank, National Association. For a description of our banking arrangements, see the section below entitled Financial Condition – Financing Arrangements.

In connection with the acquisition of Cirronet, Robert M. Gemmell, Cirronet’s President and CEO, was appointed as an executive officer of RFM and President of Cirronet pursuant to an employment agreement between RFM and Mr. Gemmell.

The shares of our common stock issued in connection with the merger as described above were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act and applicable Blue Sky laws based on representations made by the recipients thereof. We are required to file the appropriate documents with the SEC to register for resale all of the shares of RFM common stock issued to the former shareholders of Cirronet.

ITEM 1A. RISK FACTORS

You should consider the following risk factors in evaluating RFM and its business. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial results and cause the value of our securities to decline. The risks below are not the only ones facing RFM. Additional risks not currently known to us or that we currently deem immaterial also may impair our business.

Strategic Risks

Limited Experience in Business Combinations or Acquisitions

Subsequent to the end of the current fiscal year, we closed two acquisitions that involved a material investment. The return on that investment is subject to those entities achieving expected performance and our ability to integrate those operations to achieve planned results. In those transactions, we have issued stock that dilutes our stockholders’ percentage ownership, incurred substantial debt, assumed contingent liabilities, and used other assets available at the time of acquisition.

We have limited experience in acquiring other businesses, product lines and technologies. In addition, the attention of our management team may be diverted from our core business as we attempt to integrate these acquisitions with our other operations. Acquisitions also involve numerous risks, including, among others:

• Problems assimilating the purchased operations, technologies or products;

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• Costs associated with the acquisition;

• Adverse effects on existing business relationships with suppliers and customers;

• Sudden market changes;

• Risks associated with entering markets in which we have no or limited prior experience;

• Potential loss of key employees of the acquired companies; and

• Potential litigation arising from the acquired company’s operations before the acquisition.

Our inability to overcome problems encountered in connection with such acquisitions could divert the attention of management, utilize scarce corporate resources and harm our business. In addition, we may pursue a strategy of acquiring additional companies or businesses.

Uncertainty of Market Acceptance or Profitability 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 of declining products and partially offset the impact of lower average selling prices. Our future success depends on our ability to develop new products and product enhancements to keep up with technological advances and to meet customer needs. Any failure by us to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development, could have a material adverse effect on our financial condition and results of operations. Additionally, we could incur additional operating costs with the introduction of new products.

There can be no assurance that we will be successful in our planned product development or marketing efforts, or that we will have adequate financial or technical resources for our planned product development and promotion. The introduction of new products could require the expenditure of an unknown amount of funds for research and development, tooling, software development, manufacturing processes and inventory, as well as sales and marketing efforts. In order to successfully develop products, we will need to successfully anticipate market needs and may need to overcome rapid technological change and competition. In order to achieve high volume production, we may need to outsource production to third parties or enter into licensing arrangements and be successful in the management of sub-contractors overseas. There can be no assurance that our products will achieve or maintain market acceptance, result in increased revenues, or be profitable.

Product Development and Technological Change

Our industry is characterized by rapid technological change and is highly competitive with respect to timely product innovation. Our products are subject to obsolescence or price erosion because competitors are continuously introducing technologies with the same or greater capability as our technology. We are vulnerable to competitors that have much more 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.

Management of Growth, Diversification and Transition to Value Added Products

Successful expansion or diversification of our operations will depend on our ability to obtain new customers, to attract and retain skilled management and other personnel, to secure adequate sources of supply on commercially reasonable terms and to successfully manage new product introductions. To manage growth or diversification effectively, we will have to continue to implement and improve our operational, financial and management information systems, procedures and controls. As we expand or diversify, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth or diversification effectively could adversely affect our financial condition and results of operations.

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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 our 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.

Business Risks

Variability of Gross Margin

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. Therefore, our ongoing efforts to reduce manufacturing costs are an important factor in maintaining gross margins. 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.

We expect that our net sales and gross margin may vary significantly based on these and other factors, including the mix of products sold, the channels through which our products are sold, changes in product selling prices and component costs, the level of manufacturing efficiencies achieved and pricing by competitors.

Our average sales prices have historically declined, and we anticipate that the average sales prices for our products will continue to decline and could negatively impact our gross profit margins. Depending upon our ability to achieve similar reductions in our cost of sales, this reduction in average selling prices could have a material adverse effect on our gross margins and could have a material adverse effect on our business, financial condition and results of operation. There can be no assurance that we will be able to increase unit sales volumes, introduce and sell new products or reduce our cost per unit in sufficient amounts to increase or even maintain gross margins.

Liquidity

We believe that cash generated from operations, our cash balances and the amounts available under our existing 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 Price Volatility

Existing stockholders may suffer with each adverse change in the market price of our common stock. The market price of our common stock may be affected by a variety of factors in the future. Most obviously, the price of our shares may suffer adversely if our future operating results are below the expectations of investors. The stock market in general, and the market for shares of technology companies in particular, experiences extreme price fluctuations. Our common stock market price is made more volatile because of the relatively low volume of trading in our common stock. When trading is sporadic, significant price movement can be caused by the trading in a relatively small number of shares.

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Key Personnel

Our performance depends substantially on the performance of our executive officers and key employees. Our future success will depend on our ability to attract, integrate, motivate and retain qualified technical, sales, operations and managerial personnel. Competition for qualified personnel in our business is intense, and we may not be able to continue to attract and retain qualified executive officers and key personnel necessary for our business to succeed. In addition, if we lose the services of any of our key personnel and are not able to find replacements in a timely manner, our business could be disrupted, other key personnel may decide to leave, and we may incur increased operating expenses in identifying and compensating their replacements.

Sales Risks

Competition

We do business in markets that are noted for fierce competition and generally declining average selling prices. There are companies that offer or are in the process of developing similar types of products. 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. There can be no assurance that our products will be competitive with existing or future products, or that we will be able to establish or maintain a profitable price structure for our products.

We expect to face competition from existing competitors and new and emerging companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally. Competition may arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors will emerge and rapidly acquire significant market share.

We expect our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of our products. In addition, our competitors may develop enhancements to or future generations of competitive products that may render our technology or products obsolete or uncompetitive.

Decline of Demand for Product Due to Downturn of Related Industries

We may experience substantial period-to-period fluctuations in operating results due to factors affecting the industrial, automotive, consumer, medical and telecommunications industries. From time to time, each of these industries has experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in growth in any one of these industries or a technology shift could have a material adverse impact on the demand for our products, and therefore, a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the industries utilizing our products.

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Cyclical Nature of Our Industry

Our industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both the producing companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could have a material adverse effect on our business and operating results. Furthermore, any upturn in these industries could result in increased demand for, and possible shortages of, components we use to manufacture and assemble our products. Such shortages could have a material adverse effect on our business and operating results.

Credit Risks and Dependence on Major Customers

We grant credit to customers in a variety of commercial industries. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not required. Our inability to collect receivables from a large customer could have a material adverse effect on our business, financial condition, and results of operations.

There were four customers that each accounted for more than 10% of sales in our fourth quarter. 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.

Reliance on OEMs

To date, a substantial portion of our product sales has been to OEMs. The product and marketing decisions made by OEMs significantly affect the rate at which our products are used. We believe that because OEMs in certain industries receive a large portion of their revenues from sales of products and services to their installed base, these OEMs have tended to moderate the rate at which they incorporate our products into their products. Furthermore, OEMs that manufacture and promote products and technologies that compete or may compete with us may be particularly reluctant to employ our products and technologies to any significant extent, if at all. We may not be able to maintain or improve the current rate at which our products are accepted by OEMs and others, which could decrease our revenues.

International Sales

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.

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International sales may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances. Moreover, and as a result of currency changes and other factors, our competitors may have the ability to manufacture competitive products at a lower cost.

Product Returns and Order Cancellation

To the extent we have products manufactured in anticipation of future demand that does not materialize, or in the event a customer cancels an outstanding order, we could experience an unanticipated increase in our inventory. In addition, while we may not be contractually obligated to accept returned products, and have typically not done so in the past, we may determine that it is in our best interest to accept returns in order to maintain good relations with our customers. Product returns would increase our inventory and reduce our revenues. We have had to write-down inventory in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs.

We have no long-term volume commitments from our customers that are not subject to cancellation by the customer. Sales of our products are made through individual purchase orders and, in certain cases, are made under master agreements governing the terms and conditions of the relationships. Customers may change, cancel or delay orders with limited or no penalties. We have experienced cancellations of orders and fluctuations in order levels from period-to-period and we expect to continue to experience similar cancellations and fluctuations in the future that could result in fluctuations in our revenues.

Operational Risks

Parts Shortages, Over-Supplies and Dependence on Suppliers

The electronics and components industry is characterized by periodic shortages or over-supplies of parts that have in the past and may in the future negatively affect our operations. We are dependent on a limited number of suppliers and contractors for packages and semiconductor devices used in our products, and we have no long-term supply contracts with any of them.

Due to the cyclical nature of these industries and competitive conditions, we, or our sub-contractors, may experience difficulties in meeting our supply requirements in the future. Any inability to obtain adequate deliveries of parts, either due to the loss of a supplier or industry-wide shortages, could delay shipments of our products, increase our cost of goods sold and have a material adverse effect on our business, financial condition and results of operations.

Reliance on Limited Contract Manufacturers

If our contract manufacturers are unable to respond promptly and timely to changes in customer demand, we may be unable to produce enough products to respond to sudden increases in demand resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our contract manufacturers. We regularly provide rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us.

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By using contract manufacturers, our ability to directly control the use of all inventories is reduced since we do not have control over their operations. If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our contract manufacturers, we may be required to pay inventory carrying costs or purchase excess inventory. If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are unable to sell excess components or products due to their customized nature, our operating results and liquidity would be negatively impacted.

A substantial majority of our products are manufactured overseas in Taiwan, the Philippines and Japan. Due to the geographic concentration, a disruption of the manufacturing operations, resulting from sustained process abnormalities, human error, governmental intervention or natural disasters such as earthquakes, fires or floods could cause us to cease or limit our manufacturing contractors operations and consequently could harm our business, financial condition and results of operations.

Timely implementation of improved manufacturing processes

We reduce our costs almost continually 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 procedures that are difficult to maintain if not carried out properly which could result in incremental cost increase.

Terrorism and the Uncertainty of War

The consequences of any terrorist attacks, or any armed conflicts that may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or business. These include, without limitation, the possibility that insurance policies are unable to pay claims and that insurance may become unavailable or unaffordable.

Legal Risks

Intellectual Property Rights

Our ability to compete effectively is dependent on our proprietary know-how, technology and patent rights. We have applied for additional patents in the wireless area. There can be no assurance that our patent applications will be approved, that any issued patents will afford our products any competitive advantage or that any of our products will not be challenged or circumvented by third parties, or that patents issued to others will not adversely affect the sales, development or commercialization of our present or future products.

We are involved from time to time in claims and litigation over intellectual property rights, which may adversely affect our ability to manufacture and sell our products.

The wireless industry is characterized by vigorous protection and pursuit of intellectual property rights. We believe that it may be necessary, from time to time, to initiate litigation against one or more third parties to preserve our intellectual property rights. In addition, from time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights, which claims could result in litigation. Such litigation would likely result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to use the infringed technology. Such a license may not be available on commercially reasonable terms, if at all. Our failure to obtain a license on commercially reasonable terms could cause us to incur substantial costs and suspend manufacturing products using such technology. If we obtain a license, we would likely be required to make royalty payments for sales under the license. Such payments would increase our costs of revenues and reduce our gross profit.

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In addition, any litigation, whether as plaintiff or as defendant, would likely result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is ultimately determined in our favor, and the results of any litigation are inherently uncertain.

Effect of Regulatory Actions

Many of our products and the industries in which they are used are subject to U.S. and foreign regulation. Governmental regulatory action could greatly reduce the market for our products.

Product Liability

In the course of our business, we may be subject to claims for product liability for which our insurance coverage is excluded or inadequate.

ITEM 2. PROPERTIES

Our principal administrative, sales, marketing, research and development and manufacturing facilities are located in Dallas, Texas, in two adjacent buildings totaling 58,000 square feet. One building, containing 27,000 square feet, is leased through October 2008. We own the second building of 31,000 square feet. The owned facility, including the surrounding parking lots, is situated on 2.1 acres. We believe that our existing facilities are adequate for our current requirements and that the current properties are suitable and productive for their currently intended purposes. Due to our flexible offshore manufacturing capabilities, we do not expect to require significant additions to our assembly facilities or equipment in the foreseeable future. We acquired two smaller leased facilities with the Cirronet and Caver- Morehead acquisitions.

ITEM 3. LEGAL PROCEEDINGS

We are involved in routine litigation from time to time incidental to the conduct of our business. Such litigation is not expected to have a material effect on financial position, results of operations or cash flow.

PART II.

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

Our common stock (symbol RFMI) is quoted on the NASDAQ Stock Market. The following table sets forth the high and low sales prices of our common stock during each quarter of fiscal year 2006 and 2005 as furnished by NASDAQ. These prices reflect prices between dealers, without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

	Price Range
	2006				2005
Quarter Ended	High		Low		High		Low
November 30	$	6.53	$	4.76	$	9.42	$	6.60
February 28		6.04		5.00		11.17		7.00
May 31		7.25		5.65		6.90		4.50
August 31		6.19		5.23		7.89		6.07

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We have not paid dividends on our common stock during the past two most recent fiscal years and presently intend to continue this policy in order to retain earnings for use in our business. Under the terms of our bank credit agreement, we are restricted from paying dividends in certain circumstances. The number of record holders of our common stock as of October 31, 2006 was approximately 200 (which number does not include the number of shareholders whose shares are held of record by a brokerage house or clearing agency, but rather includes such brokerage house or clearing agency as one record holder). The last sales price for our common stock, as reported by NASDAQ on October 31, 2006 was $5.56.

We have not repurchased any of our outstanding equity securities during the two year period ending August 31, 2006.

Equity Compensation Plan Information

The following table summarizes our equity compensation plans as of the fiscal year ended August 31, 2006:

				(c)
Plan category	(a) Number of securities to be issued upon exercise of outstanding options	(b) Weighted- average exercise price of outstanding Options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders*	1,404,611	$	6.96	539,163
Equity compensation plans not approved by security holders**	628,131	$	4.95	35,546
Total	2,032,742	$	6.34	574,709

* 201,051 of these shares will be used as consideration for stock options that were exchanged for former Cirronet options pursuant to the Cirronet acquisition. The weighted average exercise price of such options is $1.34.

** Our 1999 Equity Incentive Plan provides for non-statutory stock options, bonuses, or restricted stock and has not been approved by the stockholders. Neither our chief executive officer nor any of our other four most highly compensated executive officers are eligible to participate in this plan. Other officers are only eligible to receive awards that are an inducement essential to such individual entering into an employment agreement with us or any of our affiliates.

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ITEM 6. SELECTED FINANCIAL DATA

	Year Ended August 31,
	2006			2005			2004			2003			2002
	(In thousands, except gross profit margin & earnings per share amounts)
Statement of Operations Data:
Sales	$	54,162		$	46,222		$	48,506		$	42,935		$	43,254
Cost of sales		38,814			33,020			33,168			33,782			32,636
Gross profit	$	15,348		$	13,202		$	15,338		$	9,153		$	10,618
Gross profit margin %		28.3	%		28.6	%		31.6	%		21.3	%		24.5	%
Research and development	$	4,651		$	4,381		$	4,470		$	3,266		$	3,133
Sales and marketing		6,667			5,386			5,384			4,877			4,777
General and administrative		3,284			2,962			3,040			2,648			2,835
Restructuring and impairment (a)		—			—			—			1,216			229
Total operating expenses		14,602			12,729			12,894			12,007			10,974
Income (loss) from operations		746			473			2,444			(2,854	)		(356	)
Other expense, net		(115	)		(29	)		(193	)		(462	)		(1,067	)
Income (loss) before income taxes		631			444			2,251			(3,316	)		(1,423	)
Income tax (benefit) expense		50			(40	)		14			25			(981	)
Net income (loss)	$	581		$	484		$	2,237		$	(3,341	)	$	(442	)
Earnings (Loss) per share:
Basic	$	0.07		$	0.06		$	0.29		$	(0.47	)	$	(0.06	)
Diluted	$	0.07		$	0.06		$	0.27		$	(0.47	)	$	(0.06	)
Weighted average common shares outstanding:
Basic		8,014			7,861			7,597			7,170			7,095
Diluted		8,398			8,310			8,255			7,170			7,095
Balance Sheet Data (at August 31,): (b)
Cash, cash equivalents and short-term investments	$	5,847		$	5,450		$	2,715		$	216		$	273
Working capital		17,568			16,548			14,805			8,894			11,277
Total assets		30,400			27,839			26,773			24,823			30,510
Long-term debt		—			—			—			892			2,844
Stockholders’ equity		24,776			23,072			21,846			17,290			20,009

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(a) In fiscal year 2003, we recorded an impairment expense of approximately $1.2 million associated with our plan to consolidate our Dallas, Texas operations and facilities. This impairment expense was for the write-down or write-off of equipment and other assets that were no longer usable in our operations. We also incurred restructuring costs of $33,000 related to the severance of 12 employees. This employment reduction resulted from the consolidation of operations at our Dallas, Texas operations.

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

(b) Balance sheet components have improved in the current year because of profitable results and favorable operating cash flow. In prior years, the major components have trended down primarily because of actions we have taken as part of our overall restructuring program in response to lower sales levels and losses that we incurred. The major items include:

(1) Increased cash in fiscal years 2006, 2005 and 2004 and elimination of bank debt as a result of positive operating cash flow and proceeds of common stock issued under employee stock programs.

(2) Inventory write-down in fiscal year 2003 of $2.6 million primarily to revise product lines and recognize obsolete inventory.

(3) Shifting the responsibility for some raw materials inventory to offshore contractors.

(4) Fixed asset impairments in fiscal years 2002 and 2003, totaling $1.4 million to reflect equipment no longer required mostly due to transition of production offshore.

(5) A reduction in capital spending due to reliance on offshore contractors, resulting in depreciation in excess of capital spending.

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

Business

For a description of our business and markets, see the section above entitled Business.

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 high quality cost-effective products in volume with short lead times. 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. See the section above entitled Competition for further discussion. 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 developments 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

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electronics industry, which has historically experienced extreme increases and decreases in demand within short periods of time, is another key factor that influences our sales performance. We believe our markets are currently in a period of stable to rising overall demand, depending on the market involved. 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. The Cirronet and Caver-Morehead acquisitions implement our strategy to grow sales with new products that have higher margin potential.

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 the need for increased working capital to support increased sales or increased capital spending and other investments to support growth programs. We feel we currently have the financial resources necessary to execute our business plans.

Critical Accounting Policies and Estimates

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 have listed below our most significant accounting policies and estimates, which we think are the most critical to fully understand and evaluate our reported financial results. Please keep the following policies and estimates in mind when reading the accompanying financial statements and related footnotes.

Trade Receivables

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

In the prior year, we recorded a charge of $135,000 due to the commencement of Chapter 11 proceedings by Delphi Corporation. In current and previous years our losses were much smaller. However, there is no guarantee that we will continue to experience relatively low rates of loss in the future. A significant change in the liquidity or financial condition of a large customer or group of customers could have a material adverse effect on our ability to collect our receivables and we may incur losses as a result.

Inventories

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

We estimate the market value of inventory based upon existing and forecasted demand for end products for the next twelve months and estimated amounts of inventory that would be consumed. We reduce the valuation of inventory items that are in excess supply compared to demand, items that have had

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limited usage over time, items that may no longer be usable due to product obsolescence and items that we decide to discontinue selling. We have a product rationalization process that involves key management personnel to identify and evaluate products and related inventory that fall into one or more of these categories.

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

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

Impairment of Long-Lived Assets

In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we regularly review our long-lived assets for changes in circumstances indicating that their carrying values may not be recoverable. We recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its estimated undiscounted cash flows. We measure an impairment loss as the difference between the carrying amount and fair value of the asset. As an example, we have moved assembly production offshore and consolidated our Dallas operations. This change in circumstances caused us to test for an impairment loss and ultimately record a $1.2 million charge in fiscal year 2003 related to fixed assets. There was no material impairment loss in the last three fiscal years.

Deferred Income Taxes

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

Accrued Medical Benefits

We largely self-insure the payment of medical benefits to our employees. Consequently we regularly estimate the value of unpaid benefits based upon historical trends and use that information to record our liability for benefits that have been incurred but not yet paid. We have stop loss insurance protection to cover the costs of medical claims over certain deductible amounts for any given plan year for an individual claimant or in the aggregate. However, medical claims may significantly and unexpectedly increase or

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decrease over a short period of time, in which case our liability for unpaid claims may no longer be accurate. This could cause us to either increase or decrease medical expense in a material way in the period in which the change occurred.

Revenue Recognition

We recognize revenue for the most part when we ship the product to the customer. Less than 5% of fiscal year 2006 sales were recognized under programs in which inventory is consigned to a customer. We recognize sales from consigned products when the customer pulls the product for use from the consigned inventory. In all cases, we recognize sales at the point at which legal title passes to the customer. Our standard terms and conditions are FOB our factory. We permit the return of defective products and accept limited amounts of product returns in other instances. Accordingly, we provide allowances for the estimated amounts of these returns based on historical experience when we recognize revenue. A small portion of our revenue, called technology development sales, is derived from engineering design services performed for customers. In our next fiscal year, we will need to incorporate software revenue recognition procedures to account for the revenue generated by Aleier, our newly created subsidiary.

Results of Operations

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

• The fiscal year ended August 31, 2006, referred to as current year or fiscal 2006, is compared to our fiscal year ended August 31, 2005, referred to as prior year or fiscal 2005. Fiscal 2005 is compared to our fiscal year ended August 31, 2004, referred to as fiscal 2004.

• The three months ended August 31, 2006, referred to as current quarter or fourth quarter, compared to the three months ended August 31, 2005, referred to as comparable quarter of the prior year or prior year quarter, and the three months ended May 31, 2006, referred to as the previous quarter or third quarter.

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

	Percentage of Sales						Year-to-Year % Change
	2006		2005		2004		2005 to 2006		2004 to 2005
Sales	100	%	100	%	100	%	17	%	(5	)%
Cost of sales	72		71		68		18		—
Gross profit	28		29		32		16		(14	)
Research and development	9		10		9		6		(2	)
Sales and marketing	12		12		11		24		—
General and administrative	6		6		7		11		(3	)
Total operating expenses	27		28		27		15		(1	)
Income (loss) from operations	1		1		5		58		(81	)
Other expense, net	—		—		—		297		(85	)
Income (loss) before income tax	1		1		5		42		(80	)
Income tax expense (benefit)	—		—		—		225		(386	)
Net income (loss)	1	%	1	%	5	%	20	%	(78	)%

Sales

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

	Years Ended August 31,
	2006				2005				2004
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Product sales:
Wireless Solutions business:
Virtual Wire™ radio, RFIC and Module products	$	13,785	25	%	$	11,280	24	%	$	12,408	25	%
Wireless Components business:
Filters		22,086	41			15,178	33			12,200	25
Frequency control modules		4,229	8			3,680	8			3,374	7
Low-power components		13,622	25			15,612	34			20,190	42
Subtotal		39,937	74			34,470	75			35,764	74
Total product sales		53,722	99			45,750	99			48,172	99
Technology development sales		440	1			472	1			334	1
Total sales	$	54,162	100	%	$	46,222	100	%	$	48,506	100	%

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Overall Sales Trends in Fiscal 2006 Compared to Fiscal 2005

Our total sales increased 17% in fiscal 2006 compared to fiscal 2005. The primary reason for this was an increase in sales for three of our four product lines due to an increase in the number of units sold. This increase was the result of greater market acceptance of fairly new products, particularly for the satellite radio application. Sales for the fourth product line (low-power components) decreased in line with trends seen in prior years, as explained below in the section entitled Product Line Sales Trends: Low-Power Components. We have anticipated this trend of lower sales of low power components products for some time. As a result, for several years we have focused our product and market development efforts on products with higher technical content, which allows them to be sold at higher average selling prices. We had considerable success in increasing sales for these higher-priced products in the current year. Sales increased more than 33% for these products, as we sold 64% more units, particularly filters for the satellite radio application which is discussed below. One of the biggest factors in determining what happens to total sales in the future will be whether or not the anticipated growth in higher-priced product line sales will be greater than or less than the anticipated decline in sales for our low-power components and other older products.

We compete in very price competitive markets in which customers require decreased prices over time to retain their business. In addition, we understand that as new products ramp up in volume our customers expect economies of scale to result in lower pricing. As a result, each of our product lines experienced a decline in average selling prices in the range of 2% to 15% in the current year. A decline in average selling prices adversely impacts gross margin, as well as sales. Therefore, offsetting this impact is an important part of our strategic plan. We have achieved significant market position in most of the markets on which we focus. However, we believe that price competition from much larger and better financed competitors represents a significant risk in maintaining our sales levels and gross margins, particularly in the automotive and consumer market.

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

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

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

Overall Sales Trends in Fiscal 2005 Compared to Fiscal 2004

Our total sales decreased 5% in fiscal 2005 compared to fiscal 2004. The primary reason for this was a decrease in sales of low-power components of almost 23% in fiscal 2005. The number of low-power components units sold decreased 19% due to a slow down in automotive production schedules and loss of sales to some customers for older style products to alternative technologies such as phased locked loop. In

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addition, there was an ongoing decrease in average unit selling prices of almost 5%. The primary market for low-power components is the automotive market for remote keyless entry and tire pressure monitoring applications. The automotive market is very price competitive and we have had to reduce average selling prices significantly in recent years to maintain our market position.

We have anticipated these trends for some time. As a result, for several years we have focused our product and market development efforts on products with additional technical content, which allows them to be sold at higher average selling prices. We had considerable success in increasing sales for these higher-priced products in the current year. Sales increased more than 8% for these products, as we sold 67% more units, particularly filters for the satellite radio application which is discussed in the section below entitled Product Line Sales Trends: Filters.

Product Line Sales Trends:

Virtual Wire™ Short-range Radio products

Sales for Virtual Wire™ Short-range Radio products increased 22% in fiscal 2006, as compared to fiscal 2005, and decreased 9% in fiscal 2005, as compared to fiscal 2004. The increase in the current year was due to a 29% increase in the number of units sold. The increase in the number of units sold was primarily due to greater market acceptance for two growth applications – AMR and medical. We have focused on these applications for some time. In addition, sales increased approximately $1 million to our world wide network of distributors, returning to more normal levels. In the prior year, sales to distributors had declined significantly from fiscal 2004 as a result of decreases in inventory levels that occurred in their supply chains. Partially offsetting the increase in the number of units sold for these products was a 5% reduction in average selling prices, as competitive conditions forced us to lower prices.

Included in Virtual Wire™ Short-range Radio products sales this year were a small amount of Wireless Solutions module sales and RFIC sales. These amounted to less than 5% of those sales. The Wireless Solutions modules will be discussed in the next section. To provide customers more choices in the radio technology field, we announced a new line of RFIC products in fiscal 2006. These are intended to cover market niches and price points that the Virtual Wire™ Short-range Radio products cannot.

The decrease in sales from the prior year was primarily due to a 7% decrease in average selling price, as competitive conditions forced us to lower prices. The increase in number of units sold to AMR applications in the prior year were offset by a decrease in sales to several distributors as a result of reduced inventory levels in their supply chains. Sales to distributors returned to normal levels in the current year.

For several years we have devoted considerable resources developing and marketing Virtual Wire™ Short-range Radio products. We believe these products offer potential for considerable 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. We recently announced the launch of our third generation of this product, which will add several new features and will be available for sale in fiscal 2007. In addition, we announced a new line of RFIC products, including receivers, transmitters and transceivers. We are not certain when, if ever, these new products will significantly impact future sales.

Wireless Systems

During the prior year, we formed the Wireless Solutions Group. Since then, we have invested considerable resources in product and marketing development to support our strategic plan for the Wireless Solutions Group. For a description of the industrial market we see for these products and our strategy to capture a portion of it, see the section above entitled Item 1, Business. We recently announced the release of

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another FCC certified standard product for this market and completed a great deal of work on custom development contracts, which are classified as technology development sales. We now have a variety of sensor modules available for sale with several different network protocol options. Our sales force is now working with customers to design these products into their applications. In the current year, we sold initial volumes of these products. While we see great potential for Wireless Systems product, it is difficult for us to predict when, or if, these products will have a significant impact on our sales. The Cirronet and Caver-Morehead acquisitions also have wireless systems products.

Filters

Filter sales increased 46% in fiscal 2006, as compared to fiscal 2005, and increased 24% in fiscal 2005, as compared to fiscal 2004. In both fiscal years we sold an increased number of units, particularly for satellite radio applications. The unit increase was 70% in the current year and 89% in fiscal 2005. We provide filters for radios that provide services from both Sirius Satellite Radio Inc. (NASDAQ:SIRI) and XM Satellite Radio Holdings, Inc. (NASDAQ:XMSR). We are working with both service providers on future generations of product and we expect sales for the satellite radio application to continue to increase as subscriptions for those services continue to increase. We have seen both automotive and general consumer applications for satellite radio service increase. In the current year, we experienced an increase in market share. Since we now have a dominant position in this market, we do not expect further increases solely due to an increase in market share. The consumer portion of the satellite radio market is characterized by very short lead times as the radio manufacturers wait for orders from retail customers before placing orders for components. As a result, forecasting is very difficult.

Partially offsetting the increase in the number of units sold was a reduction in average selling price of 15% in the current year and 34% in the prior year. A portion of this was due to increased sales for newer products in smaller packages that have lower average selling prices, as well as the fact that competitive conditions force us to provide lower prices to maintain our position. The automotive and consumer markets tend to be more price competitive than the other markets we serve. We expect the trend for an increasing number of units sold to roughly offset the trend for lower average selling prices, resulting in a general trend of stable filter sales for at least the immediate future.

Late in the year, both satellite radio service providers were negatively impacted by FCC actions that took several versions of their products off the market until changes were made eliminating electronic interference. Although this legal issue did not involve our products, the regulatory action had an almost immediate impact in our shipments to customers that build radios for this application. Regulatory actions which negatively impact the satellite radio market could have a material adverse effect on our sales.

Frequency Control Modules

Frequency control module sales increased 15% in fiscal 2006, as compared to fiscal 2005, and increased 9% in fiscal 2005, as compared to fiscal 2004. The increase in both years was primarily due to an increased number of units sold to customers in high-end computer and internet infrastructure markets. We believe the increased number of units sold represents a continued recovery in economic conditions in the telecommunication markets. While there have been some decreases in average selling prices for frequency control module products, the pressures are not nearly as great as in some of our other markets. Future sales of these products will be highly dependent upon economic conditions in the markets these products serve.

Low-power Components

Sales for low-power components products decreased 13% in fiscal 2006, as compared to fiscal 2005 and decreased 23% in fiscal 2005, as compared to fiscal 2004. The decrease in sales for the current year was due to an 11% decrease in number of units sold and a 2% decrease in average selling prices. Two major automotive applications for these products (tire pressure monitoring, or TPM, and remote keyless entry, or

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RKE) experienced a total reduction in sales of approximately $1.8 million due to conversion to other technology and a general reduction in North American automobile production schedules. Many of our products sold into this application are very mature and conversion to other technologies such as multiple function integrated circuits and phased lock loop has been going on for years. In addition, some customers have switched to very low-priced competitors. The decrease in RKE sales was $4 million in the prior year. For years our sales to the TPM application have been less than we expected due to delays in the implementation of tire safety regulations. This delay has allowed alternative technologies to take significant market share 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.

We have focused our sales efforts for low-power components on market niches where our total solution is valued by the customer. In addition, we continue to provide additional package options and seek general cost reductions to remain competitive. Although we think sales of low-power components may continue to decline, we believe we can maintain considerable market share in the niches we are targeting.

The primary market for these products is the automotive market, which is characterized by very competitive conditions and declining average selling prices. The reduction in average selling prices for low-power components has been somewhat moderated in recent years by a reduction in the number of units sold of some of the lowest priced products. We expect that the trend of lower average selling prices for low-power component products to continue, as competitive market conditions require future price reductions.

The decrease in sales in fiscal 2005 as compared to fiscal 2004 was due to a 19% decrease in the number of units sold and a 5% decrease in average selling prices. The primary reason for the reduction in the number of units sold was a 12% reduction overall in North American automotive production levels, as well as to ongoing loss of market share to alternative technologies.

We expect that the trend of lower sales for low-power components will continue into the next fiscal year, due to continued reduction in average selling prices, continued conversion of customers away from older products to alternative technologies and generally low North American automotive production levels. During the year, sales of low-power components products fluctuated in accordance with changing production schedules for automotive customers. We expect this fluctuation to continue.

Other Sales Trends

The following table provides additional data concerning our sales:

	Percentage of Sales
	2006		2005		2004
Sales for top five customers	47	%	41	%	35	%
Distribution sales	27	%	24	%	25	%
Number of customers with 10% or more sales	One		One		None
Sales for 10% or more customer	13	%	12	%	N/A
International sales	55	%	61	%	61	%

The increase in sales to the top five customers in the current year results from sales increases in satellite radio applications. Our largest customer for the current year 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 material adverse effect on our operations.

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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.

Stock Compensation Expense

At the beginning of the current year, we adopted FASB Statement 123(R). Most of the expense recorded related to the unvested portion of stock grants that were made in prior years. In addition, the current year 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 to better match the employees’ perceived benefit with the financial statement cost.

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:

	Fourth Quarter		Year to Date
Cost of Sales	$	16,000	$	158,000
Research and development expense		10,000		78,000
Sales and marketing expense		25,000		135,000
General and administrative expense		45,000		198,000
Total additional stock compensation expense	$	96,000	$	569,000

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 $34,000 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 in the next fiscal year as the prior stock compensation vehicles become vested and the new RSU grants become the primary vehicle for employee incentive compensation.

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 primarily issue RSUs in lieu of stock options in future periods to lessen dilution and control expense.

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Gross Profit

Gross Profit Trends in Fiscal 2006 Compared to Fiscal 2005

Gross profit margin remained nearly the same at 28.3% in the current year, compared to 28.6% in fiscal 2005. The gross margin percentage of sales would have been almost exactly the same if the current year had not included a $158,000 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. The ongoing impact of lower average selling prices for our products going into competitive markets was almost entirely offset by the net effect of our cost reduction efforts.

Margins improved slightly for our Virtual Wire™ Short-range Radio products and frequency control modules, as cost reductions exceeded decreases in average selling prices. Margins were unchanged for our filters, despite a 15% decrease in average selling prices due to a similar amount of per unit manufacturing cost reduction. Only low-power components experienced a slight decline in margins, as the decrease in the number of units shipped resulted in a higher overhead cost per unit as a relatively high amount of fixed overhead costs were spread over fewer units. Fixed manufacturing costs include a significant amount of depreciation expense for manufacturing equipment.

Each of our product lines experienced a decline in average selling prices in the current year of 2% or more. We expect this trend to continue, so ongoing cost reduction is crucial to maintaining or improving gross margin.

Gross Profit Trends in Fiscal 2005 Compared to Fiscal 2004

Gross profit margin decreased to 28.6% in fiscal 2005, compared to 31.6% in fiscal 2004. The primary reason for the decreased margin was that the ongoing impact of lower average selling prices for our products going into competitive markets was greater than the net effect of our cost reduction efforts. For instance, the selling prices for our filter products declined 34% from the prior year, while costs only declined 32%. In addition, the cost reduction we achieved for our low-power component products was less than planned due to the fact that the 19% reduction in the number of units shipped resulted in an increase in the overhead costs per unit, since a relatively high amount of fixed manufacturing costs were spread over fewer units. This volume effect was magnified by our efforts to hold down production rates to reduce inventory levels.

Each of our product lines experienced a decline in average selling prices in fiscal 2005 of 5% or more. We expect this trend to continue, so ongoing cost reduction is crucial to maintaining or improving gross margin. During fiscal 2005, we achieved cost reductions of 5% or more on each of our product lines, except for low-power components, which experienced a slight cost increase.

Factors Influencing Gross Margins

Our gross margin continues to be influenced by several factors, both favorable and unfavorable. The favorable factors that influence gross margin represent our long-term efforts to improve gross margins. These include:

(1) Success in achieving ongoing cost reduction - Each of our product lines has achieved cost reduction on a year-over-year per unit manufacturing cost basis for the past two years, except for low-power components as mentioned above under the section entitled Gross Profit Trends in Fiscal 2006 Compared to Fiscal 2005. We devote considerable resources to obtaining purchasing savings and in working with our suppliers and outside contractors to improve yields, increase productivity and improve processes that result in lower costs. We intend to continue our efforts to reduce manufacturing costs in future periods.

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(2) Shift in product mix - Our higher-priced products, such as Virtual Wire™ Short-range Radio products, frequency control modules and certain custom filters, have a greater long-term potential for gross margins than the very price-sensitive low-power component and satellite radio filter products. A shift in sales to the Virtual Wire™ Short-range Radio products and frequency control modules has a large positive impact on margins. These higher-margin products in the current year represented 33% of total sales, compared to 32% in the previous year, so there was minimal shift in margins resulting from mix in the current year. However, our strategy is to increase the portion of sales to products that have higher potential gross margins. Our efforts to focus product development resources on the Wireless Solutions business typify this strategy. We believe the Cirronet and Caver-Morehead acquisitions will greatly accelerate this strategy, resulting in improved gross margins. While this is our strategy, we cannot assure you that such an improved product mix will be achieved in future periods. In fact, at times during our prior year our product mix shifted unfavorably, resulting in lower margins.

(3) Higher number of units sold or produced – This factor results in lower average unit cost due to relatively high fixed manufacturing costs being spread over a larger amount of sales and production. Our plan is to increase sales to achieve this result. However, if sales were to decrease in future periods, this factor would become an unfavorable factor, as happened with low-power components products in the current year.

Unfavorable factors which influence gross margin, some of which are outside of our control, include, but are not limited to, the following:

(1) Decrease in average selling prices - As discussed above, there was a reduction in average selling prices in all of our product lines. We expect that the trend toward lower average selling prices within our product lines will continue due to competitive pressures and the fact that newer products, like older products, are reaching levels at which customers expect volume-based price breaks.

(2) The impact of non-cash charges for obsolescence and write-downs of inventory - For example, we incurred substantial non-cash charges and write-downs in fiscal 2003.

(3) New products encounter ramp up costs associated with new manufacturing processes - We will continue to introduce new products into our manufacturing processes, and, therefore, we may be subject to unanticipated new product production costs that negatively affect our gross margin.

(4) Incremental manufacturing costs - From time to time we may experience production issues at our facility in Dallas or at one or more of our offshore contractors’ facilities. This may result in additional processing, more than normal scrap loss or additional expediting costs to protect customer deliveries. This occurred temporarily during our prior year.

Research and Development Expense

Research and development expense was approximately $4.7 million, $4.4 million and $4.5 million in fiscal 2006, 2005 and 2004, respectively. We made a strategic decision to increase research and development expense in fiscal 2004 and have maintained spending in that range ever since. Research and development expenses were 9% of sales in the current year and in fiscal 2004, compared to 10% of sales in fiscal 2005. The focus of our development efforts in the current year was to develop products for the Wireless Solutions business. Besides another generation of our Virtual Wire™ Short-range Radio products, we developed several proprietary modules that involve a variety of protocol firmware options to facilitate network communication between the modules. The current year also included a $78,000 increase in stock

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compensation expense as a result of the adoption of FASB Statement 123(R) and our change to RSUs in lieu of stock options. We also increased cost of sales related to engineering technology sales by approximately $115,000 to support custom engineering projects for Wireless Solutions customers.

We believe that the continued development of our technology and new products is essential to our success and we are committed to increasing our investment in research and development expense over the long term. With the Cirronet and Caver-Morehead acquisitions, we will be adding a considerable number of technical personnel. Therefore, we expect research and development expense to increase in absolute dollars in the next quarter.

Sales and Marketing Expense

Sales and marketing expense was $6.7 million, $5.4 million and $5.4 million in fiscal 2006, 2005 and 2004, respectively. Sales and marketing expenses were 12% of sales in the current year and in fiscal 2005, compared to 11% of sales in fiscal 2004. The current year increase was largely the result of increase in sales commission expenses that fluctuated in line with sales levels. Current year increases also included increased marketing support for our Wireless Solutions business and additional sales application support for our customers. The current year included a $135,000 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.

We intend to continue to aggressively grow sales, so we expect to maintain a relatively high level of sales and marketing expense. With the Cirronet and Caver-Morehead acquisitions, we will be adding a considerable number of sales and marketing personnel. Therefore, we expect sales and marketing expense to increase in absolute dollars in the next quarter. Sales commission expenses will continue to fluctuate in line with sales levels.

General and Administrative Expense

General and administrative expense was $3.3 million, $3.0 million and $3.0 million in fiscal 2006, 2005 and 2004, respectively. General and administrative expenses were 6% of sales in the current year and in fiscal 2005, compared to 7% of sales in fiscal 2004. The current year included a $198,000 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. The increase in the current year was also partially due to an increase in executive compensation expense.

With the Cirronet and Caver-Morehead acquisitions, we will be adding some administrative personnel, as well as some other administrative expenses. Therefore, we expect general and administrative expense to increase in absolute dollars in the next quarter.

Amortization of Acquired Intangible Assets

We will allocate the purchase price of the Cirronet and Caver-Morehead acquisitions to various assets and liabilities in an opening balance sheet. We will make a preliminary estimate in our first quarter, to be finalized by the end of the fiscal year. Part of that allocation will be to intangible assets, such as acquired technology, customer relationships, trademarks, goodwill, etc. We have retained the services of a business valuation advisor, who will advise us on the valuation estimates. A very preliminary estimate is that there are substantial intangible assets (approximately $14 million), most of which have definitive lives. We currently estimate that the quarterly cost of the amortization of these intangible assets will be in the $500,000 to $600,000 range for our first quarter. Most of this cost will be classified as operating expense, but some will impact cost of sales.

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Other Income (Expense)

Other income (expense) increased to $115,000 (expense) in the current year, compared to only $29,000 (expense) in the prior year. The primary reason for the increase in expense was that we incurred approximately $240,000 in expense related to start-up costs for a wireless systems investment that we account for as minority interest. This was partially offset by an increase of approximately $116,000 in increased interest income as a result of our increased cash balances. Subsequent to year-end, we used part of our cash balance and increased our bank borrowings to pay for a portion of the Cirronet and Caver-Morehead acquisitions.

Income Tax Expense (Benefit)

In both the current and prior years we recorded small provisions for state income tax. In the current year, because of a net operating loss, or NOL, carryforward, we have only a $50,000 provision for alternative minimum federal and state income tax. In the prior year, there was a $40,000 tax benefit as a result of a reversal of prior tax provisions. We expect to record relatively small income tax provisions in the near future. The Cirronet and Caver-Morehead acquisitions should not have a material impact on income tax expense. In fiscal 2007, the alternative minimum income 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 SFAS 109. We continue to maintain a full valuation allowance on our deferred tax assets due to our historical losses and a limited history of taxable income. However, we retain the tax benefits involved and we will realize the benefit in future periods to the extent we are profitable. As of the end of the current year, we have income tax carryforwards and other potential tax benefits available to reduce future federal taxable income by approximately $16.1 million as explained in Note 12 to our Financial Statements. The NOL carryforwards expire August 31, 2023.

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

Earnings (Loss) per Share

Net income for the current year was $0.6 million, compared to $0.5 million for the prior year and $2.2 million for fiscal 2004. Our diluted earnings per share were $0.07 for fiscal 2006, compared to $0.06 per share for fiscal 2005 and $0.27 for fiscal 2004. The increase in the current year was primarily due to increased sales at approximately the same gross margin, partially offset by an increase in operating expenses as a result of our additional operating expenses to support our strategic plan and an 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. The impact of increased stock compensation in the current year was $0.6 million or $0.07 per diluted share.

Fourth Quarter of Fiscal 2006

Unaudited quarterly financial data is presented in Note 15 to the accompanying financial statements.

Sales for the fourth quarter of $14.5 million increased approximately 26%, compared to $11.5 million in the comparable quarter of the prior year. Sales decreased approximately 1% compared to the previous quarter. The sales increase in the current quarter compared to the comparable quarter of the prior year followed the same pattern and was for the same reasons as the year-to-date increase. Sales increased in three of our four product lines as a result of an increase in the number of units sold by at least 50% for each product line due to greater market acceptance of relatively new products. For example, the number of filters sold more than doubled from the comparable quarter of the prior year, primarily from the growing satellite radio application.

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The increase in sales of Virtual Wire™ Short-range Radio products was particularly large when compared to last year’s fourth quarter when sales to distributors were relatively low as a result of inventory reduction that occurred in their supply chain. The sales increase in the fourth quarter for frequency control modules was also particularly high due to a recovery in economic conditions in the telecommunications market from the prior year’s depressed levels. Partially offsetting these sales increases in the current quarter was a decrease in average selling prices in all product lines that occurred due to continuing competitive pressures, including a 25% decrease for filters and a 7% decrease for low-power components. In the current quarter, overall low-power components sales decreased 20% from the comparable quarter of the prior year, primarily due to a 15% reduction in the number of units sold due to lower North American automobile production levels and continued loss of market share for older products, as discussed under the section above entitled Low-power Components.

In the current quarter, our sales decrease from the previous quarter was primarily due to an 8% decrease in sales of filters resulting from a decrease in the number of units sold, primarily as a result of the slow down in filters for the satellite radio application that occurred late in the current quarter. This filter slow down resulted from the reaction of the supply chain to the FCC ruling to cease sales of several types of satellite radios. It is not yet clear how long this ruling will be in effect and therefore we are not certain what the impact will be on our filter sales in our first quarter. Partially offsetting this decrease in sales in the current quarter was a seasonal increase in low-power components sales of a consumer toy application, which also occurred in the prior year’s fourth quarter.

Gross profit margin was 27.5% in the fourth quarter, compared to 26.5% for the comparable quarter of the prior year and 29.0% for the previous quarter. The primary reason for the increase in gross margin from the comparable period of the prior year was a positive shift in product mix. The total of the higher margin Virtual Wire™ Short-range Radio products and frequency control modules increased from 25% of total sales in the prior year quarter to 33% of total sales in the current quarter. The impact of product mix more than offset the impact of the decrease in average selling prices that was described earlier. In addition, each of the product lines was able to achieve per unit manufacturing cost reductions of 2% or more in comparison to the comparable quarter of the prior year to moderate the impact of the decrease in average selling prices. The decrease in margin from the previous quarter was primarily due to the decrease in average selling prices that occurred in the low-power component and filter product lines of 3% or more. We were not able to offset this effect with an equal amount of per unit manufacturing cost reductions in comparison to the previous quarter.

Operating expenses for the fourth quarter were approximately $3.8 million, compared to approximately $3.2 million for the comparable quarter of the prior year and $3.8 million for the previous quarter. The increase in operating expenses from the comparable quarter of the prior year was primarily due to approximately $300,000 in increased spending to support our strategic plan to grow the business, $175,000 in increased sales commission expense due to increased sales and $80,000 in stock compensation expense as a result of the adoption of FASB Statement 123(R) and change to RSUs in lieu of stock options. General and administrative expense in the current quarter was also impacted by the absence of a $135,000 bad debt charge that occurred in the comparable quarter of the prior year; partially offset the current quarter’s increased executive compensation expense.

Other expense was $30,000 in the fourth quarter, the same as the comparable quarter of the prior year and less than the $68,000 in the previous quarter. The decrease from the previous quarter was primarily due to lower start-up costs for a wireless systems investment that we account for as minority interest.

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Financial Condition

Financing Arrangements

At August 31, 2006, we maintained access to our revolving line of credit with Wells Fargo Bank, National Association, or WFB. There were no borrowings against the line of credit during the current year. Our revolving line-of-credit facility loan balance was zero at August 31, 2006, but a loan advance of approximately $5.3 million was available under the existing borrowing base.

On September 1, 2006, our banking agreement with WFB was amended and restated to increase the revolving credit arrangement to a limit of $11.0 million and add a $4.0 million term note facility. The term of the agreement was extended to December 1, 2009. The main purpose of this amended and restated agreement was to help finance the Cirronet acquisition. See discussion of this acquisition in Note 14 of our Financial Statements. The cash portion of the purchase price was funded with a portion of the proceeds from our new $15 million credit facility with WFB. The collateral for the revolver is the combined trade receivables of RFM and its subsidiaries. If the new agreement had been in place as of August 31, 2006, it would not have materially impacted our credit availability as of that date.

Our new revolving line of credit banking agreement and its status at the end of the year are described in Note 6 to our Financial Statements included in this report.

Our prior agreement with WFB contained certain financial covenants. We were in compliance with all of such covenants as of August 31, 2006. The new bank agreement with WFB has similar financial covenants, as well as an additional covenant on financial leverage. Although we believe that we will be able to continue to comply with the covenants contained in our new credit facility, there is no assurance that this will occur. Should there be a violation of one or more of the financial covenants, when we have outstanding borrowings, and we are unable to negotiate a waiver or amendment, the maturity of our debt could be accelerated. In that case, other sources of cash would be needed to support our operations.

Liquidity

Liquidity at August 31, 2006 consisted primarily of $5.8 million of cash and approximately $5.3 million available under the existing banking agreement. Net cash provided by our operating activities was $2.7 million in the current year, a decrease from $3.9 million in the prior year. The primary reason for decreased cash provided by operations was $0.9 million in funds needed in working capital items to support increased sales in the current year compared to a $0.6 million in funds provided by a reduction in working capital due to lower sales in the prior year. Included in the noncash items was $603,000 in stock-based compensation. Partially offsetting this working capital impact was an increase in net income adjusted for noncash items of $250,000 compared to the prior year.

Collection of our receivables on a days-sales-outstanding measurement remained in the low 50-day range in the current year. The inventory increase occurred mostly in finished goods for satellite radio filters that occurred late in the year as a result of the slow down in the satellite radio market that was explained above in the section entitled Fourth Quarter of Fiscal 2006. We are working with our offshore contractors to adjust our production levels to offset this effect. Since we offer our customers shorter lead times than we get from our contractors, volatile sales levels can lead to changes in inventory balances. We continued to be within payment terms with our vendors in fiscal 2006.

Even with the new acquisitions, we expect to maintain a positive cash flow from operations for fiscal 2007, as we did in the last five years. We believe continued positive cash flow, as well as access to our credit facilities, will be sufficient to maintain normal operations for the next twelve months.

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Cash used in investing activities was $2.7 million in the current year, compared to $1.8 million for the prior year. The increase was primarily due to capital spending of approximately $2.3 million in the current year compared to $1.6 million in the prior year. A significant amount of the capital spending in the current year related to implementation of software systems that are intended to enhance our new product development process. Most of the $0.6 million in increased other assets were costs related to the Cirronet and Caver-Morehead acquisitions. We expect to acquire up to $2.5 million of capital equipment by the end of fiscal 2007, primarily related to the development of new products and new manufacturing processes.

We were provided $0.6 million in net cash from financing activities in the current year, the same as the prior year. In the current and prior year, no funds were used to reduce bank borrowings, since the bank debt was paid off in fiscal 2004. We raised $0.5 million from sales of stock to employees under various stock programs in the current year, compared to $0.7 million last year. While our switch to RSUs as a stock compensation vehicle will tend to lower future proceeds from sales of stock to employees, the stock options that were assumed as a result of the Cirronet acquisition will result in additional proceeds.

As of August 31, 2006, we had approximately $5.3 million of cash availability under the prior banking agreement based upon the borrowing base which is derived from trade accounts receivable. In addition, approximately $5.7 million more may become available under our new banking agreement if our borrowing base were to increase sufficiently to support increased borrowing. We are not able to say when or if that will happen because of our inability to see very far into the future due to limited lead times on orders placed by our customers. In addition, our new bank agreement gives us $4.0 million in availability under a term loan that was subsequently used to partially finance the Cirronet acquisition. After the transaction closed, we still had approximately $2.0 million in availability under the new bank agreement at the end of September, 2006.

While we reported positive operating cash flows for the last five fiscal years, a reduction in sales or gross margins could occur due to economic or other factors. In addition, we incurred large cash commitments under the terms of the Cirronet and Caver-Morehead acquisitions as described in Note 14 of our Financial Statements. We believe that cash generated from operations, our cash balances and the amounts available under our new 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 material adverse effect on our operations.

Contractual Obligations

The following represent our known contractual obligations as of August 31, 2006 (in thousands):

	Payments Due By Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		Over 5 Years
Contractual Obligations:
Operating Lease Obligations (1)	$	320	$	221	$	99	$	0	$	0
Purchase Obligations (2)		4,514		4,514		0		0		0
Total	$	4,834	$	4,735	$	99	$	0	$	0

(1) Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of August 31, 2006. See Note 7 to our Financial Statements.

(2) These purchase obligations are for inventory items to be sold in the ordinary course of business. The reported amount is the value of three-month commitments required by contracts with three manufacturers for product assembly costs. Amount does not include open purchase orders for raw material. See Note 7 to our Financial Statements.

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Stock Based Compensation Plans

(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 shareholder 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. However, upon stockholder approval, no further grants will be made under the 1997 Plan and any shares remaining under the 1997 Plan will be granted under our new 2006 Equity Incentive Plan. 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, SFAS 123(R) for employees and directors for our fiscal year beginning September 1, 2005 using the modified prospective method. 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 SFAS 123(R) 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. Note 9 to our Financial Statements sets forth the stock compensation expense recognized in the current and prior two years.

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(b) General Option Information

Summary of Option Activity

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

				Options Outstanding
		Number of Shares Available for Options		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	(110,950	)	—			—
	Exercises	—		(89,254	)	$	3.49
	Cancellations-stock options	111,079		(111,079	)	$	7.49
	Cancellations-restricted stock units	2,900		—			—
	Additional shares reserved	400,000		—			—
Balance at	August 31, 2006	574,709		2,032,742		$	6.34

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

The following table compares the number of shares subject to option grants with exercise prices below the closing price of our common stock at August 31, 2006 (referred to as “In-the-Money”) with the number of shares subject to option grants with exercise prices equal to or greater than the closing price of our common stock at August 31, 2006 (referred to as “Out-of-the-Money”). The closing price of our common stock at August 31, 2006 was $6.19 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	943,001	$	3.89	41,290	$	3.72	984,291	$	3.88
Out-of-the-Money	1,007,322	$	8.69	41,129	$	7.62	1,048,451	$	8.65
Total Options Outstanding	1,950,323	$	6.37	82,419	$	5.66	2,032,742	$	6.34

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Recently Issued Accounting Standards

In June 2006, the Financial Standards Accounting Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, an interpretation of SFAS 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 details how companies should recognize, measure, present, and disclose uncertain tax positions that have been or expect to be taken. As such, financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. FIN 48 is effective for public companies for annual periods that begin after December 15, 2006. We are currently reviewing FIN 48 and evaluating its potential impact.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This new standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The new standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim period within those years. The provisions of the new standard are to be applied prospectively for most financial instruments and retrospectively for others as of the beginning of the fiscal year in which the standard is initially applied. We will be required to adopt this new standard in the first quarter of 2008. We are currently evaluation the requirements of Statement No. 157 and have not yet determined the impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 addresses the views of the SEC staff regarding the process of quantifying financial statement misstatements. SEC registrants are expected to reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year. We will be required to adopt the interpretations in SAB 108 in the fourth quarter of 2006. We are currently evaluating the impact of applying this guidance.

Forward-Looking Statements

Except for the historical information, this report contains numerous forward-looking statements that involve risks and uncertainties. These statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Statements of our plans, objectives, expectations and intentions involve risks and uncertainties. Statements containing terms such as “believe”, “expects”, “plans”, “anticipates”, “may” or similar terms are considered to contain uncertainty and are forward-looking statements. We believe that these statements are based on reasonable assumptions and our expectations at the time. Our actual results may differ materially from the statements and assumptions discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to; those discussed in the sections entitled Business, Risk Factors, Legal Proceedings, Selected Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A significant portion of our products have a manufacturing process in foreign jurisdictions 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 August 31, 2006 and accordingly have not hedged any such risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in Appendix A attached hereto and incorporated by reference.

ITEM 9A. 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 year ended August 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have adopted standards of business ethics and code of ethics that apply to our directors, officers and employees. The code of ethics is publicly available on our website at http://www.rfm.com/corp/ethicspolicy.pdf. If we make any substantive amendments to this code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our directors or executive officers, we will disclose the nature of such amendment or waiver on that website and in a report on Form 8-K.

The remaining information required by this item is found under the sections entitled (a) Proposal No. 1 - Election of Directors, (b) Executive Officers, (c) Compliance with Section 16(a) of the Exchange Act and (d) The Board of Directors in the definitive proxy statement to be filed with the Commission on or about December 11, 2006.

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ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is found under the section entitled Executive Officer Compensation in the definitive proxy statement to be filed with the Commission on or about December 11, 2006.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by this item is found under the section entitled (a) Equity Compensation Plan Information and (b) Security Ownership of Certain Beneficial Owners and Management in the definitive proxy statement to be filed with the Commission on or about December 11, 2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is found under the section entitled Certain Transactions with Management in the definitive proxy statement to be filed with the Commission on or about December 11, 2006.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is found under the section entitled Proposal No. 3—Ratification of Independent Auditor Selection in the definitive proxy statement to be filed with the Commission on or about December 11, 2006.

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)1. Financial Statements. Financial statements are attached as Appendix A to this report. The index to the financial statements is found on page F-1 of Appendix A.

(a)2. Financial Statement Schedules. All schedules are omitted since the required information is not present or is not present in amounts sufficient to require a submission of the schedules, or because the information required is included in the financial statements and notes thereto.

(a)3. Exhibits. See Exhibit Index in part (b) below.

(b) Exhibit Index

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Exhibits	Previously Filed*	As Exhibit	Description
2.1	Form 8-K (filed 8/28/06)	2.1	Agreement and Plan of Merger dated as of August 24, 2006 by and among the Registrant, CI Acquisition, Inc., Cirronet Inc. and certain other parties thereto
2.2	Form 8-K (filed 8/28/06)	2.2	Agreement and Plan of Merger dated as of August 24, 2006 by and among the Registrant, Aleier Inc., Caver-Morehead Systems, Inc. and the shareholders of Caver-Morehead Systems, Inc.
2.3	Form 8-K (filed 8/28/06)	10.1	Form of Voting and Option Agreement dated as of August 24, 2006 between the Registrant and certain shareholders of Cirronet Inc.
3.1	Form 10-K (Year ended 8/31/94)	3.1	Restated Certificate of Incorporation
3.2	Form 10-K (Year ended 8/31/94)	3.2	Bylaws
4.1			Reference is made to Exhibits 3.1 and 3.2
4.2	Form 8-K (filed 12/29/94)	4.3	Rights Agreement dated as of 12/20/94
4.3	Form 8-K (filed 8/19/96)	4.4	First Amendment to Rights Agreement dated 8/14/96
4.4	Form 10-Q (Quarter ended 11/30/00) (filed 1/16/01)	4.5	Second Amendment to Rights Agreement dated 12/11/00
4.5	Form 8-A/A (Amendment No. 2) (filed 12/17/04)	4.6	Third Amendment to Rights Agreement between Registrant and Equiserve Trust Company, National Association, successor to Fleet National
4.6	Form 10-K (Year ended 8/31/05) (filed 11/17/05)	4.9	Specimen Stock Certificate
10.1	Form S-1	10.1	Form of Indemnity Agreement entered into by the Registrant and each of its officers and directors
10.2	Form 10-K (Year ended 8/31/94)	10.10	Lease Agreement between the Registrant and Jeff Yassai
10.3	Form 10-Q (Quarter ended 11/30/95)	10.18	Form of Restrictive Stock Bonus Agreement
10.4	Form 10-K (Year ended 8/31/97) (filed 12/1/97)	10.23	Form of Change of Control Agreement for certain officers

45

Exhibits	Previously Filed*	As Exhibit	Description
10.5	Form 10-Q (Quarter ended 5/31/99) (filed 7/15/99)	10.25	Form of Restricted Stock Bonus Agreement
10.6	Form 10-Q (Quarter ended 2/28/01) (filed 4/16/01)	10.46	Warrant Agreement between Registrant and Wells Fargo Business Credit, Inc. dated as of 12/8/00
10.7	Form 10-Q (2001) (Quarter ended 5/31/01) (filed 7/13/01)	10.51	Manufacturing Agreement between Registrant and Automated Technology (Phil.) Inc. Electronics Corporation dated 2/22/01
10.8	Form 10-K (Year ended 8/31/01) (filed 11/29/01)	10.59	Amendment 1 to Manufacturing Agreement between Registrant and Automated Technology (Phil.) Inc. Electronics Corporation dated 7/19/01
10.9	Form 10-K (Year ended 8/31/02) (filed 11/21/02)	10.72	Product Agreement between Registrant and Tai-Saw Technology Co., LTD dated 9/1/002
10.10	Form 10-Q (Quarter ended 5/31/03) (filed 7/14/03)	10.83	Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co., Ltd. dated 3/1/03
10.11	Form 10-K (Year ended 8/31/03) (filed 11/20/03)	10.90	Chairman of the Board of Directors Service Agreement between the Registrant and Michael Bernique dated 5/31/03
10.12	Form 10-K (Year ended 8/31/04) (filed 11/18/04)	10.95	Amendment 1 dated 8/1/04 to Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co., Ltd. dated 5/1/03
10.13	Form 10-K (Year ended 8/31/04) (filed 11/18/04)	10.96	Amended and Restated Manufacturing and Technical Support Agreement between Registrant and Morioka Seiko Instruments, Inc. dated 6/11/04
10.14	Form 10-Q (Quarter ended 2/28/05) (filed 4/13/05)	10.97	Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04
10.15	Form 10-Q (Quarter ended 2/28/05) (filed 4/13/05)	10.98	Pledge and Security Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04
10.16	Form 8-K (filed 10/27/05)	10.99	Omnibus Cash Incentive Plan of 2005

46

Exhibits	Previously Filed*	As Exhibit	Description
10.17	Form 8-K (filed 10/27/05)	10.100	Management Incentive Plan of 2005
10.18	Form 10-K (filed 11/17/05)	10.19	1994 Non-employee Director’s Stock Option Plan, as amended
10.19	Form 10-K (filed 11/17/05)	10.20	1994 Notice of Grant of Stock Options and Grant Agreement
10.20	Form 10-K (filed 11/17/05)	10.22	1997 Notice of Grant of Stock Options and Grant Agreement
10.21	Form 10-K (filed 11/17/05)	10.23	1999 Equity Incentive Plan, as amended
10.22	Form 10-K (filed 11/17/05)	10.24	1999 Notice of Grant of Stock Options and Grant Agreement
10.23	Form 8-K (filed 11/22/05	10.26	Executive Sales Incentive Plan of 2005
10.24	Form 8-K (filed 12/19/05	10.27	Form of Restricted Stock Unit Award
10.25	Form 10-Q (filed 1/13/06)	10.1	Amendment 2 dated 10/1/05 to Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co. Ltd. dated 3/1/03.
10.26	Form 10-Q (filed 1/13/06)	10.2	First amendment dated 11/1/05 to Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04.
10.27	Form 8-K (filed 1/23/06)	99.1	Employee Stock Purchase Plan as Amended
10.28	Form 8-K (filed 1/23/06)	99.2	1997 Equity Incentive Plan as Amended
10.29	Form 8-K (filed 2/1/06)	99	New member of Board of Directors – William L. Eversole
10.30	Form 8-K (filed 8/28/06)	10.2	Employment Agreement dated as of August 24, 2006 between Registrant and Robert M. Gemmell
10.31			Amended and Restated Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 9/1/06

47

Exhibits	Previously Filed*	As Exhibit	Description
10.32			Amended and Restated Pledge and Security Agreement between Registrant and Wells Fargo Bank, National Association dated 9/1/06
10.33			Form of Lock-Up Agreement for the stock of Registrant and Executive shareholders of Cirronet Inc.
10.34			Form of Lock-Up Agreement for the stock of Registrant and General shareholders of Cirronet Inc.
23.1			Consent of McGladrey & Pullen LLP, Independent Registered Public Accounting Firm
23.2			Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
24.1			Power of Attorney**
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

* Incorporated herein by reference.

** Filed on the signature page of this Annual Report on Form 10-K.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, RF Monolithics, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 17th day of November, 2006.

RF MONOLITHICS, INC.
By:	/s/ DAVID KIRK
	David Kirk
	President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Morton PLLC and David Kirk, respectively, his attorneys-in-fact for him in any and all capacities, to sign any amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of RF Monolithics, Inc. and in the capacities indicated on the 17th day of November, 2006.

/s/ DAVID M. KIRK	/s/ DEAN C. CAMPBELL
David M. Kirk	Dean C. Campbell
CEO, President & Director	Director
/s/ HARLEY E BARNES III	/s/ WILLIAM L. EVERSOLE
Harley E Barnes III	William L. Eversole
CFO	Director
/s/ MICHAEL R. BERNIQUE	/s/ FRANCIS J. HUGHES, JR.
Michael R. Bernique	Francis J. Hughes, Jr.
Chairman	Director

49

APPENDIX A

FINANCIAL STATEMENTS

RF MONOLITHICS, INC.

INDEX TO FINANCIAL STATEMENTS - ITEM 8 OF FORM 10-K

	Page
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS	F-2
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of August 31, 2006 and 2005	F-4
Consolidated Statements of Income for the Years Ended August 31, 2006, 2005 and 2004	F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended August 31, 2006, 2005 and 2004	F-6
Consolidated Statements of Cash Flows for the Years Ended August 31, 2006, 2005 and 2004	F-7
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of RF Monolithics, Inc.:

We have audited the accompanying consolidated balance sheets of RF Monolithics, Inc. as of August 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RF Monolithics, Inc. as of August 31, 2006 and 2005, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ MCGLADREY & PULLEN LLP

Dallas, Texas

November 17, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of RF Monolithics, Inc.:

We have audited the accompanying statements of income, stockholders’ equity and cash flows of RF Monolithics, Inc. (the “Company”) for the year ended August 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the results of the operations and cash flows of the Company for the year ended August 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

November 18, 2004

F-3

RF MONOLITHICS, INC.

CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2006 AND 2005

(In Thousands, Except per-Share Amounts)

	2006			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,847		$	5,450
Trade receivables - net		7,669			6,753
Inventories - net		9,118			8,616
Prepaid expenses and other		447			315
Total current assets		23,081			21,134
PROPERTY AND EQUIPMENT - Net		6,275			6,235
OTHER ASSETS - Net		1,044			470
TOTAL	$	30,400		$	27,839
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable - trade	$	3,526		$	2,962
Accrued expenses and other current liabilities		1,987			1,624
Total current liabilities		5,513			4,586
OTHER LIABILITIES		111			181
Total liabilities		5,624			4,767
STOCKHOLDERS’ EQUITY:
Common stock: $.001 par value, 20,000 shares authorized; 8,094 and
7,949 shares issued in 2006 and 2005, respectively		8			8
Additional paid-in capital		38,157			36,992
Common stock warrants		86			128
Treasury stock, 36 common shares at cost		(227	)		(227	)
Accumulated deficit		(13,248	)		(13,829	)
Total stockholders’ equity		24,776			23,072
TOTAL	$	30,400		$	27,839

See notes to consolidated financial statements.

F-4

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED AUGUST 31, 2006, 2005, AND 2004

(In Thousands, Except Per-Share Amounts)

	2006			2005			2004
SALES	$	54,162		$	46,222		$	48,506
COST OF SALES		38,814			33,020			33,168
GROSS PROFIT		15,348			13,202			15,338
OPERATING EXPENSES:
Research and development		4,651			4,381			4,470
Sales and marketing		6,667			5,386			5,384
General and administrative		3,284			2,962			3,040
Total		14,602			12,729			12,894
INCOME FROM OPERATIONS		746			473			2,444
OTHER INCOME (EXPENSE):
Interest income		203			87			13
Interest expense		(66	)		(96	)		(260	)
Other		(252	)		(20	)		54
Total		(115	)		(29	)		(193	)
INCOME BEFORE INCOME TAXES		631			444			2,251
INCOME TAX EXPENSE (BENEFIT)		50			(40	)		14
NET INCOME	$	581		$	484		$	2,237
EARNINGS PER SHARE :
Basic	$	0.07		$	0.06		$	0.29
Diluted	$	0.07		$	0.06		$	0.27
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		8,014			7,861			7,597
Diluted		8,398			8,310			8,255

See notes to consolidated financial statements.

F-5

RF MONOLITHICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED AUGUST 31, 2006, 2005, AND 2004

(In Thousands)

	Common Stock			Additional Paid-in Capital		Common Stock Warrrants					Treasury			Accumulated
	Shares	Amount				Shares		Amount			Stock			Deficit			Total
BALANCE, SEPTEMBER 1, 2003	7,260	$	7	$	33,218	593		$	842		$	(227	)	$	(16,550	)	$	17,290
Common stock issuances:
Stock warrants exercised	120		—		714	(533	)		(714	)		—			—			—
Stock options exercised	339		1		1,771	—			—			—			—			1,772
Employee Stock Purchase Plan	87		—		332	—			—			—			—			332
Amortization of unearned compensation	—		—		215	—			—			—			—			215
Net income	—		—		—	—			—			—			2,237			2,237
BALANCE, AUGUST 31, 2004	7,806	$	8	$	36,250	60		$	128		$	(227	)	$	(14,313	)	$	21,846
Common stock issuances:
Stock options exercised	102		—		423	—			—			—			—			423
Employee Stock Purchase Plan	41		—		255	—			—			—			—			255
Amortization of unearned compensation	—		—		64	—			—			—			—			64
Net income	—		—		—	—			—			—			484			484
BALANCE, AUGUST 31, 2005	7,949	$	8	$	36,992	60		$	128		$	(227	)	$	(13,829	)	$	23,072
Common stock issuances:
Stock warrants exercised	12		—		42	(30	)		(42	)		—			—			—
Stock options exercised	89		—		311	—			—			—			—			311
Employee Stock Purchase Plan	44		—		209	—			—			—			—			209
Amortization of unearned compensation	—		—		603	—			—			—			—			603
Net income	—		—		—	—			—			—			581			581
BALANCE, AUGUST 31, 2006	8,094	$	8	$	38,157	30		$	86		$	(227	)	$	(13,248	)	$	24,776

See notes to consolidated financial statements.

F-6

RF MONOLITHICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUGUST 31, 2006, 2005, AND 2004

(In Thousands)

	2006			2005			2004
OPERATING ACTIVITIES:
Net income	$	581		$	484		$	2,237
Noncash items included in net income:
Depreciation and amortization		2,161			2,402			2,946
Charge for inventory obsolesence and asset impairment		155			218			127
Provision for trade receivable allowance		52			112			35
Stock-based compensation		603			64			215
Gain on disposal of property and equipment		(48	)		(33	)		(10	)
Changes in operating assets and liabilities:
Trade receivables		(968	)		492			(479	)
Inventories		(657	)		299			(1,366	)
Prepaid expenses and other		(132	)		(33	)		40
Accounts payable - trade		564			177			1,017
Accrued expenses and other liabilities		393			(306	)		268
Net cash provided by operating activities		2,704			3,876			5,030
INVESTING ACTIVITIES:
Acquisition of property and equipment		(2,277	)		(1,646	)		(595	)
Proceeds from disposition of property and equipment		136			131			158
Change in other assets		(586	)		(273	)		(70	)
Net cash used in investing activities		(2,727	)		(1,788	)		(507	)
FINANCING ACTIVITIES:
Repayments on line of credit		—			—			(2,696	)
Repayments on building mortgage and other		—			—			(1,402	)
Repayments on third party financing		(90	)		(117	)		(30	)
Change in other liabilities		(10	)		86			—
Proceeds from common stock and warrants issued		520			678			2,104
Net cash provided by (used in) financing activities		420			647			(2,024	)
INCREASE IN CASH AND CASH EQUIVALENTS		397			2,735			2,499
CASH AND CASH EQUIVALENTS:
Beginning of year		5,450			2,715			216
End of year	$	5,847		$	5,450		$	2,715
NON CASH FINANCING ACTIVITY:
Software acquired under third party financing	$	0		$	0		$	237
SUPPLEMENTAL INFORMATION:
Interest paid	$	2		$	7		$	79
Income taxes (refunded) paid	$	10		$	55		$	(36	)

See notes to consolidated financial statements.

F-7

RF MONOLITHICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED AUGUST 31, 2006, 2005 AND 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - We design, develop, manufacture and market a broad range of Wireless products that are solution driven and technology enabled. We have two lines of business-Wireless Solutions business and Wireless Components business.

Our Wireless Solutions business includes Virtual Wire™ Short-range Radio, RF Integrated Circuits, or RFIC, and Module products. These are wireless radios and the networks that manage and use them. Our goal is to provide customers with a comprehensive solution with a wide variety of alternative products and services for their wireless network applications. These product offerings will be enhanced in our next fiscal year by two acquisitions that were consummated in September, 2006. These acquisitions were Cirronet Inc, or Cirronet, and Caver-Morehead Systems, Inc., or Caver Morehead (which was acquired by Aleier, Inc., or Aleier, a wholly-owned subsidiary of RFM). See Note 14 to the financial statements for additional information on these transactions. Wireless radios are marketed under the RFM brand. Standard and custom radio modules and packaged radio and network gateway products will be marketed under the Cirronet brand. Asset management platform software and end-applications will be marketed under the Aleier brand.

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

Our products are incorporated into application designs in five primary markets: industrial, automotive, consumer, medical and telecommunications, and are sold primarily in North America, Europe and Asia.

We have manufacturing operations in Dallas, Texas and manufacturing agreements with a manufacturer in the Philippines, a manufacturer in Taiwan and a manufacturer in Japan. Generally, the core SAW device or die is produced in Dallas in a wafer fabrication process and shipped to the foreign manufacturers for assembly with other purchased components.

Consolidated results and balances include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our subsidiaries as of August 31, 2006 consisted of RFM Technologies, Inc. and Electronics International, LLC.

Financial Statement Preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies as of the date of the financial statements and revenues and expenses for the period. Those estimates and assumptions could differ significantly from conditions in future periods. Differences from those estimates are recognized in the period they become known.

Revenue is recognized for the most part when we ship the product to the customer. There are a small number of programs in which inventory is consigned to a customer and we recognize sales when the customer pulls the product for use from that inventory. In all cases, we recognize sales at the point at which legal title passes to the customer. Our standard terms and conditions are FOB our shipping point, which means that the title to the goods transfers to the customer upon shipment. We permit the return of

F-8

defective products and accept limited amounts of product returns in other instances. Accordingly, we provide allowances for the estimated amounts of these returns based on historical experience. A small portion of our revenue, called technology development sales, is derived from engineering design services performed for customers. The cost of shipping and handling is classified as a cost of sale. This cost is reduced by any freight and handling costs billed to our customer, which is considered minor.

Cash Equivalents represent liquid investments with maturities at the date of acquisition of three months or less.

Trade Receivables consist primarily of amounts due from customers for product shipped to them. We perform credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts based upon historical experience and specific customer information. If events occur causing collectibility of outstanding trade receivables to become unlikely, we record an increase to our allowance for doubtful accounts. When collection by all means available, including a collection agency, is unsuccessful, the customers account is written off to the allowance for doubtful accounts. We maintain credit insurance on major foreign customer balances and have a relatively diversified customer base.

Inventories are stated at the lower of cost (first-in, first-out method) or market. We have a specific inventory reserve that is set by periodic detailed reviews of inventory movement and marketability. We estimate the market value of inventory based upon existing and forecasted demand for end products for the next twelve months and estimated amounts of inventory that would be consumed. We reduce the valuation of inventory items that are in excess supply compared to demand, items that have had limited usage over time, items that may no longer be usable due to product obsolescence and items that we decide to discontinue selling. We have a product rationalization process that involves key management personnel to identify and deal with products and related inventory that fall into those situations.

Property and Equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:

Description	Life (Years)
Machinery & equipment	5
Machinery & equipment (over $50k)	7
Tooling	3
Furniture & fixtures	5
Leasehold improvements	life of lease
Computer equipment	3
Computer software	3
Land improvements	5
Building	10
Building improvements-structural	5
Building improvements-all other	3

Other Assets include patents and capitalized acquisition related purchase costs. Patent costs are amortized over the estimated useful lives of the respective patents, which is five years. Costs for patent applications denied are written off in the period in which the denial is received.

Impairment of Long-lived Assets is evaluated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which requires an entity to review long-lived tangible and intangible assets for impairment and recognize a loss if expected future undiscounted cash flows are less than the carrying amount of the assets. Such losses

F-9

are measured as the difference between the carrying value and the estimated fair value of the assets. The estimated fair value is determined based on expected discounted future cash flows. There were no material impairment charges related to long-lived assets in the current year.

Warranty Reserve is established based upon estimated warranty returns for the one year period after shipment date as permitted by our standard sales agreement. The warranty reserve included in the accrued liabilities in the accompanying balance sheet at both August 31, 2006 and 2005 was $45,000. Warranty claims have historically been limited because of our extensive quality systems.

Financial Instruments that potentially subject us to an interest and credit risk consist of cash and cash equivalents, accounts receivable, accounts payable and debt instruments, the carrying value of which are a reasonable estimate of their fair values due to their short maturities or variable interest rates.

Research and Development Costs are expensed as incurred. These costs do not include nonrecurring engineering costs related to contract technology development sales, which are included in cost of sales.

Deferred Income Taxes are provided under the asset and liability method for temporary differences in recognition of income and expense for tax and financial reporting purposes. Due to historical losses and a limited history of taxable income, we maintain a full valuation allowance on our deferred tax assets.

Earnings per Share is computed by dividing the net earnings by the weighted average shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common and potentially dilutive shares, from dilutive stock options and warrants to purchase common stock outstanding during each year. The dilutive effect of the options and warrants to purchase common stock are excluded from the computation of diluted net loss per share if their effect is antidilutive. The number of common stock equivalents excluded from the diluted net loss per share computation at August 31, 2006, 2005 and 2004 because they were antidilutive, were stock options in the amount of 1,155,851 and 784,832 and 401,563, respectively.

Stock-Based Compensation - We adopted SFAS 123(Revised 2004), “Share-Based Payment”, or SFAS 123(R), for our fiscal year beginning September 1, 2005 using the modified prospective method. 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 second quarter of this fiscal year, 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.

F-10

The following table illustrates the effect on net income and earnings per share in the prior two years if the fair value based method under SFAS 123(R) had been applied to all outstanding vested and unvested awards in those periods. For the current year, in compliance with SFAS 123(R), we recorded expense for all amortized stock-based compensation. Amounts are in thousands, except per share amounts:

	Years Ended August 31,
	2005			2004
Net Income, as reported	$	484		$	2,237
Add: Stock option based compensation expense included in reported net income, net of related tax effects.		53			105
Deduct: Total stock option based compensation expense, including ESPP, determined under fair value based method for all awards, net of related tax effects.		(1,720	)		(1,391	)
Pro forma net income (loss)	$	(1,183	)	$	951
EARNINGS (LOSS) PER SHARE
Basic - as reported	$	0.06		$	0.29
Basic - pro forma	$	(0.15	)	$	0.13
Diluted - as reported	$	0.06		$	0.27
Diluted - pro forma	$	(0.15	)	$	0.12

Segment Accounting – We report as a single segment under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”. Our management reviews financial information at the enterprise wide level and makes decisions accordingly.

Recently Issued Accounting Standards – In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48, an interpretation of SFAS 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 details how companies should recognize, measure, present, and disclose uncertain tax positions that have been or are expected to be taken. As such, financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. FIN 48 is effective for public companies for annual periods that begin after December 15, 2006. We are currently reviewing FIN 48 and evaluating its potential impact.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This new standard defines fair value, establishes a framework for measuring fair value in generally accepted

F-11

accounting principles, and expands disclosures about fair value measurements. The new standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim period within those years. The provisions of the new standard are to be applied prospectively for most financial instruments and retrospectively for others as of the beginning of the fiscal year in which the standard is initially applied. We will be required to adopt this new standard in the first quarter of 2008. We are currently evaluation the requirements of Statement No. 157 and have not yet determined the impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 addresses the views of the SEC staff regarding the process of quantifying financial statement misstatements. SEC registrants are expected to reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year. We will be required to adopt the interpretations in SAB 108 in the fourth quarter of 2006. We are currently evaluating the impact of applying this guidance.

In July 2006, the FASB issued Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. We will be required to adopt this interpretation in the first quarter of 2007. We are currently evaluation the requirements of FIN 48 and have not yet determined the impact on our consolidated financial statements.

2. TRADE RECEIVABLES

Trade receivables consist of the following (in thousands):
	2006			2005
Trade receivables	$	7,756		$	6,867
Other receivables		173			284
Allowance for trade receivables		(260	)		(398	)
Total	$	7,669		$	6,753
Allowance activity is as follows (in thousands):
	2006			2005			2004
Beginning balance	$	398		$	286		$	250
Provision		52			112			35
Recoveries (Write-offs)		(190	)		—			1
Ending balance	$	260		$	398		$	286

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One of our major customers, Delphi Corporation, filed Chapter 11 bankruptcy on October 8, 2005. In order to fully reserve for our receivable exposure at August 31, 2005 for this customer, we recorded a $135,000 additional provision for doubtful accounts in fiscal year 2005. All other trade receivable allowances were reduced by $23,000, resulting in a net provision for trade receivables of $112,000 for fiscal year 2005. In the current year, we increased the bad debt reserve by $15,000 and other trade receivable reserves by $37,000, for a total provision of $52,000 for fiscal year 2006. As a result of the Delphi bankruptcy, we wrote off $542,000 of receivables and subsequently sold the bankruptcy claim to a third party for $352,000 for a net write-off of $190,000 in fiscal year 2006.

3. INVENTORIES

Inventories consist of the following (in thousands):

	2006			2005
Raw materials and supplies	$	3,778		$	3,560
Work in process		2,040			2,287
Finished goods		4,196			3,799
Total inventories - gross		10,014			9,646
Less inventory reserves		(896	)		(1,030	)
Total inventories - net	$	9,118		$	8,616
Reserve activity is as follows (in thousands):
	2006			2005			2004
Beginning balance	$	1,030		$	1,031		$	1,686
Disposals		(289	)		(219	)		(782	)
Provision for inventory disposals		155			218			127
Ending balance	$	896		$	1,030		$	1,031

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4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

	2006		2005
Land and improvements	$	426	$	421
Building and improvements		2,650		2,591
Machinery and equipment		29,996		30,291
Test fixtures		361		252
Construction in progress		587		569
Leasehold improvements		528		523
Computer software		3,622		2,634
Office furniture		365		410
Total		38,535		37,691
Less accumulated depreciation and amortization		32,260		31,456
Property and equipment - net	$	6,275	$	6,235

Construction in progress includes computer software and other fixed assets not yet placed in service.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following (in thousands):

	2006		2005
Accrued payroll and compensation, including accrued medical benefits	$	1,351	$	944
Other accrued expenses		636		680
Total	$	1,987	$	1,624

6. CREDIT FACILITIES

On December 31, 2004, we replaced our banking agreement with a new revolving credit arrangement with an affiliate of our previous lender, under which the lender will make advances to us based on levels of eligible accounts receivable, subject to a limit of $10.0 million. As of August 31, 2006, our revolving line of credit facility had a loan balance of zero and availability of approximately $5.3 million under our borrowing base. Financial covenants under the new revolving credit arrangement include provisions as to the ratio of senior funded debt to cash flow, tangible net worth, profitability, and fixed charges coverage. This agreement was scheduled to expire on December 31, 2006.

On September 1, 2006, the above referenced banking agreement was amended and restated to increase the revolving credit arrangement to a limit of $11.0 million and added a $4.0 million term note. The term of the agreement was extended to December 1, 2009. The main purpose of this amended and restated agreement is to help finance the acquisitions of Caver-Morehead and Cirronet in September 2006. See discussion of these acquisitions in Note 14.

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7. LEASES AND CONTINGENCIES

Leases - We have entered into non-cancelable operating lease agreements for one of our headquarters facilities and certain equipment. Rent expense under the operating leases in fiscal years 2006, 2005, and 2004 was $212,000, $203,000, and $196,000, respectively. Minimum future rental commitments under the operating leases at August 31, 2006 are as follows (in thousands):

	Operating Leases
Fiscal year ending August 31:
2007	$	221
2008		78
2009		21
Total minimum payments	$	320

Purchase commitments – We have contractual relationships with a manufacturer in the Philippines (Infinity Solutions (Phil.) Inc.), a manufacturer in Taiwan (Tai-Saw Technology Co., Ltd.) and a manufacturer in Japan (Morioka Seiko Instruments, Inc., a subsidiary of Seiko Instruments, Inc.). The agreements with all three manufacturers call for us to commit to three months of activity in accordance with a three-month forecast submitted by us and accepted by the manufacturer. The total contract value of the three-month commitments as of August 31, 2006 was approximately $4.5 million.

Litigation – We are involved in routine litigation from time to time incidental to the conduct of our business. Such litigation is not expected to have a material effect on financial position, results of operations or cash flow.

8. CAPITAL STOCK

Preferred Stock - Preferred stock of 5,000,000 shares with $.001 par value is authorized; none was issued or outstanding at August 31, 2006 and 2005. Rights, preferences and other terms of the preferred stock will be determined by the Board of Directors at the time of issuance.

Stock Warrants – In December 2000, we sold 533,332 unregistered shares of common stock to a group of investors for $3.75 per share. Attached to the common stock were warrants to purchase 533,332 additional shares of our common stock at an exercise price of $7.50 per share. The warrants had a term of three years, expiring in December 2003. The value of these warrants using the Black-Scholes model was approximately $714,000. In November 2003, 109,998 of such warrants were exercised in cashless transactions. The excess of market price of $8.062 per share at the time of exercise over the grant price of $7.50 per share was issued to the warrant holders in the form of 7,665 shares of new common stock. In December 2003, the rest of such warrants, 423,334, were exercised in cashless transactions. The excess of market price of $10.20 per share at the time of exercise over the grant price of $7.50 per share was issued to the warrant holders in the form of 111,994 shares of new common stock.

In May 2006, 30,000 warrants granted to our bank in May 2003 to support loan agreement costs were exercised by the bank in a cashless transaction. The value of the warrants recorded at grant date was $42,000 using the Black-Scholes model. The excess of market price of $6.06 per share at the time of exercise over the grant price of $3.75 per share was issued to the warrant holder in the form of 11,423 shares of new common stock.

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As of August 31, 2006, there were 30,000 warrants outstanding. These were granted to our bank in December, 2000 and will expire in December 2010.

Stockholder Rights Plan - In December 1994, we adopted a stockholder rights plan. In connection with the adoption of such plan, we reserved 250,000 shares of our Series A Junior Participating Preferred Stock. At the same time, we declared a dividend of one preferred share purchase right, or Right, for each outstanding share of our common stock. The dividend of 4,965,847 Rights was issued to the stockholders of record on January 16, 1995. Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $74.40 per one one-hundredth of a Preferred Share, subject to adjustment. The Rights become exercisable on the earlier of (a) the tenth day after the public announcement of acquisition by a person or group of persons, not including an exempt person as defined by the stockholder rights plan, of 15% or more of our common shares outstanding or (b) the tenth business day after the date of first public announcement of the intention of a person or group of persons to commence a tender or exchange offer to acquire 15% or more of our common shares outstanding. When issued, the Preferred Shares have dividend and voting rights that are defined in the Rights plan. We can redeem the Rights at a redemption price of $.01 per Right in accordance with the Rights plan. The Board of Directors has approved the extension of the Rights plan until December 20, 2009.

9. STOCK-BASED COMPENSATION PLANS

We adopted SFAS 123(R) for our fiscal year beginning September 1, 2005 using the modified prospective method. In compliance with the standard, we recorded stock-based compensation expense in the current year related to options for employees and directors and our 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 second quarter of this fiscal year, 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 our fiscal years 2006, 2005 and 2004. Compensation expense recognized in thousands was:

	Years Ended August 31,
	2006		2005		2004
Stock Compensation Plans:
Stock options for employees and directors	$	430	$	—	$	—
Employee Stock Purchase Plan		41		—		—
Stock options for consultants		34		53		105
Restricted Stock Units		98		—		—
Restricted Stock Grants		—		11		110
Totals	$	603	$	64	$	215

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The adoption of SFAS 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 SFAS 123(R) and the change to RSUs in lieu of stock options was the recognition of additional stock compensation expense in the current fiscal year of $569,000.

As of August 31, 2006, we had an aggregate of 4.5 million shares authorized for issuance under our equity plans. The equity plans provide for the issuance of common shares pursuant to stock option exercises, issuance of restricted stock grants and restricted stock units. As of August 31, 2006, there were an aggregate of 2.1 million grants outstanding under the plans and approximately 575,000 shares available for grant under the plans. Under the equity plans, stock options, restricted stock grants and restricted stock units can be issued to employees, non-employee directors and consultants.

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 and/or RSUs 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 RSUs vest at a rate of one-fourth at each annual anniversary of the grant date.

The vested shares are issued to the grantee at each vesting date. 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.

Stock Options - 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 August 31, 2006, options to purchase 111,079 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:

	Years Ended August 31,
	2006		2005		2004
Expected dividend yield	0		0		0
Risk-free interest rate	4.5	%	3.6	%	3.5	%
Expected life of options (years)	6.0		4.2		6.0
Assumed volatility	71	%	74	%	81	%

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 the prior two years follows:

F-17

	2005				2004
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	2,069,003		$	6.30	2,032,625		$	5.96
Granted	292,296		$	5.71	384,000		$	7.06
Exercised	(102,558	)	$	4.12	(338,728	)	$	5.23
Expired	(31,666	)	$	8.77	(8,894	)	$	2.58
Outstanding at end of year	2,227,075		$	6.29	2,069,003		$	6.30
Options exercisable at year-end	1,915,197		$	6.55	1,388,264		$	6.85

The summary of stock option activity for the fiscal year ended August 31, 2006 follows:

	2006
	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	(89,254	)	$	3.49
Expired/cancelled	(111,079	)	$	7.49
Outstanding at August 31, 2006	2,032,742		$	6.34	4.8	$	0
Exercisable at August 31, 2006	1,950,323		$	6.37	4.7	$	0

The aggregate intrinsic values in the table above are zero because the market price on August 31, 2006 of $6.19 is less than the weighted average exercise price. The weighted-average grant-date fair value of options granted in fiscal years 2006 and 2005 was $2.72 and $2.60 respectively. The total intrinsic value of options exercised in fiscal years 2006 and 2005 was $224,780 and $288,391 respectively. Intrinsic values of options exercised will result in a deduction for tax purposes.

The following table summarizes information about stock options outstanding at August 31, 2006 for all four plans:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at August 31, 2006	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable at August 31, 2006	Weighted- Average Exercise Price
$ 2.01 to $ 3.95	569,751	5.52 years	$	3.06	541,842	$	3.08
$ 4.15 to $ 7.50	887,449	4.97 years	$	5.88	843,565	$	5.86
$ 7.56 to $ 11.37	426,042	4.24 years	$	8.99	415,416	$	8.98
$ 12.12 to $ 27.06	149,500	2.08 years	$	13.93	149,500	$	13.93
Totals	2,032,742				1,950,323

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A summary of shares of our common stock subject to our nonvested options as of August 31, 2006 and the changes during the twelve 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	(224,552	)	$	1.92
Expired/cancelled	(10,907	)	$	2.87
Nonvested at August 31, 2006	82,419		$	2.92

As of August 31, 2006, there was a total of $199,976 of unrecognized compensation cost related to nonvested stock options granted. The total cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of stock options vested in fiscal year 2006 was approximately $430,000.

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, or 1997 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. Upon approval by the stockholders, all shares remaining under the 1997 Plan will be available for issuance under the new 2006 Equity Incentive Plan. As of August 31, 2006, there was a total of $516,691 of unrecognized compensation cost related to nonvested RSUs granted. The total cost is expected to be recognized over a weighted-average period of 3.4 years. The following table sets forth the status of our RSU compensation activity as of August 31, 2006:

Nonvested Shares	Shares		Weighted- Average Grant-Date Fair Value
Nonvested at November 30, 2005	0		$	0.00
Granted	110,950		$	5.69
Vested	0		$	0.00
Cancelled	(2,900	)	$	5.69
Nonvested at August 31, 2006	108,050		$	5.69

Restricted common stock grants -All restricted stock grants have been issued from our 1997 Plan. The grants are considered issued stock when granted and presented to the grantee as vesting occurs. We record unearned compensation based on the share price on the date of the grant and expense that amount over the vesting period. Generally, the shares vest over a two or four year period. We have recognized compensation expense related to restricted stock grants of approximately $11,000 and $110,000 in fiscal years 2005 and 2004, respectively. The use of restricted stock grants has been discontinued and all expense of prior grants was fully amortized as of the end of fiscal year 2005. A summary of our 1997 Plan restricted stock activity and unvested balance follows:

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	2006				2005				2004
	Shares		Weighted- Average Price		Shares		Weighted- Average Price		Shares		Weighted- Average Price
Unvested at beginning of year	1,500		$	3.1600	14,703		$	3.4418	50,758		$	3.5408
Granted	—			—	—			—	—			—
Vested	(1,500	)	$	3.1600	(13,203	)	$	3.4738	(36,055	)	$	3.5812
Forfeited	—			—	—			—	—			—
Unvested at end of year	—		$	—	1,500		$	3.1600	14,703		$	3.4418

Employee Stock Purchase Plan - In 1994, we adopted an employee stock purchase plan, or Purchase Plan. In connection with the adoption of the Purchase Plan, we have reserved a total of 875,000 shares of our common stock. The number of shares authorized and added to the plan in the past three years was 150,000 shares in fiscal year 2004. Under the terms of the Purchase Plan, rights to purchase common stock may be granted to eligible employees at the discretion of the board of directors, subject to certain restrictions. The Purchase Plan enables our eligible employees, through payroll withholding, to purchase shares of common stock at 85% of the fair market value of the common stock at the purchase date. Purchases are made on a calendar quarter schedule. At August 31, 2006, there are 104,776 shares reserved for future purchase rights under this plan. A summary of the activity for the employee stock purchase plan is as follows:

	Shares	Purchase Proceeds
Purchases for fiscal years:
2004	87,263	$	332,316
2005	40,615		254,831
2006	44,096		208,936

10. INTERNATIONAL SALES AND SALES BY PRODUCT LINE

International sales in foreign markets are as follows (in thousands):

	2006				2005				2004
	Sales		As a Percentage of Total Revenue		Sales		As a Percentage of Total Revenue		Sales		As a Percentage of Total Revenue
International sales:
Europe	$	8,326	15.4	%	$	9,301	20.1	%	$	13,203	27.2	%
Asia		19,457	35.9	%		16,503	35.7	%		14,268	29.4	%
Other		2,159	4.0	%		2,168	4.7	%		2,204	4.6	%
Total	$	29,942	55.3	%	$	27,972	60.5	%	$	29,675	61.2	%

There are no long lived assets separately identified with international sales.

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Total sales in all markets are shown below by product line:

	Years Ended August 31,
	2006				2005				2004
	Amount		% of Total		Amount		% of Total		Amount		% of Total
	(Dollars in thousands)
Product sales:
Wireless Solutions business:
Virtual Wire™ radio, RFIC and Module products	$	13,785	25	%	$	11,280	24	%	$	12,408	25	%
Wireless Components business:
Filters		22,086	41			15,178	33			12,200	25
Frequency control modules		4,229	8			3,680	8			3,374	7
Low-power components		13,622	25			15,612	34			20,190	42
Subtotal		39,937	74			34,470	75			35,764	74
Total product sales		53,722	99			45,750	99			48,172	99
Technology development sales		440	1			472	1			334	1
Total sales	$	54,162	100	%	$	46,222	100	%	$	48,506	100	%

11. CONCENTRATION RISKS

Major Customers

Two customers each represented 10% or more of either the total trade receivable balance at August 31, 2006 or the total sales for fiscal year 2006. One customer, Delphi Corporation, represented 13% of the accounts receivable balance and 13% of total sales. The other customer represented 11% of the accounts receivable balance and 9% of total sales. Delphi filed Chapter 11 bankruptcy on October 8, 2005. We have recognized the total write-off of pre-petition receivables. See Trade Receivables footnote 2. This company was our largest customer in fiscal year 2006 and has yet to exit bankruptcy.

Two customers each represented 10% or more of either the total trade receivable balance at August 31, 2005 or the total sales for fiscal year 2005. One customer represented 10% of the accounts receivable balance and 12% of total sales. The other customer, Delphi Corporation, represented 13% of the accounts receivable balance and 8% of total sales. Delphi filed Chapter 11 bankruptcy on October 8, 2005.

Major Vendors

Two vendors each represented 10% or more of either total trade payables at August 31, 2006 or total cost of sales for fiscal year 2005. Both were our offshore contractors. One vendor represented 31% of the trade payable balance and 40% of total cost of sales. The other vendor represented 17% of the trade payable balance and 10% of total cost of sales.

Two vendors each represented 10% or more of either total trade payables at August 31, 2005 or total cost of sales for fiscal year 2005. Both were our offshore contractors. One vendor represented 30% of the trade payable balance and 27% of total cost of sales. The other vendor represented 19% of the trade payable balance and 18% of total cost of sales.

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12. INCOME TAXES

The income tax expense (benefit) is shown below (in thousands):

	2006		2005			2004
Current - federal	$	42	$	(46	)	$	49
Current - state		8		6			(35	)
	$	50	$	(40	)	$	14

A reconciliation between income taxes computed at the federal statutory rate and income tax expense (benefit) is shown below (in thousands):

	2006			2005			2004
Income tax expense computed at federal statutory rate	$	215		$	151		$	765
State income tax expense - net of federal income tax benefit		8			4			6
State income tax refund - net of federal income tax benefit		—			—			(30	)
Expenses not deductible for tax purposes		82			12			12
Increase (decrease) in valuation allowance affecting the provision for income taxes		(230	)		(157	)		(762	)
Changes in tax credits		42			(46	)		23
Other		(67	)		(4	)		—
Total income tax expense (benefit)	$	50		$	(40	)	$	14

The tax effects of significant items comprising our net deferred income taxes as of August 31, 2006 and 2005 are as follows (in thousands):

	2006			2005
Net Operating Losses	$	5,276		$	6,044
Accrued expenses		2,280			1,841
Inventories		136			75
Tax credit carryforwards		619			581
Total deferred tax assets		8,311			8,541
Prepaid expenses and other		(127	)		(107	)
Property and equipment		(1,263	)		(1,283	)
Total deferred income tax liabilities		(1,390	)		(1,390	)
Net deferred tax assets		6,921			7,151
Less valuation allowance		(6,921	)		(7,151	)
	$	—		$	—

F-22

As of August 31, 2006, we have income tax carryforwards of $15,519,000, $577,000 and $42,000 related to net operating losses, general business credits and alternative minimum tax credits, respectively, available to reduce future federal income tax liabilities. The net operating loss carryforwards expire August 31, 2023. To the extent net operating loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders’ equity.

Consistent with prior years and due to our historical losses and a limited history of taxable income, we have maintained a 100% valuation allowance against our net deferred tax assets. We retain the tax benefits involved and will realize the benefits in future periods to the extent we are profitable.

13. EMPLOYEE BENEFIT PLAN

We have a profit sharing plan under Section 401(k) of the Internal Revenue Code, which covers substantially all employees. We may match employee contributions at a rate determined by the Board of Directors. Discretionary matching cash contributions of approximately $230,000, $154,000 and $127,000 were made in fiscal years 2006, 2005 and 2004, respectively.

14. SUBSEQUENT EVENTS - ACQUISITIONS

Aleier, Inc.

On September 1, 2006, we completed our acquisition of Caver-Morehead Systems, Inc., a Texas corporation, or Caver Morehead, pursuant to an Agreement and Plan of Merger, or Merger Agreement. Aleier, Inc., a newly created Texas corporation and wholly-owned subsidiary of RFM, through a merger acquired substantially all of the assets and assumed substantially all of the liabilities of Caver-Morehead in an all cash transaction valued at $4.0 million. $2.0 million of the purchase price is subject to an earn-out agreement that entitles Caver-Morehead’s former shareholders to receive additional consideration upon the achievement by Aleier of certain margin targets and is expected to be paid in cash in two installments on February 2007 and February 2008, subject to reduction as described in the Merger Agreement. Aleier also assumed liabilities estimated to be $708,000 and incurred certain transaction costs. The asset management software, acquired from Caver-Morehead, is marketed by Aleier under the brand name Aleier.

Cirronet Inc.

On September 15, 2006, we completed our acquisition of Cirronet Inc., a Georgia corporation, pursuant to an Agreement and Plan of Merger, or Cirronet Merger Agreement, by and among RFM, Cirronet and certain other parties thereto. Pursuant to the Cirronet Merger Agreement, Cirronet continued after the merger as a wholly-owned subsidiary of RFM.

The purchase price was a total of $24 million, assuming all potential payouts, plus the assumption of Cirronet’s liabilities as of the closing estimated at $1.8 million and transaction costs. The consideration included payment of approximately $7,451,000 in cash, the issuance of approximately 709,000 shares of our common stock to Cirronet’s former shareholders and the exchange by RFM of Cirronet’s stock options that entitle the holders to purchase an aggregate of 1,089,468 shares of our common stock. We also (a) issued an unsecured, subordinated promissory note in the principal amount of $3.0 million, which is payable to Cirronet’s former shareholders on November 1, 2007, subject to reduction as described in the Cirronet Merger Agreement and (b) entered into an earnout agreement that entitles Cirronet’s former shareholders and option holders to receive an additional milestone payment of up to an aggregate amount of $4.8 million upon the achievement by Cirronet of certain sales and margin targets.

F-23

The earnout payment is scheduled to be paid in cash on November 1, 2007, subject to reduction as described in the Cirronet Merger Agreement.

15. QUARTERLY INFORMATION (UNAUDITED)

Selected unaudited quarterly financial data is as follows (in thousands, except per-share amounts):

	Fiscal 2006 Quarter Ended												Fiscal 2005 Quarter Ended
	Nov. 30			Feb. 28			May 31			Aug. 31			Nov. 30		Feb. 29		May 31			Aug. 31
Sales	$	12,296		$	12,693		$	14,696		$	14,477		$	12,163	$	11,283	$	11,284		$	11,492
Cost of sales		8,978			8,906			10,428			10,502			8,573		7,878		8,128			8,441
Gross profit		3,318			3,787			4,268			3,975			3,590		3,405		3,156			3,051
Operating expenses:
Research and development		1,176			1,131			1,143			1,201			1,063		1,119		1,105			1,094
Sales and marketing		1,492			1,632			1,741			1,802			1,364		1,347		1,318			1,357
General and administrative		750			810			886			838			734		714		726			788
Total		3,418			3,573			3,770			3,841			3,161		3,180		3,149			3,239
Income (loss) from operations		(100	)		214			498			134			429		225		7			(188	)
Other expense, net		52			(69	)		(68	)		(30	)		—		4		(3	)		(30	)
Income (loss) before income taxes		(48	)		145			430			104			429		229		4			(218	)
Income tax expense (benefit)		1			5			17			27			22		8		(54	)		(16	)
Net income (loss)	$	(49	)	$	140		$	413		$	77		$	407	$	221	$	58		$	(202	)
Earnings per share:
Basic	$	(0.01	)	$	0.02		$	0.05		$	0.01		$	0.05	$	0.03	$	0.01		$	(0.03	)
Diluted	$	(0.01	)	$	0.02		$	0.05		$	0.01		$	0.05	$	0.03	$	0.01		$	(0.03	)
Weighted average common shares outstanding:
Basic		7,949			7,981			8,042			8,083			7,809		7,843		7,869			7,923
Diluted		7,949			8,381			8,498			8,466			8,264		8,399		8,202			7,923

******

F-24

INDEX TO EXHIBITS

Exhibits	Previously Filed*	As Exhibit	Description
2.1	Form 8-K (filed 8/28/06)	2.1	Agreement and Plan of Merger dated as of August 24, 2006 by and among the Registrant, CI Acquisition, Inc., Cirronet Inc. and certain other parties thereto
2.2	Form 8-K (filed 8/28/06)	2.2	Agreement and Plan of Merger dated as of August 24, 2006 by and among the Registrant, Aleier Inc., Caver-Morehead Systems, Inc. and the shareholders of Caver-Morehead Systems, Inc.
2.3	Form 8-K (filed 8/28/06)	10.1	Form of Voting and Option Agreement dated as of August 24, 2006 between the Registrant and certain shareholders of Cirronet Inc.
3.1	Form 10-K (Year ended 8/31/94)	3.1	Restated Certificate of Incorporation
3.2	Form 10-K (Year ended 8/31/94)	3.2	Bylaws
4.1			Reference is made to Exhibits 3.1 and 3.2
4.2	Form 8-K (filed 12/29/94)	4.3	Rights Agreement dated as of 12/20/94
4.3	Form 8-K (filed 8/19/96)	4.4	First Amendment to Rights Agreement dated 8/14/96
4.4	Form 10-Q (Quarter ended 11/30/00) (filed 1/16/01)	4.5	Second Amendment to Rights Agreement dated 12/11/00
4.5	Form 8-A/A (Amendment No. 2) (filed 12/17/04)	4.6	Third Amendment to Rights Agreement between Registrant and Equiserve Trust Company, National Association, successor to Fleet National
4.6	Form 10-K (Year ended 8/31/05) (filed 11/17/05)	4.9	Specimen Stock Certificate
10.1	Form S-1	10.1	Form of Indemnity Agreement entered into by the Registrant and each of its officers and directors

Exhibits	Previously Filed*	As Exhibit	Description
10.2	Form 10-K (Year ended 8/31/94)	10.10	Lease Agreement between the Registrant and Jeff Yassai
10.3	Form 10-Q (Quarter ended 11/30/95)	10.18	Form of Restrictive Stock Bonus Agreement
10.4	Form 10-K (Year ended 8/31/97) (filed 12/1/97)	10.23	Form of Change of Control Agreement for certain officers
10.5	Form 10-Q (Quarter ended 5/31/99) (filed 7/15/99)	10.25	Form of Restricted Stock Bonus Agreement
10.6	Form 10-Q (Quarter ended 2/28/01) (filed 4/16/01)	10.46	Warrant Agreement between Registrant and Wells Fargo Business Credit, Inc. dated as of 12/8/00
10.7	Form 10-Q (2001) (Quarter ended 5/31/01) (filed 7/13/01)	10.51	Manufacturing Agreement between Registrant and Automated Technology (Phil.) Inc. Electronics Corporation dated 2/22/01
10.8	Form 10-K (Year ended 8/31/01) (filed 11/29/01)	10.59	Amendment 1 to Manufacturing Agreement between Registrant and Automated Technology (Phil.) Inc. Electronics Corporation dated 7/19/01
10.9	Form 10-K (Year ended 8/31/02) (filed 11/21/02)	10.72	Product Agreement between Registrant and Tai-Saw Technology Co., LTD dated 9/1/002
10.10	Form 10-Q (Quarter ended 5/31/03) (filed 7/14/03)	10.83	Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co., Ltd. dated 3/1/03
10.11	Form 10-K (Year ended 8/31/03) (filed 11/20/03)	10.90	Chairman of the Board of Directors Service Agreement between the Registrant and Michael Bernique dated 5/31/03
10.12	Form 10-K (Year ended 8/31/04) (filed 11/18/04)	10.95	Amendment 1 dated 8/1/04 to Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co., Ltd. dated 5/1/03
10.13	Form 10-K (Year ended 8/31/04) (filed 11/18/04)	10.96	Amended and Restated Manufacturing and Technical Support Agreement between Registrant and Morioka Seiko Instruments, Inc. dated 6/11/04

Exhibits	Previously Filed*	As Exhibit	Description
10.14	Form 10-Q (Quarter ended 2/28/05) (filed 4/13/05)	10.97	Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04
10.15	Form 10-Q (Quarter ended 2/28/05) (filed 4/13/05)	10.98	Pledge and Security Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04
10.16	Form 8-K (filed 10/27/05)	10.99	Omnibus Cash Incentive Plan of 2005
10.17	Form 8-K (filed 10/27/05)	10.100	Management Incentive Plan of 2005
10.18	Form 10-K (filed 11/17/05)	10.19	1994 Non-employee Director’s Stock Option Plan, as amended
10.19	Form 10-K (filed 11/17/05)	10.20	1994 Notice of Grant of Stock Options and Grant Agreement
10.20	Form 10-K (filed 11/17/05)	10.22	1997 Notice of Grant of Stock Options and Grant Agreement
10.21	Form 10-K (filed 11/17/05)	10.23	1999 Equity Incentive Plan, as amended
10.22	Form 10-K (filed 11/17/05)	10.24	1999 Notice of Grant of Stock Options and Grant Agreement
10.23	Form 8-K (filed 11/22/05	10.26	Executive Sales Incentive Plan of 2005
10.24	Form 8-K (filed 12/19/05	10.27	Form of Restricted Stock Unit Award
10.25	Form 10-Q (filed 1/13/06)	10.1	Amendment 2 dated 10/1/05 to Comprehensive Manufacturing Assembly Agreement between Registrant and Tai-Saw Technology Co. Ltd. dated 3/1/03.
10.26	Form 10-Q (filed 1/13/06)	10.2	First amendment dated 11/1/05 to Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 12/31/04.
10.27	Form 8-K (filed 1/23/06)	99.1	Employee Stock Purchase Plan as Amended
10.28	Form 8-K (filed 1/23/06)	99.2	1997 Equity Incentive Plan as Amended

Exhibits	Previously Filed*	As Exhibit	Description
10.29	Form 8-K (filed 2/1/06)	99	New member of Board of Directors – William L. Eversole
10.30	Form 8-K (filed 8/28/06)	10.2	Employment Agreement dated as of August 24, 2006 between Registrant and Robert M. Gemmell
10.31			Amended and Restated Loan Agreement between Registrant and Wells Fargo Bank, National Association dated 9/1/06
10.32			Amended and Restated Pledge and Security Agreement between Registrant and Wells Fargo Bank, National Association dated 9/1/06
10.33			Form of Lock-Up Agreement for the stock of Registrant and Executive shareholders of Cirronet Inc.
10.34			Form of Lock-Up Agreement for the stock of Registrant and General shareholders of Cirronet Inc.
23.1			Consent of McGladrey & Pullen LLP, Independent Registered Public Accounting Firm
23.2			Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
24.1			Power of Attorney**
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

* Incorporated herein by reference.

** Filed on the signature page of this Annual Report on Form 10-K.

EX-10.31

Exhibit 10.31

AMENDED AND RESTATED LOAN AGREEMENT

Dated as of September 1, 2006

between

RF MONOLITHICS, INC.

and

WELLS FARGO BANK, NATIONAL ASSOCIATION

Table of Contents

			Page
ARTICLE I		Definitions	1
	Section 1.1	Definitions	1
	Section 1.2	Accounting Matters	14
	Section 1.3	Other Definitional Provisions	14
ARTICLE II		Advances and Letters of Credit	15
	Section 2.1	Loans.	15
	Section 2.2	General Provisions Regarding Interest; Etc.	17
	Section 2.3	Unused Facility Fee	17
	Section 2.4	Use of Proceeds	18
	Section 2.5	Letters of Credit.	18
ARTICLE III		Payments	20
	Section 3.1	Method of Payment	20
	Section 3.2	Prepayments.	21
	Section 3.3	Additional Costs in Respect of Letters of Credit	22
ARTICLE IV		Security	22
	Section 4.1	Collateral	22
	Section 4.2	Setoff	22
ARTICLE V		Conditions Precedent	23
	Section 5.1	Initial Extension of Credit	23
	Section 5.2	All Extensions of Credit	24
	Section 5.3	Additional Conditions	24
ARTICLE VI		Representations and Warranties	25
	Section 6.1	Corporate Existence	25
	Section 6.2	Financial Statements; Etc	25
	Section 6.3	Action; No Breach	26
	Section 6.4	Operation of Business	26
	Section 6.5	Litigation and Judgments	26
	Section 6.6	Rights in Properties; Liens	26
	Section 6.7	Enforceability	26
	Section 6.8	Approvals	26
	Section 6.9	Debt	27
	Section 6.10	Taxes	27
	Section 6.11	Use of Proceeds; Margin Securities	27
	Section 6.12	ERISA	27
	Section 6.13	Disclosure	27
	Section 6.14	Subsidiaries, Ventures, Etc	27
	Section 6.15	Agreements	28
	Section 6.16	Compliance with Laws	28
	Section 6.17	Inventory	28
	Section 6.18	Investment Company Act	28

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Table of Contents

			Page
	Section 6.19	Public Utility Holding Company Act	28
	Section 6.20	Environmental Matters.	28
	Section 6.21	Intellectual Property	29
	Section 6.22	Depository Relationship	29
	Section 6.23	Subsidiaries	30
	Section 6.24	Further Assurances	30
ARTICLE VII		Affirmative Covenants	30
	Section 7.1	Reporting Requirements	30
	Section 7.2	Maintenance of Existence; Conduct of Business	33
	Section 7.3	Maintenance of Properties	33
	Section 7.4	Taxes and Claims	33
	Section 7.5	Insurance	33
	Section 7.6	Inspection Rights	34
	Section 7.7	Keeping Books and Records	34
	Section 7.8	Compliance with Laws	34
	Section 7.9	Compliance with Agreements	34
	Section 7.10	Further Assurances	34
	Section 7.11	ERISA	34
ARTICLE VIII		Negative Covenants	34
	Section 8.1	Debt	34
	Section 8.2	Limitation on Liens	35
	Section 8.3	Mergers, Etc	35
	Section 8.4	Restricted Payments	35
	Section 8.5	Loans and Investments	36
	Section 8.6	Intentionally Omitted.	36
	Section 8.7	Transactions With Affiliates	36
	Section 8.8	Disposition of Assets	36
	Section 8.9	Sale and Leaseback	37
	Section 8.10	Prepayment of Debt	37
	Section 8.11	Nature of Business	37
	Section 8.12	Environmental Protection	37
	Section 8.13	Accounting	37
	Section 8.14	No Negative Pledge	37
	Section 8.15	Guaranties	37
	Section 8.16	Subsidiaries	37
ARTICLE IX		Financial Covenants	38
	Section 9.1	Quick Ratio	38
	Section 9.2	Fixed Charge Coverage Ratio	38
	Section 9.3	Leverage Ratio	38
	Section 9.4	Consolidated Net Income	38
ARTICLE X		Default	39
	Section 10.1	Events of Default	39

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Table of Contents

			Page
	Section 10.2	Remedies Upon Default	41
	Section 10.3	Performance by the Lender	41
	Section 10.4	Cash Collateral	41
ARTICLE XI		Miscellaneous	42
	Section 11.1	Expenses	42
	Section 11.2	INDEMNIFICATION	42
	Section 11.3	Limitation of Liability	43
	Section 11.4	No Duty	43
	Section 11.5	Lender Not Fiduciary	43
	Section 11.6	Equitable Relief	43
	Section 11.7	No Waiver; Cumulative Remedies	44
	Section 11.8	Successors and Assigns	44
	Section 11.9	Survival	44
	Section 11.10	ENTIRE AGREEMENT; AMENDMENT	44
	Section 11.11	Notices	44
	Section 11.12	Governing Law; Venue; Service of Process	45
	Section 11.13	Counterparts	45
	Section 11.14	Severability	45
	Section 11.15	Headings	45
	Section 11.16	Intentionally Omitted.	45
	Section 11.17	Construction	45
	Section 11.18	Independence of Covenants	45
	Section 11.19	WAIVER OF JURY TRIAL	46
	Section 11.20	Participations; Etc	46
	Section 11.21	Arbitration.	46
	Section 11.22	Additional Interest Provision	48
	Section 11.23	Ceiling Election	49

-iii-

AMENDED AND RESTATED LOAN AGREEMENT

THIS AMENDED AND RESTATED LOAN AGREEMENT (the “Agreement”), dated as of September 1, 2006, is between RF MONOLITHICS, INC., a Delaware corporation (the “Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association (the “Lender”).

R E C I T A L S:

The Borrower has requested that the Lender extend credit to the Borrower as described in this Agreement. The Lender is willing to make such credit available to the Borrower upon and subject to the provisions, terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE I

Definitions

Section 1.1 Definitions. As used in this Agreement, all exhibits, appendices and schedules hereto and in any note, certificate, report or other Loan Documents made or delivered pursuant to this Agreement, the following terms will have the meanings given such terms in this Section 1 or in the provision, section or recital referred to below:

“AAA” has the meaning for such term set forth in Section 11.20.B of the Agreement.

“Advance” means an advance by the Lender to the Borrower pursuant to Article II or any advance made by the Lender to cover any drawing under any Letters of Credit.

“Advance Request Form” means a certificate, in a form approved by the Lender, in substantially the form of Exhibit E, properly completed and signed by the Borrower requesting a Revolving Credit Advance.

“Affiliate” means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (b) that directly or indirectly beneficially owns or holds fifteen percent (15%) or more of any class of voting stock of such Person; or (c) fifteen percent (15%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term “control” means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall the Lender be deemed an Affiliate of the Borrower or any of its Subsidiaries or Affiliates.

“Agreement” has the meaning set forth in the Introductory Paragraph hereto, as the same may, from time to time, be amended, modified, restated, renewed, waived, supplemented, or otherwise changed, and includes all schedules, exhibits and appendices attached or otherwise identified therewith.

LOAN AGREEMENT - Page 1

“Aleier” means Aleier, Inc., a Texas corporation and wholly owned subsidiary of the Borrower.

“Attributable Debt” means, on any date, (a) in respect of any Capital Lease Obligation of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a Capital Lease Obligation.

“Borrower” means the Person identified as such in the introductory paragraph hereof, and its successors and assigns.

“Borrowing Base” means, at any time, an amount equal to (i) 80% of the value of Eligible Accounts except for the period beginning September 1, 2007 and ending November 30, 2008, and (ii) for the period beginning September 1, 2007 and ending November 30, 2008, 85% of the value of Eligible Accounts.

“Borrowing Base Report” means, as of any date of preparation, a certificate setting forth the Borrowing Base (in a form acceptable to the Lender in substantially the form of Exhibit A attached hereto) prepared by and certified by the chief financial officer, controller or assistant controller of the Borrower.

“Business Day” has the meaning assigned to it in the Notes.

“Capital Expenditure” shall mean any expenditure by a Person for (a) an asset which will be used in a year or years subsequent to the year in which the expenditure is made and which asset is properly classified in relevant financial statements of such Person as equipment, real property, a fixed asset or a similar type of capitalized asset in accordance with GAAP or (b) an asset relating to or acquired in connection with an acquired business, and any and all acquisition costs related to (a) or (b) above.

“Capital Lease Obligation” shall mean the amount of Debt under a lease of Property by a Person that would be shown as a liability on a balance sheet of such Person prepared for financial reporting purposes in accordance with GAAP.

“Cash Collateral” has the meaning set forth for such term in Section 2.5.D.

“Cash Income Taxes” means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, the aggregate amount of federal and state income taxes paid by them during such period.

“Caver-Morehead Acquisition” means the transaction described in that certain Agreement and Plan of Merger dated as of August 24, 2006 by and among Caver-Morehead Systems, Inc., a Texas corporation, its shareholders, Aleier and the Borrower.

“Caver-Morehead Note” means the subordinated promissory note in the original principal amount of $200,000 to be issued pursuant to the Caver-Morehead Acquisition.

LOAN AGREEMENT - Page 2

“Change of Control” means the occurrence of any of the following events:

(a) any Person or “group” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a Person will be deemed to have “beneficial ownership” of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than twenty percent (20%) of the voting power of all classes of voting stock of the Borrower.

(b) During any consecutive two-year period beginning the day following the date of this Agreement, individuals who at the beginning of such period constituted the board of directors of the Borrower (together with any new directors whose election to such board of directors, or whose nomination for election by the owners of the Borrower, was approved by a vote of 66-2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors of the Borrower then in office.

(c) David Kirk or other senior management of the Borrower as of the date hereof shall cease to actively manage the Borrower’s day-to-day business activities, and there is not, in the reasonable judgment of the Lender, competent replacement management.

“CI Acquisition” means CI Acquisition, Inc., a Georgia corporation and wholly owned subsidiary of the Borrower.

“Cirronet Acquisition” means the transaction described in that certain Agreement and Plan of Merger dated as of August 24, 2006 by and among Cirronet Inc., a Georgia corporation, Robert M. Gemmell, Fran Maynard, as the Shareholder’s Representative, CI Acquisition and the Borrower.

“Cirronet Note” means the subordinated promissory note in the original principal amount of $3,000,000 to be issued pursuant to the Cirronet Acquisition.

“Code” means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder.

“Collateral” has the meaning for such term set forth in Section 4.1 of this Agreement.

“Commitments” means, collectively, the Revolving Credit Commitment and the Term Loan Commitment.

“Compliance Certificate” means a certificate, substantially in the form of Exhibit B attached hereto, prepared by and executed by the chief financial officer of the Borrower.

“Consolidated EBITDA” means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, an amount equal to the sum of (a) Consolidated Net Income for such period, plus (b) Interest Expense deducted in determining such Consolidated Net Income, plus (c) income tax expenses deducted in determining such Consolidated Net Income, plus (d) the amount of depreciation, depletion and amortization expense deducted in determining such

LOAN AGREEMENT - Page 3

Consolidated Net Income, plus (e) extraordinary losses computed and calculated in accordance with GAAP reducing such Consolidated Net Income, minus (i) income tax credits included in calculating such Consolidated Net Income and minus (ii) extraordinary gains computed and calculated in accordance with GAAP increasing such Consolidated Net Income.

“Consolidated Funded Debt” means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments and any Subordinated Debt, plus (b) all direct obligations arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds and similar instruments, plus (c) Attributable Debt in respect of Capital Lease Obligations and Synthetic Lease Obligations, plus (d) without duplication, all Guarantees with respect to outstanding Debt of the types specified in clauses (a) through (c) above of Persons other than the Borrower or any Subsidiary, plus (e) all Debt of the types referred to in clauses (a) through (d) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer (other than a joint venturer that is only a limited partner), unless such Debt is expressly made non-recourse to the Borrower or such Subsidiary.

“Consolidated Interest Charges” means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) all Interest Expense paid in cash during such period by the Borrower and its Subsidiaries in connection with borrowed money (including capitalized interest) that is treated as interest in accordance with GAAP, and (b) the portion of rent expense of the Borrower and its Subsidiaries with respect to such period under capital leases that is treated as interest in accordance with GAAP.

“Consolidated Liabilities” means, at any particular time, all amounts which, in conformity with GAAP, would be included as liabilities on a balance sheet of a Person.

“Consolidated Net Income” means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, the net income of the Borrower and its Subsidiaries for that period.

“Consolidated Tangible Net Worth” means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, Shareholders’ Equity (by way of clarification, and not as an additional deduction, such GAAP calculation would be net of treasury shares) of the Borrower and its Subsidiaries on that date minus the Intangible Assets of the Borrower and its Subsidiaries on that date.

“Constituent Documents” means (i) in the case of a corporation, its articles or certificate of incorporation and bylaws; (ii) in the case of a general partnership, its partnership agreement; (iii) in the case of a limited partnership, its certificate of limited partnership and partnership agreement; (iv) in the case of a trust, its trust agreement; (v) in the case of a joint venture, its joint venture agreement; (vi) in the case of a limited liability company, its articles of organization and operating agreement or regulations; and (vii) in the case of any other entity, its organizational and governance documents and agreements.

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“Debt” means as to any Person at any time (without duplication): (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than ninety (90) days, (d) all Capital Lease Obligations of such Person, (e) all Debt or other obligations of others Guaranteed by such Person, (f) all obligations secured by a Lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person, (g) any other obligation for borrowed money or other financial accommodations which in accordance with GAAP would be shown as a liability on the balance sheet of such Person, (h) any repurchase obligation or liability of a Person with respect to accounts, chattel paper or notes receivable sold by such Person, (i) any liability under a sale and leaseback transaction that is not a Capital Lease Obligation, (j) any obligation under any so-called “synthetic leases”, (k) any obligation arising with respect to any other transaction that is the functional equivalent of borrowing but which does not constitute a liability on the balance sheets of a Person, (l) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments, and (m) all liabilities of such Person in respect of unfunded vested benefits under any Plan.

“Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Default” means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default.

“Default Interest Rate” has the meaning assigned to it in the Notes.

“Dispute” means any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to any of the Loan Documents and each other document, contract and instrument required hereby or now or hereafter delivered to Lender in connection herewith, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the foregoing documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the foregoing documents.

“Disclosure Schedule” means the schedule of the same name attached hereto.

“Dollars” and “$” mean lawful money of the United States of America.

“Domestic Subsidiary” means any Subsidiary that is organized under the laws of any political subdivision of the United States.

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“Eligible Accounts” means, at any time, but subject to the last sentence of this definition, all accounts receivable of the Borrower created in the ordinary course of business that are acceptable to the Lender and satisfy the following conditions:

A. The account complies with all applicable laws, rules, and regulations, including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z of the Board of Governors of the Federal Reserve System;

B. The account has not been outstanding for 60 days or more past the due date, but not to exceed 120 days after the original date of invoice;

C. The account does not represent a commission and the account was created in connection with (i) the sale of goods by the Borrower in the ordinary course of business and such sale has been consummated and such goods have been shipped and delivered and received by the account debtor, or (ii) the performance of services by the Borrower in the ordinary course of business and such services have been completed and accepted by the account debtor;

D. The account arises from an enforceable contract, the performance of which has been completed by the Borrower;

E. The account does not arise from the sale of any good that is on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval, consignment, or any other repurchase or return basis, apart from Borrower’s standard product warranties;

F. The Borrower has good and indefeasible title to the account and the account is not subject to any Lien except Liens in favor of the Lender;

G. The account does not arise out of a contract with or order from, an account debtor that, by its terms, prohibits or makes void or unenforceable the grant of a security interest by the Borrower to the Lender in and to such account;

H. The account is not subject to any setoff, counterclaim, defense, dispute, recoupment, or adjustment other than normal discounts for prompt payment;

I. The account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs;

J. The account is not evidenced by chattel paper or an instrument (although it may be secured by a letter of credit provided by the Borrower’s customer);

K. No default exists under the account by any party thereto;

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L. The account debtor has not returned or refused to retain, or otherwise notified the Borrower of any dispute concerning, or claimed nonconformity of, any of the goods from the sale of which the account arose;

M. The account is not owed by an Affiliate, employee, officer, director or shareholder of the Borrower;

N. The account is payable in Dollars, Euros, Pounds Sterling or Japanese Yen by the account debtor; provided, however, that accounts may be payable in any of the aforementioned currencies other than Dollars only to the extent that accounts in any one such currency do not exceed five percent (5%) of all accounts;

O. The account is not owed by an account debtor whose accounts the Lender in its reasonable discretion has chosen to exclude from Eligible Accounts;

P. The account shall be ineligible if the account debtor is domiciled in any country other than the United States of America and Canada other than accounts which are insured under a foreign credit insurance policy acceptable to Lender in its sole discretion;

Q. The account shall be ineligible if more than twenty-five percent (25%) of the aggregate balances then outstanding on accounts owed by such account debtor and its Affiliates to the Borrower are ineligible by reason of paragraph B of this definition;

R. The account shall be ineligible if the account debtor is the United States of America or any department, agency, or instrumentality thereof, and the Federal Assignment of Claims Act of 1940, as amended, shall not have been complied with;

S. The account shall be ineligible to the extent the aggregate of all accounts owed by the account debtor and its Affiliates to which the account relates exceeds twenty-five percent (25%) of all accounts owed by all of the Borrower’s account debtors; and

T. The Account is otherwise acceptable in the sole discretion of the Lender; provided that the Lender shall have the right to create and adjust eligibility standards and related reserves from time to time in its good faith credit judgment.

The amount of the Eligible Accounts owed by an account debtor to the Borrower shall be reduced by the amount of all “contra accounts” and other obligations owed by the Borrower to such account debtor. The definition of Eligible Accounts will be reviewed and revised after the Lender completes its review of accounts receivable. The Borrower will pay for a comprehensive review to be conducted on or before March 1, 2007.

“Environmental Laws” means any and all federal, state, and local laws, regulations, judicial decisions, orders, decrees, plans, rules, permits, licenses, and other governmental restrictions and requirements pertaining to health, safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of

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1980, 42 U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., as the same may be amended or supplemented from time to time.

“Environmental Liabilities” means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs, and expenses, (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment, resulting from the past, present, or future operations of such Person or its Affiliates.

“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder.

“ERISA Affiliate” means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower or is under common control (within the meaning of Section 414(c) of the Code) with the Borrower.

“Event of Default” has the meaning specified in Section 10.1.

“Fiscal Quarter(s)” means the three-calendar-month periods ending on November 30, February 28, May 31, and August 31 of each calendar year.

“Fiscal Year” means the twelve-calendar-month period beginning September 1 of each year and ending August 31 of each year.

“Fixed Charge Coverage Ratio” means, as of the last day of a Fiscal Quarter that is the applicable date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) the sum of (i) Consolidated EBITDA for the period of four Fiscal Quarters ended on such date of determination plus (ii) non-cash stock option expenses (to the extent not included in the amortization calculation) minus (iii) Maintenance Capital Expenditures for the period of four Fiscal Quarters ended on such date of determination minus (iv) cash taxes minus

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(vi) dividends and distributions to (b) the sum of (i) Consolidated Interest Charges for the period of four Fiscal Quarters ended on such date of determination plus (ii) interest, lease payments and current period scheduled principal payments on Consolidated Funded Debt (including Attributable Debt but excluding principal payments due and payable on the Termination Date) during the period of the four Fiscal Quarters following such date of determination; provided, however, that for the determination of Consolidated EBITDA for Permitted Acquisitions that became Subsidiaries of the Borrower within the four fiscal quarters most recently ended at the date of determination, Consolidated EBITDA for such Subsidiaries during fiscal year 2007 shall be annualized pro forma EBITDA for the year to date period then ended (as such calculations shall be evidenced in form and substance satisfactory to the Lender); and further provided that any outstanding amounts under the Revolving Credit Note will not be classified as current period scheduled principal payments.

“Foreign Subsidiary” means each Subsidiary of the Borrower which is organized under the laws of a jurisdiction other than the United States of America or any state or commonwealth thereof.

“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period.

“Governmental Authority” means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government.

“Guarantee” by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person as well as any obligation or liability, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation or liability (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to operate Property, to take-or-pay, or to maintain net worth or working capital or other financial statement conditions or otherwise) or (b) entered into for the purpose of indemnifying or assuring in any other manner the obligee of such Debt or other obligation or liability of the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.

“Guarantor” means any Person who from time to time guarantees all or any part of the Obligations. The Guarantors are the Subsidiaries of the Borrower.

“Guaranty” means a written guaranty of each Guarantor in favor of the Lender, in form and substance satisfactory to Lender, as the same may be amended, modified, restated, renewed, replaced, extended, supplemented or otherwise changed from time to time.

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“Hazardous Material” means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls.

“Intangible Assets” means assets that are considered to be intangible assets under GAAP, including, to the extent specified by GAAP, customer lists, goodwill, computer software, copyrights, trade names, trademarks, patents, franchises, licenses, unamortized deferred charges, unamortized debt discount and capitalized research and development costs.

“Interest Expense” means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, all expenses treated as interest in accordance with GAAP.

“Letter of Credit” means any standby letter of credit issued by the Lender for the account of or at the direction of the Borrower pursuant to Article II of this Agreement.

“Letter of Credit Liabilities” means, at any time, the aggregate face amounts of all outstanding Letters of Credit, plus any amounts drawn under any Letters of Credit for which the Lender has not been fully reimbursed by the Borrower (unless the Lender, in its sole discretion, has cleared the drawn amount by means of an Advance under the Revolving Credit Note, in which case the drawn amount would not constitute a Letter of Credit Liability).

“Letter of Credit Request Form or Application” means a certificate or agreement, in a form acceptable to the Lender, properly completed and signed by the Borrower requesting issuance of a Letter of Credit and containing provisions for fees for the issuance of Letters of Credit, repayment of drawn letters of credit, the interest rate applicable to drawn and unpaid Letters of Credit, and such other matters as the Lender may require.

“Leverage Ratio” means, at any particular time, the ratio of Consolidated Liabilities to Consolidated Tangible Net Worth.

“LIBOR” has the meaning assigned to it in the Notes.

“LIBOR Loan” means any loan accruing interest at LIBOR.

“Lien” means any lien, mortgage, security interest, tax lien, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise.

“Loan Documents” means this Agreement, the Guaranty, the Security Documents and all promissory notes, security agreements, deeds of trust, assignments, letters of credit, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, restated, extended, supplemented, replaced, consolidated, substituted, or otherwise changed from time to time.

“Maintenance Capital Expenditures” means Capital Expenditures employed to replace partially or fully depreciated assets to maintain the existing operating capacity and expected

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service life of any asset, or other Capital Expenditures that are incurred in maintaining existing system volumes and related cash flows. Maintenance Capital Expenditures include both regular routine maintenance and major periodic planned maintenance.

“Maximum Lawful Rate” means, at any time, the maximum rate of interest which may be charged, contracted for, taken, received or reserved by the Lender in accordance with applicable Texas law (or applicable United States federal law to the extent that such law permits Lender to charge, contract for, receive or reserve a greater amount of interest than under Texas law). The Maximum Lawful Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Lawful Rate resulting from a change in the Maximum Lawful Rate shall take effect without notice to the Borrower at the time of such change in the Maximum Lawful Rate.

“Multiemployer Plan” means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA.

“Notes” means, collectively, all promissory notes (and “Note” means any of such Notes) executed at any time by the Borrower and payable to the order of the Lender, as amended, renewed, replaced, extended, supplemented, consolidated, restated, modified, otherwise changed and/or increased from time to time.

“Obligated Party” means the Guarantor or any other Person who is or becomes party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof.

“Obligations” means all obligations, indebtedness, and liabilities of the Borrower, each Guarantor and any other Obligated Party to the Lender or Affiliates of the Lender, or both, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligations, indebtedness, and liabilities under this Agreement, any Swap Contract, the other Loan Documents (including, without limitation, all Letter of Credit Liabilities), any cash management or treasury services agreements and all interest accruing thereon (whether a claim for post-filing or post-petition interest is allowed in any insolvency, reorganization or similar proceeding) and all attorneys’ fees and other expenses incurred in the enforcement or collection thereof.

“Operating Lease” means any lease (other than a lease constituting a Capital Lease Obligation) of real or personal Property.

“Origination Fee” means $22,500.

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA.

“Permitted Acquisition” means the Caver-Morehead Acquisition and the Cirronet Acquisition.

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“Permitted Debt” means (i) the Obligations, (ii) cash payments of up to $4,800,000 to the former shareholders of Cirronet Inc. and up to $2,000,000 to Caver-Morehead Systems, Inc. upon the attainment of certain performance targets described in the Cirronet Acquisition and the Caver-Morehead Acquisition, respectively, (iii) the Cirronet Note, and (iv) the Caver-Morehead Note.

“Permitted Investments” means (i) investments in wholly-owned Domestic Subsidiaries, (ii) travel advances or loans to the Borrower’s officers and employees not exceeding at any one time an aggregate of $50,000, (iii) advances in the form of progress payments for the purchase of Capital Expenditures, prepaid rent not exceeding one month and security deposits maintained in the ordinary course of business, and (iv) capital contributions to or investments in joint ventures and otherwise in the ordinary course of its business with any Person and Guarantees by the Borrower or any of its Subsidiaries in favor of any Person in the ordinary course of its business (including arrangements with suppliers, customers and customers of its customers), to the extent now existing plus additional cash contributions, that do not, in the aggregate, exceed $2,000,000 during the term of this Agreement.

“Person” means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, Governmental Authority, or other entity, and shall include such Person’s heirs, administrators, personal representatives, executors, successors and assigns.

“Plan” means any employee benefit or other plan established or maintained by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA.

“Prime Rate” has the meaning assigned to it in the Notes.

“Prime Rate Loan” means any loan accruing interest at the Prime Rate.

“Principal Office” means the principal office of the Lender, presently located at 4975 Preston Park Boulevard, Suite 280, Plano, Texas 75093.

“Prohibited Transaction” means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code.

“Property” of a Person means any and all property, whether real, personal, tangible, intangible or mixed, of such Person, or any other assets owned, operated or leased by such Person.

“Quick Ratio” means the ratio of current assets minus inventory to current liabilities minus any Revolving Credit Advance outstandings classified as Current Liabilities.

“Related Indebtedness” has the meaning set forth in Section 11.21 of this Agreement.

“Release” means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching, or migration of Hazardous Materials into the indoor or outdoor environment or into or out of property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water, ground water, or property.

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“Remedial Action” means all actions required to (a) clean up, remove, treat, or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care.

“Reportable Event” means any of the events set forth in Section 4043 of ERISA.

“Revolving Credit Advance” means any Advance made by the Lender to the Borrower pursuant to Section 2.1(A) of this Agreement.

“Revolving Credit Commitment” means the obligation of the Lender to make Revolving Credit Advances pursuant to Section 2.1 in an aggregate principal amount at any time outstanding up to but not exceeding (i) Eleven Million Dollars ($11,000,000) from September 1, 2006 through August 31, 2007 and (ii) Twelve Million Dollars ($12,000,000) from September 1, 2007 and at all times thereafter, subject, however, to termination pursuant to Section 10.2.

“Revolving Credit Note” means the Revolving Credit Note of the Borrower payable to the order of the Lender, in substantially the form of Exhibit C hereto, and all amendments, extensions, renewals, replacements, and modifications thereof.

“Revolving Credit Termination Date” means December 1, 2009.

“Security Agreement” means the Pledge and Security Agreement of the Borrower in favor of the Lender, in form and substance satisfactory to the Lender, as the same may be amended, restated, supplemented, modified, or changed from time to time, the Security Agreement of the Guarantors in favor of the Lender, in form and substance satisfactory to the Lender, as the same may be amended, restated, supplemented, modified or changed from time to time, and each Security Agreement executed by any Subsidiary pursuant to Section 8.16.

“Security Documents” means the Security Agreement, the Guaranty, the Loan Assignment Document (and the documents referred to therein), and each and every pledge, mortgage, deed of trust or other collateral security agreement required by or delivered to the Lender from time to time to secure the Obligations or any portion thereof.

“Shareholders’ Equity” means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, shareholders’ equity as of such date determined in accordance with GAAP.

“Subordinated Debt” means any Debt of the Borrower (other than the Obligations) that has been subordinated to the Obligations by written agreement, in form and content satisfactory to the Lender and which has been approved in writing by the Lender as constituting “Subordinated Debt” for purposes of this Agreement.

“Subsidiary” means (a) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the

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happening of any contingency) is at the time directly or indirectly owned or controlled by the Borrower or one or more of the Subsidiaries or by the Borrower and one or more of the Subsidiaries; and (b) any other entity (i) of which at least a majority of the ownership, equity or voting interest is at the time directly or indirectly owned or controlled by one or more of the Borrower and the Subsidiaries and (ii) which is treated as a subsidiary in accordance with GAAP. As used herein and in the Loan Documents, the term “Subsidiary” shall be deemed to not include either Industrial Telemetry, Inc. or Just One Electronics.

“Swap Contract” means any agreement (including related confirmations and schedules) between the Borrower and the Lender or any Affiliate of the Lender now existing or hereafter entered into which is, or relates to, a rate swap, basis swap, forward rate transaction, cap transaction, floor transaction, collar transaction or any other similar transactions (including any option with respect to any of these transactions) or any combination thereof.

“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).

“Term Loan Commitment” means an amount equal to $4,000,000.

“Term Loan Termination Date” means 11:00 A.M. Dallas, Texas time on September 1, 2009, or such earlier date on which the Commitment terminates as provided in this Agreement.

“Term Note” means any promissory note of the Borrower payable to the order of the Lender in substantially the form of Exhibit D hereto, and all amendments, extensions, renewals, replacements and modifications thereof.

“Term Loan Advance” means any Advance made by the Lender to the Borrower pursuant to Section 2.1(b) of this Agreement.

“UCC” means the Chapters 1 through 11 of the Texas Business and Commerce Code, as amended from time to time.

Section 1.2 Accounting Matters. Any accounting term used in this Agreement or the other Loan Documents shall have, unless otherwise specifically provided therein, the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, that all financial covenants and calculations in the Loan Documents shall be made in accordance with GAAP as in effect on the date of this Agreement unless the Borrower and the Lender shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing.

Section 1.3 Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein”, and “hereunder” and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise

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specified, all Article and Section references pertain to this Agreement. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC.

ARTICLE II

Advances and Letters of Credit

Section 2.1 Loans.

A. Revolving Credit Advances. Subject to the terms and conditions of this Agreement, the Lender agrees to make Revolving Credit Advances to the Borrower from time to time from the date hereof to and including the Revolving Credit Termination Date in an aggregate principal amount at any time outstanding up to but not exceeding the amount of the Revolving Credit Commitment, provided that the aggregate amount of all Revolving Credit Advances at any time outstanding shall not exceed the lesser of (i) the amount of the Revolving Credit Commitment minus all outstanding Letter of Credit Liabilities or (ii) the Borrowing Base minus all outstanding Letter of Credit Liabilities. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, the Borrower may borrow, repay, and reborrow hereunder.

1. The Revolving Credit Note. The obligation of the Borrower to repay the Revolving Credit Advances and interest thereon shall be evidenced by the Revolving Credit Note executed by the Borrower, payable to the order of the Lender, in the principal amount of the Revolving Credit Commitment as originally in effect, and dated the date hereof.

2. Repayment of Revolving Credit Advances. The Borrower shall repay the unpaid principal amount of all Advances on the Revolving Credit Termination Date, unless sooner due by reason of acceleration by the Lender as provided in this Agreement.

3. Interest. The unpaid principal amount of the Revolving Credit Note shall, subject to the following sentence, bear interest as provided in the Revolving Credit Note. If at any time the rate of interest specified in the Revolving Credit Note would exceed the Maximum Lawful Rate but for the provisions thereof limiting interest to the Maximum Lawful Rate, then any subsequent reduction shall not reduce the rate of interest on the Revolving Credit Advances below the Maximum Lawful Rate until the aggregate amount of interest accrued on the Revolving Credit Advances equals the aggregate amount of interest which would have accrued on the Revolving Credit Advances if the interest rate had not been limited by the Maximum Lawful Rate. Accrued and unpaid interest on the Revolving Credit Advances shall be payable as provided in the Revolving Credit Note and on the Revolving Credit Termination Date.

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4. Borrowing Procedure. Except with respect to the credit sweep provisions of the Revolving Credit Note and requests for Advances made through the Lender’s internet request system, the Borrower shall give the Lender notice of each Revolving Credit Advance by means of an Advance Request Form containing the information required therein and delivered (by hand or by mechanically confirmed facsimile) to the Lender no later than 1:00 p.m. (Texas time) (i) for Prime Rate Loans, on the Business Day prior to the day on which the Revolving Credit Advance is desired to be funded, specifying the requested date of the Revolving Credit Advance, in a minimum amount of $100,000 plus integral multiples thereof, and (ii) for LIBOR Loans, three Business Days prior to the day on which the Revolving Credit Advance is desired to be funded, specifying the requested date of the Revolving Credit Advance, in a minimum amount of $250,000 plus integral multiples thereof. The Lender at its option may accept telephonic requests for such Revolving Credit Advances, provided that such acceptance shall not constitute a waiver of the Lender’s right to require delivery of an Advance Request Form in connection with subsequent Revolving Credit Advances. Any telephonic request for a Revolving Credit Advance by the Borrower shall be promptly confirmed by submission of a properly completed Advance Request Form to the Lender, but failure to deliver an Advance Request Form shall not be a defense to payment of the Revolving Credit Advance. The Lender shall have no liability to the Borrower for any loss or damage suffered by the Borrower as a result of the Lender’s honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically, by facsimile or electronically and purporting to have been sent to the Lender by the Borrower and the Lender shall have no duty to verify the origin of any such communication or the identity or authority of the Person sending it. Subject to the terms and conditions of this Agreement, each Revolving Credit Advance shall be made available to the Borrower by depositing the same, in immediately available funds, in an account of the Borrower designated by the Borrower maintained with the Lender at the Principal Office.

5. Term Loan. Subject to the terms and conditions of this Agreement, the Lender agrees to make, on or about the date of this Agreement a single Term Loan Advance to the Borrower in the amount of the Term Loan Commitment.

(1) The Term Note. The obligation of the Borrower to repay the Term Loan and interest thereon shall be evidenced by the Term Note executed by the Borrower, payable to the order of the Lender, in the principal amount of the Term Loan Commitment.

(2) Repayment of Principal and Interest. Subject to prior acceleration as provided in this Agreement, the unpaid principal balance of the Term Note shall be repaid as provided therein.

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(3) Interest. The unpaid principal amount of the Term Note shall, subject to the following sentence, bear interest as provided in the Term Note. If at any time the rate of interest specified in the Term Note shall exceed the Maximum Lawful Rate but for the provisions thereof limiting interest to the Maximum Lawful Rate, then any subsequent reduction shall not reduce the rate of interest on the Term Note Advances below the Maximum Lawful Rate until the aggregate amount of interest accrued on the Term Note Advances equals the aggregate amount of interest which would have accrued on the Term Note Advances if the interest rate had not been limited by the Maximum Lawful Rate. Accrued and unpaid interest on the Term Note Advances shall be payable as provided in the Term Note and on the Term Loan Termination Date.

Section 2.2 General Provisions Regarding Interest; Etc.

A. Any outstanding principal of any Advance and (to the fullest extent permitted by law) any other amount payable by the Borrower under this Agreement or any other Loan Document that is not paid in full when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest at the Default Interest Rate for the period from and including the due date thereof to but excluding the date the same is paid in full. Additionally, upon the occurrence of an Event of Default (and from the date of such occurrence) all outstanding and unpaid principal amounts of all of the Obligations shall, to the extent permitted by law, bear interest at the Default Interest Rate until such time as the Lender shall waive in writing the application of the Default Interest Rate to such Event of Default situation. Interest payable at the Default Interest Rate shall be payable from time to time on demand.

B. Computation of Interest. Interest on the Advances and all other amounts payable by the Borrower hereunder shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be.

Section 2.3 Unused Facility Fee. The Borrower agrees to pay to the Lender an unused facility fee on the daily average unused amount of the Revolving Credit Commitment for the period from and including the date of this Agreement to and including the Termination Date, at the rate of one-quarter of one percent (.25%) per annum based on a 360 day year and the actual number of days elapsed. For the purpose of calculating the commitment fee hereunder, the Commitment shall be deemed utilized by the amount of all outstanding Advances and Letter of Credit Liabilities. The unused facility fee shall be payable quarterly in arrears and on the Revolving Credit Termination Date.

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Section 2.4 Use of Proceeds. The proceeds of the Revolving Credit Advances shall be used by the Borrower (i) to pay fees and expenses in connection with the transactions contemplated herein, (ii) to make Permitted Acquisitions, and (iii) for working capital in the ordinary course of business and other general corporate purposes.

Section 2.5 Letters of Credit.

A. Standby Letters of Credit. Subject to the terms and conditions of this Agreement, the Lender agrees to issue one or more Letters of Credit for the account of the Borrower from time to time from the date hereof to and including the Revolving Credit Termination Date; provided, however, that the outstanding Letter of Credit Liabilities shall not at any time exceed the lesser of (a) One Million Dollars ($1,000,000), (b) an amount equal to the amount of the Commitment minus the outstanding Revolving Credit Advances, or (c) the Borrowing Base minus the outstanding Revolving Credit Advances. Each Letter of Credit shall have an expiration date not to exceed 365 days, shall not have an expiration date beyond the Revolving Credit Termination Date, shall be payable in Dollars, must support a transaction that is entered into in the ordinary course of the Borrower’s business, must be satisfactory in form and substance to the Lender, will be subject to the payment of such Letter of Credit fees as the Lender may require, and shall be issued pursuant to such documents and instruments executed by the Borrower (including, without limitation, the Borrower’s form of letter of credit application as then in effect) as the Lender may require.

Each payment by the Lender pursuant to a drawing under a Letter of Credit is due and payable ON DEMAND, and at the sole option of the Lender, can be charged by the Lender as (and will be deemed to be) a Revolving Credit Advance by the Lender to the Borrower under the Revolving Credit Note and this Agreement as of the day and time such payment is made by the Lender and in the amount of such payment.

B. Obligations Absolute. The obligation of the Borrower to reimburse the Lender for each drawing under each Letter of Credit shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following:

1. any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other agreement or instrument relating thereto;

2. the existence of any claim, counterclaim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;

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3. any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit; or

4. any payment by the Lender under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the Lender under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law.

The Borrower shall promptly examine a copy of each Letter of Credit that is delivered to it and, in the event of any claim of noncompliance with the Borrower’s instructions or other irregularity, the Borrower will immediately notify the Lender. The Borrower shall be conclusively deemed to have waived any such claim against the Lender and its correspondents unless such notice is given as aforesaid.

C. Role of Lender. The Borrower agrees that, in paying any drawing under a Letter of Credit, the Lender shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Borrower’s pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. None of the Lender, any of its Affiliates, any of the respective officers, directors, employees, agents or attorneys-in-fact of the Lender and its Affiliates, nor any of the respective correspondents, participants or assignees of the Lender shall be liable or responsible for any of the matters described in clauses (1) through (4) of Section 2.5.B; provided, however, that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the Lender, and the Lender may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the Lender’s willful misconduct or gross negligence or the Lender’s willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of

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Credit. In furtherance and not in limitation of the foregoing, the Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, and the Lender shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason.

D. Cash Collateral. Upon the request of the Lender, (i) if the Lender has honored any full or partial drawing request under any Letter of Credit and such drawing has not been reimbursed on the applicable honor date or converted to a Revolving Credit Advance, or (ii) if, as of the Revolving Credit Termination Date, any Letter of Credit may for any reason remain outstanding and partially or wholly undrawn, the Borrower shall immediately Cash Collateralize the then outstanding amount of all Letter of Credit obligations (in an amount equal to such outstanding amount determined as of the applicable honor date or the Letter of Credit expiration date, as the case may be). For purposes hereof, “Cash Collateralize” means to pledge and deposit with or deliver to the Lender, as collateral for the Letter of Credit obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Lender. Derivatives of such term have corresponding meanings. The Borrower hereby grants to the Lender a security interest in all such cash, deposit accounts and all balances therein and all proceeds of the foregoing. Cash Collateral shall be maintained in a blocked, non-interest bearing deposit account at the Lender.

E. Applicability of ISP98. Unless otherwise expressly agreed by the Lender and the Borrower when a Letter of Credit is issued, the rules of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each Letter of Credit.

F. Standby Letter of Credit Fees. The Borrower shall pay to the Lender, an amount equal to two and twenty-five one hundredths percent (2.25%) per annum on the daily average undrawn amount of the Letter of Credit Liability from and including the date of this Agreement to and including the Revolving Credit Termination Date. The accrued letter of credit fee shall be payable quarterly in arrears and on the Revolving Credit Termination Date. Fronting, amendment, transfer, negotiation and other fees will also be payable by the Borrower on demand for the account of the Lender as issuing bank as determined in accordance with the Lender’s then current fee policy.

ARTICLE III

Payments

Section 3.1 Method of Payment. All payments of principal, interest, and other amounts to be made by the Borrower under this Agreement and the other Loan Documents shall be made to the Lender at the Principal Office in Dollars and immediately available funds, without setoff, deduction, or counterclaim, and free and clear of all taxes at the time and in the

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manner provided in the Notes. Provided no Event of Default exists, the Lender shall apply such payment first to all accrued unpaid interest, then to outstanding expenses, and then the remaining amounts, if any, shall be applied to reduce the outstanding principal balance of the Obligations. After an Event of Default, all payments and amounts received on account of the Obligations shall be applied by the Lender in such order as it elects in its sole discretion. Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and unused facility fee, as the case may be.

Section 3.2 Prepayments.

A. Voluntary Prepayments.

1. Prime Rate Loans. The Borrower may prepay all or any portion of any Prime Rate Loan provided that the Borrower gives the Lender notice of at least one Business Day.

2. LIBOR Loans. The Borrower may prepay all or any portion of any LIBOR Loan provided that (a) the Borrower gives the Lender notice of at least three Business Days, (b) each prepayment is at least $250,000 or integral multiples thereof and (c) the Borrower does not undertake any additional LIBOR Loans for a period of 90 days from the date of the prepayment. If the Borrower makes any prepayment of a LIBOR Loan before the end of the related interest period, or fails to borrow, convert or extend a LIBOR Loan after giving notice thereof, or if a LIBOR Loan is converted to a Prime Rate Loan as a result of certain changes in circumstances, the Borrower will reimburse the Lender for any related funding losses and loss of anticipated earnings.

3. Term Loans. The Borrower may prepay all or any portion of any Term Loan, and such prepayment shall be applied in inverse order of maturity.

B. Mandatory Prepayment.

1. Revolving Credit Loans. The Borrower must pay on DEMAND the amount by which at any time the unpaid principal balance of the Revolving Credit Note, plus the aggregate Letter of Credit Liabilities, exceed the Borrowing Base.

2. Term Loans. The Borrower must prepay the Term Loan in amounts equal to (i) 100% of the net proceeds from each sale of assets by the Borrower or any of its Subsidiaries to the extent that the aggregate net proceeds of such sales exceed $100,000 in any fiscal year, and (ii) 100% of the net proceeds from each issuance by the Borrower or any of its Subsidiaries of Debt or Equity Interests apart from those issued to other Subsidiaries or the Borrower to evidence intercompany transactions among the Borrower and/or any new Subsidiaries. Such payments shall be applied in inverse order of maturity.

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Section 3.3 Additional Costs in Respect of Letters of Credit. If as a result of any regulatory change there shall be imposed, modified, or deemed applicable any tax, reserve, special deposit, or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder or the Lender’s commitment to issue Letters of Credit hereunder, and the result shall be to increase the cost to the Lender of issuing or maintaining any Letter of Credit or its commitment to issue Letters of Credit hereunder or reduce any amount receivable by the Lender hereunder in respect of any Letter of Credit (which increase in cost, or reduction in amount receivable, shall be the result of the Lender’s reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by the Lender, the Borrower agrees to pay the Lender, from time to time as specified by the Lender, such additional amounts as shall be sufficient to compensate the Lender for such increased costs or reductions in amount. A statement as to such increased costs or reductions in amount incurred by the Lender, submitted by the Lender to the Borrower, shall be conclusive as to the amount thereof, provided that the determination thereof is made on a reasonable basis.

ARTICLE IV

Security

Section 4.1 Collateral. To secure full and complete payment and performance of the Obligations, the Borrower shall execute and deliver or cause to be executed and delivered all of the Security Documents required by the Lender covering the Property and collateral described in such Security Documents (which, together with any other Property and collateral described in the Security Agreement, and any other property which may now or hereafter secure the Obligations or any part thereof, is sometimes herein called the “Collateral”). The Borrower shall execute and cause to be executed such further documents and instruments, including without limitation, Uniform Commercial Code financing statements, as the Lender, in its sole discretion, deems necessary or desirable to create, evidence, preserve, and perfect its liens and security interests in the Collateral.

Section 4.2 Setoff. If an Event of Default shall have occurred and be continuing, the Lender shall have the right to set off and apply against the Obligations in such manner as the Lender may determine, at any time and without notice to the Borrower, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from the Lender to the Borrower whether or not the Obligations are then due. As further security for the Obligations, the Borrower hereby grants to the Lender a security interest in and control of all money, instruments, and other property of the Borrower now or hereafter held by the Lender, including, without limitation, property held in safekeeping. In addition to the Lender’s right of setoff and as further security for the Obligations, the Borrower hereby grants to the Lender a security interest in all deposits (general or special, time or demand, provisional or final) and other accounts of the Borrower now or hereafter on deposit with or held by the Lender and all other sums at any time credited by or owing from the Lender to the Borrower. The rights and remedies of the Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Lender may have.

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ARTICLE V

Conditions Precedent

Section 5.1 Initial Extension of Credit. The obligation of the Lender to make the initial Advance under any Note or issue the initial Letter of Credit is subject to the condition precedent that the Lender shall have received on or before the day of such Advance or Letter of Credit all of the following, each dated (unless otherwise indicated or the context otherwise requires) the date hereof, in form and substance satisfactory to the Lender:

A. Resolutions. Resolutions of the Board of Directors (or other governing body) of the Borrower and each other Obligated Party certified by the Secretary or an Assistant Secretary (or other custodian of records) of the Borrower and each other Obligated Party which authorize the execution, delivery, and performance by the Borrower and each other Obligated Party of this Agreement and the other Loan Documents to which the Borrower is or is to be a party;

B. Incumbency Certificate. A certificate of incumbency certified by an authorized officer or representative certifying the names of the individuals or other Persons authorized to sign this Agreement and each of the other Loan Documents to which the Borrower and each other Obligated Party is or is to be a party (including the certificates contemplated herein) on behalf of the Borrower and each other Obligated Party together with specimen signatures of such Persons;

C. Constituent Documents. The Constituent Documents for the Borrower and each other Obligated Party as of a date acceptable to the Lender;

D. Governmental Certificates. Certificates of the appropriate government officials of the state of incorporation or organization of the Borrower and each other Obligated Party as to the existence and good standing of the Borrower and each other Obligated Party, each dated within ten days prior to the date of the initial Advance or Letter of Credit;

E. Notes. The Notes executed by the Borrower;

F. Security Documents. The Security Documents executed by the Borrower and other Obligated Parties;

G. Financing Statements. Uniform Commercial Code financing statements executed by the Borrower and covering such Collateral as the Lender may request;

H. Guaranty. The Guaranty executed by the Guarantors;

I. Insurance Matters. Copies of insurance certificates describing all insurance policies required by Section 7.5, together with loss payable and lender endorsements in favor of the Lender with respect to all insurance policies covering Collateral;

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J. Foreign Insurance. Foreign credit insurance policies relating to accounts which shall be satisfactory to Lender in its sole discretion;

K. UCC Search. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against the Borrower and each other Obligated Party in the office of the Secretary of State of Texas, such search to be as of a date no more than ten (10) days prior to the date of the initial Advance or the Letter of Credit;

L. Opinion of Counsel. A favorable opinion of Morton PLLC, Dallas, Texas, legal counsel to the Borrower, as to such other matters as the Lender may reasonably request;

M. Origination Fee. Payment of $22,500 payable to Lender;

N. Attorneys’ Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys’ fees) referred to in Section 11.1, to the extent incurred, shall have been paid in full by the Borrower; and

O. Additional Items. Satisfactory review of the pre-closing collateral exam conducted by the Lender.

Section 5.2 All Extensions of Credit. The obligation of the Lender to make any Advance or issue any Letter of Credit (including the initial Advance and the initial Letter of Credit) is subject to the following additional conditions precedent:

A. Request for Advance or Letter of Credit. The Lender shall have received in accordance with this Agreement, as the case may be, an Advance Request Form or Letter of Credit Request Form pursuant to the Lender’s requirements dated the date of such Advance or Letter of Credit and executed by an authorized officer of the Borrower;

B. No Default, Etc. No Default or Event of Default shall have occurred and be continuing, or would result from or after giving effect to such Advance or Letter of Credit;

C. Representations and Warranties. All of the representations and warranties contained in Article VI hereof and in the other Loan Documents shall be true and correct on and as of the date of such Advance with the same force and effect as if such representations and warranties had been made on and as of such date, except to the extent that any such representation and warranty relates solely to an earlier date and was true and correct on such earlier date; and

D. Additional Documentation. The Lender shall have received such additional approvals, opinions, or documents as the Lender or its legal counsel may reasonably request.

Section 5.3 Additional Conditions. The obligation of the Lender to make any Advance for Permitted Acquisitions is subject to the following additional conditions precedent:

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A. Guaranty Supplements. The Lender shall have received a Guaranty Supplement executed by each of Aleier, Inc. and Cirronet Inc.;

B. Security Agreement Supplements. The Lender shall have received a Security Agreement Supplement executed by each of Aleier, Inc. and Cirronet Inc.;

C. Incumbency Certificate. The Lender shall have received a certificate of incumbency certified by an authorized officer or representative of Aleier, Inc. and Cirronet Inc. certifying the names of the individuals or other Persons authorized to sign the Loan Documents to which Aleier, Inc. and Cirronet Inc. is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such person;

D. Constituent Documents. The Constituent Documents for Aleier, Inc. and Cirronet Inc. as of a date acceptable to the Lender; and

E. Governmental Certificates. Certificates of the appropriate governmental officials of the state of incorporation or organization of Aleier, Inc. and Cirronet Inc. as to the existence and good standing of Aleier, Inc. and Cirronet Inc.

ARTICLE VI

Representations and Warranties

To induce the Lender to enter into this Agreement, and except as set forth on the Disclosure Schedule, the Borrower represents and warrants to the Lender that:

Section 6.1 Corporate Existence. The Borrower and each of its Subsidiaries (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would be reasonably likely to have a material adverse effect on its business, condition (financial or otherwise), operations, prospects, or properties. The Borrower has the power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party.

Section 6.2 Financial Statements; Etc. The Borrower has delivered to the Lender audited consolidated financial statements of the Borrower and its Subsidiaries as at and for the fiscal year ended August 31, 2005. Such financial statements have been prepared in accordance with GAAP, and fairly present, on a consolidated basis, the financial condition of the Borrower and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither the Borrower nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements. There has been no material adverse change in the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any of its Subsidiaries since the effective date of the most recent financial statements referred

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to in this Section. All projections delivered by the Borrower to the Lender have been prepared in good faith, with care and diligence and use assumptions that are reasonable under the circumstances at the time such projections were prepared and delivered to the Lender and all such assumptions are disclosed in the projections.

Section 6.3 Action; No Breach. The execution, delivery, and performance by the Borrower of this Agreement and the other Loan Documents to which the Borrower is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite action on the part of the Borrower and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) Constituent Documents of the Borrower or any of its Subsidiaries, (ii) any applicable law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any agreement or instrument to which the Borrower or any of its Subsidiaries is a party or by which any of them or any of their Properties is bound or subject, or (b) constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien upon any of the revenues or assets of the Borrower or any Subsidiary.

Section 6.4 Operation of Business. The Borrower and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, necessary to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, and the Borrower and each of its Subsidiaries are not in violation of any valid rights of others with respect to any of the foregoing.

Section 6.5 Litigation and Judgments. There is no action, suit, investigation, or proceeding before or by any Governmental Authority or arbitrator pending, or to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries, that would, if adversely determined, be reasonably likely to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any of its Subsidiaries or the ability of the Borrower to pay and perform the Obligations. There are no outstanding judgments against the Borrower or any Subsidiary of the Borrower.

Section 6.6 Rights in Properties; Liens. The Borrower and each of its Subsidiaries have good and indefeasible title to or valid leasehold interests in their respective Properties, including the Properties reflected in the financial statements described in Section 6.2, and none of the Properties of the Borrower or any Subsidiary is subject to any Lien, except as permitted by Section 8.2.

Section 6.7 Enforceability. This Agreement constitutes, and the other Loan Documents to which the Borrower is party, when delivered, shall constitute legal, valid, and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors’ rights.

Section 6.8 Approvals. No authorization, approval, or consent of, and no filing or registration with, any Governmental Authority or third party is or will be necessary for the execution, delivery, or performance by the Borrower of this Agreement and the other Loan Documents to which the Borrower is or may become a party or the validity or enforceability thereof.

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Section 6.9 Debt. Except as disclosed in the Disclosure Schedule and the Permitted Debt, the Borrower and its Subsidiaries have no Debt.

Section 6.10 Taxes. The Borrower and each Subsidiary have filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales tax returns, and have paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable. The Borrower knows of no pending investigation of the Borrower or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of the Borrower or any Subsidiary.

Section 6.11 Use of Proceeds; Margin Securities. Neither the Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock.

Section 6.12 ERISA. The Borrower and each Subsidiary are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan. No notice of intent to terminate a Plan has been filed, nor has any Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings. Neither the Borrower nor any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. The Borrower and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans, and the present value of all vested benefits under each Plan do not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with ERISA. Neither the Borrower nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA.

Section 6.13 Disclosure. No statement, information, report, representation, or warranty made by the Borrower in this Agreement or in any other Loan Document or furnished to the Lender in connection with this Agreement or any of the transactions contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to the Borrower which has a material adverse effect, or would be reasonably likely to have a material adverse effect, on the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary that has not been disclosed in writing to the Lender.

Section 6.14 Subsidiaries, Ventures, Etc. The Borrower has no Subsidiaries, Affiliates or joint ventures or partnerships other than those listed on the Disclosure Schedule and the Disclosure Schedule sets forth the jurisdiction of incorporation or organization of each such Person and the percentage of the Borrower’s ownership interest in such Person. All of the outstanding capital stock or other ownership interest of Person described in the Disclosure Schedule has been validly issued, is fully paid, and is nonassessable.

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Section 6.15 Agreements. Neither the Borrower nor any Subsidiary is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate or other organizational restriction which would be reasonably likely to have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary, or the ability of the Borrower to pay and perform its obligations under the Loan Documents to which it is a party. Neither the Borrower nor any Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party.

Section 6.16 Compliance with Laws. Neither the Borrower nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any Governmental Authority or arbitrator.

Section 6.17 Inventory. All inventory of the Borrower has been and will hereafter be produced in compliance with all applicable laws, rules, regulations, and governmental standards, including, without limitation, and to the extent applicable, the minimum wage and overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C. §§ 201-219), and the regulations promulgated thereunder.

Section 6.18 Investment Company Act. Neither the Borrower nor any Subsidiary is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section 6.19 Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of a “holding company” or a “public utility” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

Section 6.20 Environmental Matters.

A. The Borrower, each Subsidiary, and all of their respective properties, assets, and operations are in compliance in all material respects with all Environmental Laws. The Borrower is not aware of, nor has the Borrower received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of the Borrower and the Subsidiaries with all Environmental Laws;

B. The Borrower and each Subsidiary have obtained all permits, licenses, and authorizations that are required under applicable Environmental Laws, and all such permits are in good standing and the Borrower and its Subsidiaries are in compliance in all material respects with all of the terms and conditions of such permits;

C. Except to the extent set forth in the Disclosure Schedule, no Hazardous Materials exist on, about, or within or have been used, generated, stored, transported, disposed of on, or Released from any of the properties or assets of the Borrower or any Subsidiary. Except to the extent set forth in the Disclosure Schedule, the use which the Borrower and the Subsidiaries make and intend to

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make of their respective properties and assets will not result in the use, generation, storage, transportation, accumulation, disposal, or Release of any Hazardous Material on, in, or from any of their properties or assets;

D. Neither the Borrower nor any of its Subsidiaries nor any of their respective currently or previously owned or leased properties or operations is subject to any outstanding or threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or docketed administrative proceeding with respect to (i) failure to comply with Environmental Laws, (ii) Remedial Action, or (iii) any Environmental Liabilities arising from a Release or threatened Release;

E. There are no conditions or circumstances associated with the currently or previously owned or leased properties or operations of the Borrower or any of its Subsidiaries that could reasonably be expected to give rise to any Environmental Liabilities;

F. Neither the Borrower nor any of its Subsidiaries is a treatment, storage, or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., regulations thereunder or any comparable provision of state law. The Borrower and its Subsidiaries are in compliance with all applicable financial responsibility requirements of all Environmental Laws;

G. Neither the Borrower nor any of its Subsidiaries has filed or failed to file any notice required under applicable Environmental Law reporting a Release; and

H. No Lien arising under any Environmental Law has attached to any property or revenues of the Borrower or its Subsidiaries.

Section 6.21 Intellectual Property. All material Intellectual Property owned or used by the Borrower, any Subsidiary or any Obligated Party is listed, together with application or registration numbers, where applicable, in the Disclosure Schedule. Each Person identified on the Disclosure Schedule owns, or is licensed to use, all Intellectual Property necessary to conduct its business as currently conducted except for such Intellectual Property the failure of which to own or license could not reasonably be expected to have a material adverse effect on the Company and its Subsidiaries, taken as a whole. To the extent consistent with prudent practices as determined by the Borrower using reasonable business judgment, each Person identified on the Disclosure Schedule will maintain the patenting and registration of all Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office, or other appropriate Governmental Authority and will promptly patent or register, as the case may be, all new Intellectual Property and notify the Lender in writing within a reasonable period of time thereafter of any such new patent or registration.

Section 6.22 Depository Relationship. To induce the Lender to establish the interest rates provided for in the Notes, the Borrower will use the Lender as its principal depository bank and the Borrower covenants and agrees to maintain the Lender as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts.

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Section 6.23 Subsidiaries. Within 30 days after the time that any Person becomes a Domestic Subsidiary as a result of the creation of such Subsidiary or a Permitted Acquisition or otherwise, then, unless such Domestic Subsidiary is merged into the Borrower or a Guarantor (with the Borrower or such Guarantor being the surviving Person) prior to the expiration of such thirty-day period, (a) such Subsidiary shall execute a Guaranty of the Obligations, a Security Agreement, and if applicable, a deed of trust, and any related collateral documents reasonably required by the Lender, to secure the Obligations, and (b) 100% of such Subsidiary’s Equity Interest shall be pledged to secure the Obligations, and (c) the Lender shall receive such board resolutions, officer’s certificates, corporate and other documents and opinions of counsel as the Lender shall reasonably request in connection with the actions described in subsections (a) and (b) above. Within thirty days after the time that any Person becomes a Foreign Subsidiary as a result of the creation of such Subsidiary or a Permitted Acquisition or otherwise, (a) all of such Subsidiary’s Equity Interest (up to 65%) owned by Borrower or a Domestic Subsidiary shall be pledged to secure the Obligations and (b) the Lender shall receive such board resolutions, officer’s certificates, corporate and other documents and opinions of counsel as the Lender shall reasonably request in connection with such pledge.

Section 6.24 Further Assurances. At any time or from time to time upon reasonable request by the Lender, the Borrower shall, or shall cause any of the Borrower’s Subsidiaries to, promptly execute and deliver such further documents and to promptly, to the extent the same can be accomplished with the exercise of commercially reasonable efforts, do such other acts and things as the Lender may reasonably request in order to effect fully the validity or enforceability of this Agreement and the other Loan Documents or to protect the priority or perfection of the Liens granted under this Agreement and the other Loan Documents, to ensure that the Lender has all of the rights, powers and privileges bargained-for in the Loan Documents, and to provide for payment of the Obligations in accordance with the terms of this Agreement and the other Loan Documents.

ARTICLE VII

Affirmative Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will perform and observe the following positive covenants, unless the Lender shall otherwise consent in writing:

Section 7.1 Reporting Requirements. The Borrower will furnish to the Lender:

A. Annual Financial Statements. As soon as available, and in any event within the later of (i) 75 days after the end of each Fiscal Year of the Borrower, and (ii) the last date on which it may be deemed timely filed under regulations of the SEC then applicable to the Borrower, beginning with the Fiscal Year ending August 31, 2006, a copy of the annual audit report of the Borrower and the Subsidiaries for such Fiscal Year containing, on a consolidated and consolidating basis, balance sheets and statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows as at the end of such Fiscal Year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding Fiscal Year, all in reasonable detail and audited

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and certified by independent certified public accountants of recognized standing acceptable to the Lender, to the effect that such report has been prepared in accordance with GAAP and containing no material qualifications or limitations on scope;

B. Quarterly Financial Statements. As soon as available, and in any event within the later of (i) 45 days after the end of each of the quarters of each Fiscal Year of the Borrower, and (ii) the last date on which it may be deemed timely filed under regulations of the SEC then applicable to the Borrower, a copy of an unaudited financial report of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter and for the portion of the Fiscal Year then ended, containing, on a consolidated and consolidating basis, balance sheets and statements of operations, and cash flows, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by a senior financial officer of the Borrower to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments) the financial condition and results of operations of the Borrower and its Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein;

C. Annual Projections. As soon as practicable and in any event prior to August 31 of each Fiscal Year, a business plan of the Borrower and its Subsidiaries for the ensuing four fiscal quarters, such plans to be prepared in accordance with sound financial and managerial practices and to include, on a quarterly basis, the following: a quarterly operating and capital budget, a projected income statement, statement of cash flows and balance sheet and a report containing management’s discussion and analysis of such projections, to the best of such officer’s knowledge, such projections are good faith estimates of the financial condition and operations of the Borrower and its Subsidiaries for such period.

D. Borrowing Base Report. As soon as available, and in any event within 30 days after the end of each calendar month, a Borrowing Base Report, in a form acceptable to the Lender, certified by a senior financial officer of the Borrower;

E. Compliance Certificate. Concurrently with the delivery of each of the financial statements referred to in subsections 7.1.A and 7.1.B, a certificate of a senior financial officer of the Borrower (i) stating that to the best of such officer’s knowledge, no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Article IX;

F. Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to the Borrower or any Subsidiary by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary;

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G. Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting the Borrower or any Subsidiary which, if determined adversely to the Borrower or such Subsidiary, could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or such Subsidiary;

H. Notice of Default. As promptly as practicable (but in any event not later than five Business Days) after an officer of the Borrower obtains knowledge of the occurrence of a Default or Event of Default, a written notice of such Default or Event of Default, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such Default or Event of Default;

I. ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which the Borrower or any Subsidiary files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within five (5) days after the Borrower or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or the Borrower or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of the chief financial officer of the Borrower setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action that the Borrower proposes to take with respect thereto;

J. Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Lender pursuant to any other clause of this Section;

K. Notice of Material Adverse Change. As soon as possible and in any event within five days after the occurrence thereof, written notice of any matter that has, or reasonably could have a material adverse effect on the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary on a consolidated basis and taken as a whole (each a “Material Adverse Effect”);

L. Accounts Receivable and Accounts Payable Aging. As soon as available, and in any event within 30 days after the end of each calendar month, an account receivable aging, classifying the Borrower’s domestic and export accounts receivable in categories of 0-30, 31-60, 61-90 and over 90 days from date of invoice, and in such form and detail as the Lender shall require, and account payable aging by categories of 0-30, 31-60 and over 60, from date of invoice, also in such detail as the Lender shall reasonably require, and in each case certified by a senior financial officer of the Borrower;

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M. Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by the Borrower or any Subsidiary to its stockholders generally and one copy of each regular, periodic or special report, registration statement, or prospectus filed by the Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency;

N. List of Account Debtors. As soon as available and in any event within [45 days] of [August 31 and February 28] of each Fiscal Year, a list of account debtors including addresses, names of contacts, telephone numbers and other information as may be required by the Lender; and

O. General Information. Promptly, such other information concerning the Borrower or any Subsidiary as the Lender may from time to time request.

Section 7.2 Maintenance of Existence; Conduct of Business. The Borrower will preserve and maintain, and will cause each Subsidiary to preserve and maintain, its existence and all of its leases, privileges, licenses, permits, franchises, qualifications, and rights that are necessary or desirable in the ordinary conduct of its business. The Borrower will conduct, and will cause each Subsidiary to conduct, its business in an orderly and efficient manner in accordance with good business practices. Without limitation, the Borrower will not make (and will not permit any of its Subsidiaries to make) any material change in its credit collection policies if such change would materially impair the collectibility of any Account, nor will it rescind, cancel or modify any Account except in the ordinary course of business.

Section 7.3 Maintenance of Properties. The Borrower will maintain, keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its Properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition.

Section 7.4 Taxes and Claims. The Borrower will pay or discharge, and will cause each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither the Borrower nor any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established.

Section 7.5 Insurance. The Borrower will maintain, and will cause each of the Subsidiaries to maintain, insurance with financially sound and reputable insurance companies in such amounts and covering such risks as is usually carried by corporations engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and the Subsidiaries operate, provided that in any event the Borrower will maintain and cause each Subsidiary to maintain workmen’s compensation insurance (or similar program), property insurance, comprehensive general liability insurance, reasonably satisfactory to the Lender. Each insurance policy covering Collateral shall name the Lender as loss payee and shall provide that such policy will not be cancelled or reduced without 30 days prior written notice to the Lender.

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Section 7.6 Inspection Rights. At any reasonable time and from time to time, the Borrower will permit, and will cause each Subsidiary to permit, representatives of the Lender to examine the Collateral and conduct Collateral audits (such audits to be limited to no more than one annually at Borrower’s expense so long as no Default or Event of Default has occurred and is continuing), to examine, copy, and make extracts from its books and records, to visit and inspect its properties, and to discuss its business, operations, and financial condition with its officers, employees, and independent certified public accountants.

Section 7.7 Keeping Books and Records. The Borrower will maintain, and will cause each Subsidiary to maintain, proper books of record and account in conformity with GAAP and applicable SEC rules shall be made of all dealings and transactions in relation to its business and activities.

Section 7.8 Compliance with Laws. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, orders, and decrees of any Governmental Authority or arbitrator.

Section 7.9 Compliance with Agreements. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all agreements, contracts, and instruments binding on it or affecting its properties or business to the extent required so as not to cause a Material Adverse Effect.

Section 7.10 Further Assurances. The Borrower will, and will cause each Subsidiary to, execute and deliver such further agreements and instruments and take such further action as may be requested by the Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents and to create, preserve, and perfect the Liens of the Lender in the Collateral.

Section 7.11 ERISA. The Borrower will comply, and will cause each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder.

ARTICLE VIII

Negative Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will perform and observe the following negative covenants, unless the Lender shall otherwise consent in writing:

Section 8.1 Debt. The Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Debt, except:

A. Debt to the Lender;

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B. Permitted Debt and Existing Debt described on the Disclosure Schedule hereto;

C. Subordinated Debt;

D. Purchase money Debt not to exceed $2,000,000 in the aggregate; and

E. Guarantees permitted under clause (iv) of the definition of “Permitted Investments.”

Section 8.2 Limitation on Liens. The Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Lien upon any of its Property, assets, or revenues, whether now owned or hereafter acquired, except:

A. Liens disclosed on the Disclosure Schedule hereto;

B. Liens in favor of the Lender;

C. Encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of the Borrower or the Subsidiaries to use such assets in their respective businesses, and none of which is violated in any material respect by existing or proposed structures or land use;

D. Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith and for which adequate reserves have been established;

E. Liens of mechanics, materialmen, warehousemen, carriers, or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business;

F. Liens resulting from good faith deposits to secure payments of workmen’s compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, or contracts (other than for payment of Debt), or leases made in the ordinary course of business; and

G. Purchase money Liens on specific property to secure Debt used to acquire such property to the extent permitted in Section 8.1.D.

Section 8.3 Mergers, Etc. The Borrower will not, and will not permit any Subsidiary to, become a party to a merger or consolidation, or purchase or otherwise acquire all or any part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person, or wind-up, dissolve, or liquidate, except for Permitted Acquisitions.

Section 8.4 Restricted Payments. The Borrower will not declare or pay any dividends or make any other payment or distribution (in cash, property, or obligations) on account of its

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equity interests, or redeem, purchase, retire, or otherwise acquire any of its equity interests, or permit any of its Subsidiaries to purchase or otherwise acquire any equity interest of the Borrower or another Subsidiary, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its equity interests or for any redemption, purchase, retirement, or other acquisition of any of its equity interests, provided that, the Borrower may make such payments in an amount not to exceed $1,000,000 in the aggregate in any Fiscal Year so long as before and after giving effect to any such payment, the Borrower is in pro forma compliance with all terms of this Agreement and no Default or Event of Default shall have occurred and be continuing.

Section 8.5 Loans and Investments. The Borrower will not make, and will not permit any Subsidiary to make, any advance, loan, extension of credit, or capital contribution to or investment in, or purchase, or permit any Subsidiary to purchase, any stock, bonds, notes, debentures, or other securities of, any Person, except:

A. readily marketable direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having maturities of one year or less from the date of acquisition;

B. fully insured certificates of deposit or bankers’ acceptances having maturities of one year or less from the date of acquisition issued by members of the Federal Reserve System having deposits in excess of $100,000,000;

C. commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor’s Corporation or Moody’s Investors Service; and

D. Permitted Investments.

Section 8.6 Intentionally Omitted.

Section 8.7 Transactions With Affiliates. The Borrower will not enter into, and will not permit any Subsidiary to enter into, any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of the Borrower or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower’s or such Subsidiary’s business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm’s-length transaction with a Person not an Affiliate of the Borrower or such Subsidiary.

Section 8.8 Disposition of Assets. The Borrower will not sell, lease, assign, transfer, or otherwise dispose of any of its assets, or permit any Subsidiary to do so with any of its assets, except (a) dispositions of inventory in the ordinary course of business or (b) dispositions, for fair value, of worn-out and obsolete equipment not necessary or useful to the conduct of business or (c) collections of Receivables (as defined in the Security Documents) or (d) other arms-length dispositions in the ordinary course of business provided that (i) at the time of disposition no Default exists or would result therefrom, (ii) such disposition is for fair value, (iii) such disposition would not reasonably be likely to have a material adverse effect on the Borrower or its Subsidiaries taken as a whole, and (iv) the proceeds of such disposition are either (A) properly

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reinvested in the business of the Borrower or a Subsidiary or (B) used to pay the outstanding balance on the Term Note, with any excess amount being used to pay down any outstanding amounts under the Revolving Credit Note.

Section 8.9 Sale and Leaseback. The Borrower will not enter into, and will not permit any Subsidiary to enter into, any arrangement with any Person pursuant to which it leases from such Person real or personal property that has been or is to be sold or transferred, directly or indirectly, by it to such Person.

Section 8.10 Prepayment of Debt. The Borrower will not prepay, and will not permit any Subsidiary to prepay, any Debt, except (i) the Obligations and Debt reflected on the Borrower’s balance sheet as of September 1, 2006.

Section 8.11 Nature of Business. The Borrower will not, and will not permit any Subsidiary to, engage in any business other than the businesses in which they are engaged as of the date hereof and businesses substantially related thereto.

Section 8.12 Environmental Protection. Except for those uses set forth in the Disclosure Schedule, the Borrower will not, and will not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Material, (b) generate any Hazardous Material, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material, or (d) otherwise conduct any activity or use any of their respective properties or assets in any manner that is likely to violate any Environmental Law or create any Environmental Liabilities for which the Borrower or any of its Subsidiaries would be responsible.

Section 8.13 Accounting. The Borrower will not, and will not permit any of its Subsidiaries to, change its fiscal year or make any change (a) in accounting treatment or reporting practices, except as required by GAAP and disclosed to the Lender, or (b) in tax reporting treatment, except as required by law and disclosed to the Lender.

Section 8.14 No Negative Pledge. The Borrower will not, and will not permit any Subsidiary to, enter into or permit to exist any arrangement or agreement, other than pursuant to this Agreement or any Loan Document, which directly or indirectly prohibits the Borrower or any Subsidiary from creating or incurring a Lien on any of its assets.

Section 8.15 Guaranties. Except as otherwise permitted herein, the Borrower will not assume, Guarantee, endorse, or otherwise become directly or contingently liable in connection with any obligations of any other Person.

Section 8.16 Subsidiaries. The Borrower will not form any Subsidiary unless such Subsidiary complies with the requirements of Section 6.23 and Section 7.9.

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ARTICLE IX

Financial Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will, at all times, observe and perform the following financial covenants, unless the Lender shall otherwise consent in writing.

Section 9.1 Quick Ratio. The Borrower will not permit the Quick Ratio to be less than the ratio set forth below during the corresponding period set forth below:

Period	Ratio
September 1, 2006 through May 31, 2007	1.00:1.00
June 1, 2007 through August 31, 2007	0.80:1.00
September 1, 2007 through August 31, 2008	1.25:1.00
September 1, 2008 and at all times thereafter	1.50:1.00

Section 9.2 Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed Charge Coverage Ratio, calculated as of the end of each Fiscal Quarter, for the four preceding Fiscal Quarters, to be less than the ratio set forth below during the corresponding period set forth below:

Period	Ratio
September 1, 2006 through May 31, 2007	1.75:1.00
June 1, 2007 through August 31, 2007	2:25:1.00
September 1, 2007 and at all times thereafter	2.50:1.00

Section 9.3 Leverage Ratio. The Borrower will not permit on the Leverage Ratio to be greater than the ratio set forth below during the corresponding period set forth below:

Period	Ratio
September 1, 2006 through May 31, 2007	1.50:1.00
June 1, 2007 through May 31, 2008	2.00:1.00
June 1, 2008 through May 31, 2009	1.50:1.00
June 1, 2009 and at all times thereafter	1.00:1.00

Section 9.4 Consolidated Net Income. The Borrower will not sustain (a) net losses greater than $500,000 for any Fiscal Quarter, (b) an aggregate net loss for any two consecutive quarters (starting with the fourth fiscal quarter of 2007), or (c) an aggregate net loss for any four consecutive quarters based on a rolling four quarters basis, measured at the end of each Fiscal Quarter; provided, however, that non-cash stock compensation expenses shall not be included in the computation of net losses and non-cash extraordinary expenses for the Fiscal Year ending August 31, 2007 related to the Caver-Morehead and Cirronet Acquisitions shall not be included in the computation of net losses.

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ARTICLE X

Default

Section 10.1 Events of Default. Each of the following shall be deemed an “Event of Default”:

A. The Borrower shall fail to pay the Obligations or any part thereof shall not be paid when due or declared due.

B. The Borrower shall breach Section 7.1.H. of this Agreement or any provision of Article VIII or Article IX of this Agreement.

C. Any representation or warranty made or deemed made by the Borrower or any Obligated Party (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made.

D. The Borrower or any Obligated Party shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document (other than as covered by Section 10.1.A and B above), and such failure continues for more than 15 days following the date any of the President, chief financial officer, controller or assistant controller has knowledge of such failure.

E. The Borrower, any Subsidiary, or any Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing.

F. The Borrower, any Subsidiary, or any Obligated Party shall fail to pay when due any principal of or interest on any Debt (other than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment.

G. This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by the Borrower, any Subsidiary, any

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Obligated Party or any of their respective shareholders, or the Borrower or any Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral purported to be covered thereby.

H. Any of the following events shall occur or exist with respect to the Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; or (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of the Lender subject the Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed One Hundred Thousand Dollars ($100,000).

I. The Guarantor or any other Obligated Party shall have died or have been declared incompetent by a court of proper jurisdiction; or if the Guarantor or any other Obligated Party is a corporation, partnership or other entity, such Person shall be the subject of a bankruptcy or receivership proceeding or shall have dissolved, liquidated or otherwise ceased doing business.

J. The Borrower, any of its Subsidiaries, or any Obligated Party, or any of their properties, revenues, or assets, shall become subject to an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged within thirty (30) days from the date of entry thereof.

K. An involuntary proceeding shall be commenced against the Borrower, any Subsidiary, or any Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of thirty (30) days.

L. The Borrower, any Subsidiary or any Obligated Party shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) against any of its assets or properties.

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M. A final judgment or judgments for the payment of money in excess of One Hundred Thousand Dollars ($100,000) in the aggregate shall be rendered by a court or courts against the Borrower, any of its Subsidiaries, or any Obligated Party and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof and the Borrower or the relevant Subsidiary or Obligated Party shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal.

N. A Change in Control shall occur.

O. A material adverse change in the business, condition (financial or otherwise), operations, prospects, or Properties of the Borrower or any Subsidiary shall have occurred.

Section 10.2 Remedies Upon Default. If any Event of Default shall occur and be continuing, the Lender may without notice terminate the Commitment and declare the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of an Event of Default under Section 10.1.E or Section 10.1.K, the Commitment shall automatically terminate, and the Obligations shall become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrower. If any Event of Default shall occur and be continuing, the Lender may exercise all rights and remedies available to it in law or in equity, under the Loan Documents, or otherwise.

Section 10.3 Performance by the Lender. If the Borrower shall fail to perform any covenant or agreement contained in any of the Loan Documents, the Lender may perform or attempt to perform such covenant or agreement on behalf of the Borrower. In such event, the Borrower shall, at the request of the Lender, promptly pay any amount expended by the Lender in connection with such performance or attempted performance to the Lender, together with interest thereon at the Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that the Lender shall not have any liability or responsibility for the performance of any obligation of the Borrower under this Agreement or any other Loan Document.

Section 10.4 Cash Collateral. If any Event of Default shall occur and be continuing on the Termination Date or if any obligations are outstanding as of the Termination Date, including obligations related to Swap Contracts, the Borrower shall, if requested by the Lender, immediately deposit with and pledge to the Lender cash or cash equivalent investments in an amount equal to the outstanding Letter of Credit Liabilities, any obligations under any Swap Contracts, and any other obligations due to Lender, as security for the Obligations.

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ARTICLE XI

Miscellaneous

Section 11.1 Expenses. The Borrower hereby agrees to pay on demand: (a) all costs and expenses of the Lender in connection with the preparation, negotiation, execution, and delivery of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the reasonable fees and expenses of legal counsel, advisors, consultants, and auditors for the Lender, (b) all costs and expenses of the Lender in connection with any Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the reasonable fees and expenses of legal counsel, advisors, consultants, and auditors for the Lender, (c) all transfer, stamp, documentary, or other similar taxes, assessments, or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments, and other charges incurred in connection with any filing, registration, recording, or perfection of any security interest or Lien contemplated by this Agreement or any other Loan Document, and (e) all other costs and expenses incurred by the Lender in connection with this Agreement or any other Loan Document, any litigation, dispute, suit, proceeding or action; the enforcement of its rights and remedies, protection of its interests in bankruptcy, insolvency or other legal proceedings, including, without limitation, all costs, expenses, and other charges (including the Lender’s internal charges) incurred in connection with evaluating, observing, collecting, examining, auditing, appraising, selling, liquidating, or otherwise disposing of the Collateral or other assets of the Borrower. Anything herein to the contrary notwithstanding, the obligation of the Borrower to reimburse professional fees hereunder shall be conditioned upon the provision to the Borrower of a reasonably detailed statement of services rendered to the Lender by the professional for whom reimbursement is sought; provided, however, that such detail shall in no event be required to reveal confidential communications between the Lender and such professional that are subject to the attorney-client privilege.

Section 11.2 INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY THE BORROWER OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF THE BORROWER OR ANY SUBSIDIARY, (E) THE USE OR PROPOSED USE OF ANY LETTER OF CREDIT, (F) ANY AND ALL TAXES, LEVIES, DEDUCTIONS, AND CHARGES IMPOSED ON THE LENDER OR ANY OF THE LENDER’S CORRESPONDENTS IN RESPECT OF ANY

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LETTER OF CREDIT, OR (G) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) ARISING OUT OF OR RESULTING FROM THE SOLE CONTRIBUTORY OR ORDINARY NEGLIGENCE OF SUCH PERSON. ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE LENDER SHALL NOT BE INDEMNIFIED OR HELD HARMLESS FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

Section 11.3 Limitation of Liability. Neither the Lender nor any Affiliate, officer, director, employee, attorney, or agent of the Lender shall have any liability with respect to, and the Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by the Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. The Borrower hereby waives, releases, and agrees not to sue the Lender or any of the Lender’s Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents.

Section 11.4 No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by the Lender shall have the right to act exclusively in the interest of the Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to the Borrower or any of the Borrower’s shareholders or any other Person other than Lender.

Section 11.5 Lender Not Fiduciary. The relationship between the Borrower and the Lender is solely that of debtor and creditor, and the Lender has no fiduciary or other special relationship with the Borrower, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between the Borrower and the Lender to be other than that of debtor and creditor. The Lender shall in good faith hold in confidence all information, memoranda, or extracts furnished to the Lender by the Borrower hereunder or in connection with the negotiation hereof; provided that the Lender may disclose such information (i) to its Affiliates, accountants or counsel; (ii) to any regulatory agency having the authority to examine the Lender, as required by any legal or governmental process or otherwise by law, and (iii) to the extent that such information shall be publicly available or shall have been known to the Lender independently of any disclosure by the Borrower hereunder or in connection herewith.

Section 11.6 Equitable Relief. The Borrower recognizes that in the event the Borrower fails to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to the Lender. The Borrower therefore agrees that the Lender, if the Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

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Section 11.7 No Waiver; Cumulative Remedies. No failure on the part of the Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law.

Section 11.8 Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of the Lender and the Borrower and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender.

Section 11.9 Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents, and no investigation by the Lender or any closing shall affect the representations and warranties or the right of the Lender to rely upon them. Without prejudice to the survival of any other obligation of the Borrower hereunder, the obligations of the Borrower under Sections 11.1 and 11.2 shall survive repayment of the Note and termination of the Commitment and the Letters of Credit.

Section 11.10 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this Agreement and the other Loan Documents to which the Borrower is a party may be amended or waived only by an instrument in writing signed by the parties hereto.

Section 11.11 Notices. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission) and mailed, faxed or delivered, to the address, facsimile number or subject to the last sentence hereof electronic mail address specified for notices below the signatures hereon or to such other address as shall be designated by such party in a notice to the other parties. All such other notices and other communications shall be deemed to have been given or made upon the earliest to occur of (i) actual receipt by the intended recipient or (ii) (A) if delivered by hand or courier, (B) if delivered by mail, four business days after deposit in the mail, postage prepaid; (C) if delivered by facsimile when sent and receipt has been confirmed by telephone; and (D) if delivered by electronic mail (which form of delivery is subject to the provisions of the last sentence below) when delivered; provided, however, that notices and other communications

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pursuant to Article II shall not be effective until actually received by the Lender. Electronic mail and intranet websites may be used only to distribute only routine communications, such as financial statements and other information, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose.

Section 11.12 Governing Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Dallas County, Texas, and it shall be performable for all purposes in Dallas County, Texas. Any action or proceeding against the Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Dallas County, Texas. The Borrower hereby irrevocably (a) submits to the nonexclusive jurisdiction of such courts, and (b) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. The Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 11.12. Nothing herein or in any of the other Loan Documents shall affect the right of the Lender to serve process in any other manner permitted by law or shall limit the right of the Lender to bring any action or proceeding against the Borrower or with respect to any of its property in courts in other jurisdictions. Any action or proceeding by the Borrower against the Lender shall be brought only in a court located in Dallas County, Texas.

Section 11.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section 11.14 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal.

Section 11.15 Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

Section 11.16 Intentionally Omitted.

Section 11.17 Construction. The Borrower and the Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the Borrower and the Lender.

Section 11.18 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists.

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Section 11.19 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.

Section 11.20 Participations; Etc. The Lender shall have the right at any time and from time to time to grant participations in, and sell and transfer, the Obligations and any Loan Documents. Each actual or proposed participant or assignee, as the case may be, shall be entitled to receive all information received by the Lender regarding the Borrower and its Subsidiaries, including, without limitation, information required to be disclosed to a participant or assignee pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the actual or proposed participant or assignee is subject to the circular or not).

Section 11.21 Arbitration.

A. Upon the demand of any party, any dispute under this Agreement or the Loan Documents shall be resolved by binding arbitration (except as set forth in Section 11.20.E. below) in accordance with the terms of this Agreement or the other Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute.

B. Arbitration proceedings shall be administered by the American Arbitration Association (“AAA”) or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the foregoing documents. The arbitration shall be conducted at a location in Dallas County, Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control.. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under Section 91 of Title 12 of the United States Code or any similar applicable state law.

C. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies,

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including without limitation, injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder.

D. Arbitrators must be active members of the Texas State Bar with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the State of Texas, (ii) may grant any remedy or relief that a court of the State of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations.

E. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the State of Texas, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (1) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (2) whether the conclusions of law are erroneous under the substantive law of the State of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the State of Texas.

F. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for

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arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the foregoing documents or the subject matter of the Dispute shall control. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. This arbitration provision shall survive termination, amendment or expiration of any of the foregoing documents or any relationship between the parties.

G. Lender and Borrower hereby agree to keep all Disputes and arbitration proceedings strictly confidential, provided, however, that Lender and Borrower may disclose such confidential information as is necessary in any litigation between Lender and Borrower or as required by applicable law and, on a confidential basis, to accountants, attorneys and other consultants in the ordinary course of business.

Section 11.22 Additional Interest Provision. It is expressly stipulated and agreed to be the intent of the Borrower and the Lender at all times to comply strictly with the applicable Texas law governing the maximum rate or amount of interest payable on the indebtedness evidenced by any Note, any Loan Document, and the Related Indebtedness (or applicable United States federal law to the extent that it permits the Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas law). If the applicable law is ever judicially interpreted so as to render usurious any amount (i) contracted for, charged, taken, reserved or received pursuant to any Note, any of the other Loan Documents or any other communication or writing by or between the Borrower and the Lender related to the transaction or transactions that are the subject matter of the Loan Documents, (ii) contracted for, charged, taken, reserved or received by reason of the Lender’s exercise of the option to accelerate the maturity of any Note and/or any and all indebtedness paid or payable by the Borrower to the Lender pursuant to any Loan Document other than any Note (such other indebtedness being referred to in this Section as the “Related Indebtedness”), or (iii) the Borrower will have paid or the Lender will have received by reason of any voluntary prepayment by the Borrower of any Note and/or the Related Indebtedness, then it is the Borrower’s and the Lender’s express intent that all amounts charged in excess of the Maximum Lawful Rate shall be automatically canceled, ab initio, and all amounts in excess of the Maximum Lawful Rate theretofore collected by the Lender shall be credited on the principal balance of any Note and/or the Related Indebtedness (or, if any Note and all Related Indebtedness have been or would thereby be paid in full, refunded to the Borrower), and the provisions of any Note and the other Loan Documents shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder; provided, however, if any Note has been paid in full before the end of the stated term of any such Note, then the Borrower and the Lender agree that the Lender shall, with reasonable promptness after the Lender discovers or is advised by the Borrower that interest was received in an amount in excess of the Maximum Lawful Rate, either refund such excess interest to the Borrower and/or credit such excess interest against such Note and/or any Related Indebtedness then owing by the Borrower to the Lender. The Borrower hereby agrees that as a condition precedent to any claim seeking usury penalties against the Lender, the

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Borrower will provide written notice to the Lender, advising the Lender in reasonable detail of the nature and amount of the violation, and the Lender shall have sixty (60) days after receipt of such notice in which to correct such usury violation, if any, by either refunding such excess interest to the Borrower or crediting such excess interest against the Note to which the alleged violation relates and/or the Related Indebtedness then owing by the Borrower to the Lender. All sums contracted for, charged, taken, reserved or received by the Lender for the use, forbearance or detention of any debt evidenced by any Note and/or the Related Indebtedness shall, to the extent permitted by applicable law, be amortized or spread, using the actuarial method, throughout the stated term of such Note and/or the Related Indebtedness (including any and all renewal and extension periods) until payment in full so that the rate or amount of interest on account of any Note and/or the Related Indebtedness does not exceed the Maximum Lawful Rate from time to time in effect and applicable to such Note and/or the Related Indebtedness for so long as debt is outstanding. In no event shall the provisions of Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving triparty accounts) apply to this Note and/or any of the Related Indebtedness. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of the Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration.

Section 11.23 Ceiling Election. To the extent that Lender is relying on Chapter 303 of the Texas Finance Code to determine the Maximum Lawful Rate payable on any such Note and/or any other portion of the Indebtedness, the Lender will utilize the weekly ceiling from time to time in effect as provided in such Chapter 303, as amended. To the extent United States federal law permits the Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law, Lender will rely on United States federal law instead of such Chapter 303 for the purpose of determining the Maximum Lawful Rate. Additionally, to the extent permitted by applicable law now or hereafter in effect, the Lender may, at its option and from time to time, utilize any other method of establishing the Maximum Lawful Rate under such Chapter 303 or under other applicable law by giving notice, if required, to the Borrower as provided by applicable law now or hereafter in effect.

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

BORROWER:
RF MONOLITHICS, INC.
By:	Harley E Barnes III
	Harley E. Barnes III
	Chief Financial Officer
Address for Notices:
4441 Sigma Road
Dallas, Texas 75244
Fax No.: (972) 404-9476
Telephone No.: (972) 448-3789
Attention: Chief Financial Officer e-mail: bbarnes@rfm.com
LENDER:
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:	/s/ Linda G. Davis
	Linda G. Davis
	Vice President
Address for Notices:
4975 Preston Park Blvd.
Suite 280
Plano, Texas 75093
Fax No.: (972) 867-5674
Telephone No.: (972) 599-5301
Attention: Linda G. Davis e-mail: davislg@wellsfargo.com

LOAN AGREEMENT - Page 50

EX-10.32

Exhibit 10.32

AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT

THIS AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT is entered into as of September 1, 2006, by and between RF MONOLITHICS, INC. (the “Debtor”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association (“Lender”) on behalf of itself and its Affiliates (the “Secured Party”).

PRELIMINARY STATEMENT

Debtor and Lender are entering into an Amended and Restated Loan Agreement dated as of September 1, 2006 (as it may be amended, restated or modified from time to time, the “Loan Agreement”). Debtor is entering into this Pledge and Security Agreement (as it may be amended, restated or modified from time to time, the “Security Agreement”) in order to, among other things, induce Lender to enter into and extend credit to Debtor under the Loan Agreement.

ACCORDINGLY, Debtor and Secured Party hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 Terms Defined in Loan Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Loan Agreement.

1.2 Terms Defined in Texas Uniform Commercial Code. Terms defined in the UCC (defined below) which are not otherwise defined in this Security Agreement are used herein as defined in the UCC as in effect on the date hereof.

1.3 Definitions of Certain Terms Used Herein. As used in this Security Agreement, in addition to the terms defined in the introductory paragraph and the Preliminary Statement, the following terms shall have the following meanings:

“Accounts” mean any “account,” as such term is defined in Section 9.102(a)(2) of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) all rights of Debtor to payment for goods sold or leased or services rendered or the license of Intellectual Property, whether or not earned by performance, (b) all accounts receivable (including Health Care Insurance Receivables) of Debtor, (c) all rights of Debtor to receive any payment of money or other form of consideration, (d) all security pledged, assigned, or granted to or held by Debtor to secure any of the foregoing, (e) all guaranties of, or indemnifications with respect to, any of the foregoing, (f) all Chattel Paper, (g) all Instruments, and (h) all rights of Debtor as unpaid sellers of goods or services, including, but not limited to, all rights of stoppage in transit, replevin, reclamation, and resale.

“Account Debtor” means any Person who is or who may become obligated to Debtor under, with respect to, or on account of an Account.

“Chattel Paper” means any “chattel paper”, as such term is defined in Section 9.102(a)(11) of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, all Electronic Chattel Paper, Tangible Chattel Paper and all records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, or a lease of specific goods, now owned or hereafter acquired by Debtor.

“Collateral” means all Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Financial Assets, Letter of Credit Rights, Commercial Tort Claims, Fixtures, Investment Property, Instruments, Inventory, Health Care Insurance Receivables, Intellectual Property, Securities, Deposit Accounts, including all funds, certificates, checks, drafts, wire transfer receipts, and other earnings, profits, or other proceeds from time to time representing, evidencing, deposited into, or held in Deposit Accounts, Stock Rights and Other Collateral, wherever located, in which Debtor now has or hereafter acquires any right or interest, and the Proceeds, insurance proceeds and products thereof, together with all books and records, customer lists, credit files, computer files, programs, printouts and other computer materials and records related thereto.

“Commercial Tort Claims” means any “commercial tort claim”, as such term is defined in Section 9.102(a)(13) of the UCC, now owned or hereafter acquired by Debtor and in any event, shall include, without limitation, any claim now owned or hereafter acquired by Debtor, arising in tort with respect to which: (a) the claimant is an organization; or (b) the claimant is an individual and the claim (i) arose in the course of the claimant’s business or profession and (ii) does not include damages arising out of personal injury to or the death of an individual.

“Control” shall have the meaning set forth in Section 9.115 of the UCC.

“Debtor” includes Debtor’s successors and assigns.

“Deposit Accounts” means any “deposit account”, as such term is defined in Section 9.102(a)(29) of the UCC, now owned or hereafter acquired by Debtor and in any event, shall include, without limitation, any and all deposit accounts or other bank accounts now owned or hereafter acquired or opened by Debtor, and any account which is a replacement or substitute for any of such accounts.

“Documents” means any “document”, as such term is defined in Section 9.102(a)(30) of the UCC, now owned or hereafter acquired by Debtor, including without limitation all bills of lading, dock warrants, dock receipts, warehouse receipts and orders for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers.

“Electronic Chattel Paper” means any “electronic chattel paper”, as such term is defined in Section 9.102(a)(31) of the UCC, now owned or hereafter acquired by Debtor.

“Equipment” means any “equipment”, as such term is defined in Section 9.102(a)(33) of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without

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limitation, all machinery, equipment, furnishings, Fixtures and vehicles now owned or hereafter acquired by Debtor and any and all additions, substitutions, and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment, and accessories installed thereon or affixed thereto.

“Financial Assets” means any “financial asset”, as such term is defined in Section 8.102(a)(9) of the UCC, now owned or hereafter acquired by Debtor.

“Fixtures” means all goods which become so related to particular real estate that an interest in such goods arises under any real estate law applicable thereto, including, without limitation, all trade fixtures.

“General Intangibles” means any “general intangibles”, as such term is defined in Section 9.102(a)(42) of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) all of Debtor’s trade secrets, trademarks, Intellectual Property, registrations, renewal rights, goodwill franchises, licenses, permits, proprietary information, customer lists, designs, and inventions, (b) all of Debtor’s books, records, data, plans, manuals, computer software, and computer programs, (c) all of Debtor’s contract rights, partnership interests, joint venture interests, securities, deposit accounts, investment accounts, certificates of deposit, and investment property, (d) all rights of Debtor to payment under letters of credit and similar agreements, (e) all tax refunds and tax refund claims of Debtor, (f) all choses in action and causes of action of Debtor (whether arising in contract, tort, or otherwise and whether or not currently in litigation) and all judgments in favor of Debtor, (g) all rights and claims of Debtor under warranties and indemnities, and (h) all rights of Debtor under any insurance, surety, or similar contract or arrangement.

“Health Care Insurance Receivable” means any “health care insurance receivable”, as such term is defined in Section 9.102(a)(46) of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, any interest in or claim under a policy of insurance that is a right to payment of a monetary obligation for health care goods or services provided, whether now owned or hereafter acquired by Debtor.

“Instrument” means any “instrument”, as such term is defined in Section 9.102(a)(47) of the UCC, now owned or hereafter acquired by Debtor, other than stock and other securities, and in any event, shall include, without limitation, all promissory notes, drafts, bills of exchange and trade acceptances of Debtor, whether now owned or hereafter acquired.

“Intellectual Property” means the copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses and other intellectual property now owned or hereafter acquired by Debtor.

“Inventory” means any “inventory”, as such term is defined in Section 9.102(a)(48) of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) all goods and other personal property of Debtor that are held for sale or lease or to be furnished under any contract of service, (b) all raw materials, work-in-process, finished goods, inventory,

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supplies, and materials of Debtor, (c) all wrapping, packaging, advertising, and shipping materials of Debtor, (d) all goods that have been returned to, repossessed by, or stopped in transit by Debtor, and (e) all Documents evidencing any of the foregoing.

“Investment Property” means any “investment property”, as such term is defined in Section 9.102(a)(49) of the UCC, now owned or hereafter acquired by Debtor, and, in any event, shall include, without limitation, each of the following, whether now owned or hereafter acquired by Debtor: (a) any security, whether certificated or uncertificated; (b) any security entitlement; (c) any securities account; (d) any commodity contract; and (e) any commodity account.

“Letter-of-Credit Right” means any “letter-of-credit right”, as such term is defined in Section 9.102(a)(51) of the UCC, now owned or hereafter acquired by Debtor, and in any event, shall include, without limitation, any right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance (but shall not include any right of a beneficiary to demand payment or performance under a letter of credit), now owned or hereafter acquired by Debtor.

“Obligations” means:

(a) Debtor’s obligations and indebtedness under the Loan Agreement, each Loan Document and this Security Agreement;

(b) all future advances by Lender or its Affiliates to Debtor;

(c) all costs and expenses, including, without limitation, all reasonable attorneys’ fees and legal expenses, incurred by Lender or its Affiliates to preserve and maintain the Collateral, collect the obligations herein described, and enforce this Security Agreement;

(d) all other obligations, indebtedness, and liabilities of Debtor to Lender or its Affiliates, now existing or hereafter arising, regardless of whether such obligations, indebtedness, and liabilities are similar, dissimilar, related, unrelated, direct, indirect, fixed, contingent, primary, secondary, joint, several, or joint and several;

(e) all amounts owed under any extension, renewal, or modification of any of the foregoing; and

(f) any of the foregoing that arises after the filing of a petition by or against Debtor under the Bankruptcy Code, even if the obligations due do not accrue because of the automatic stay under Bankruptcy Code § 362 or otherwise.

“Other Collateral” means any property of Debtor, other than real estate, not included within the defined terms Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Financial Assets Instruments, Letter-of-Credit Rights, Commercial Tort Claims, Inventory, Investment Property, Pledged Securities, Deposit Accounts, including all funds, certificates, checks, drafts, wire transfer receipts, and other earnings, profits, or other proceeds from time to time representing, evidencing, deposited into, or held in Deposit Accounts, and Stock Rights, including, without limitation, all cash on hand and all deposit accounts or other deposits (general or special, time or demand, provisional or final) with any bank or other financial institution, it being intended that the Collateral include all property of Debtor other than real estate.

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“Pledged Securities” means 100% of all capital stock (or other equity interests) now or in the future issued by each present and future Subsidiary.

“Proceeds” means any “proceeds,” as such term is defined in Section 9.102(a)(65) of the UCC and, in any event, shall include, but not be limited to, (a) any and all proceeds of any insurance, indemnity, warranty, or guaranty payable to Debtor from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure, or forfeiture of all or any part of the Collateral by any Governmental Authority (or any person acting under color of Governmental Authority), and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral.

“Receivables” means the Accounts, Chattel Paper, Documents, Investment Property, Instruments, or Commercial Tort Claims, and any other rights or claims to receive money which are General Intangibles or which are otherwise included as Collateral.

“Secured Obligations” means the Obligations, including without limitation any such Obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, whether or not allowed or allowable in such proceeding.

“Security” has the meaning set forth in 8.102(a)(15) of the UCC.

“Stock Rights” means any securities, dividends or other distributions and any other right or property which Debtor shall receive or shall become entitled to receive for any reason whatsoever with respect to, in substitution for or in exchange for any securities or other ownership interests in a corporation, partnership, joint venture or limited liability company constituting Collateral and any securities, any right to receive securities and any right to receive earnings, in which Debtor now has or hereafter acquires any right, issued by an issuer of such securities.

“Tangible Chattel Paper” means any “tangible chattel paper”, as such term is defined in Section 9.102(a)(79) of the UCC, now owned or hereafter acquired by Debtor.

“UCC” means the Uniform Commercial Code as in effect in the State of Texas, as the same has been or may be amended or revised from time to time, or, if so required with respect to any particular Collateral by mandatory provisions of applicable law, as in effect in the jurisdiction in which such Collateral is located.

The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.

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ARTICLE II

GRANT OF SECURITY INTEREST

2.1 Security Interest. Debtor hereby pledges, assigns and grants to Secured Party (including their Affiliates), a security interest in all of Debtor’s right, title and interest in and to the Collateral to secure the prompt and complete payment and performance of the Secured Obligations. If the security interest granted hereby in any rights of Debtor under any contract included in the Collateral is expressly prohibited by such contract, then the security interest hereby granted therein nonetheless remains effective to the extent allowed by Chapter 9 of the UCC or other applicable law but is otherwise limited by that prohibition.

2.2 Debtor Remains Liable. Notwithstanding anything to the contrary contained herein, (a) Debtor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its respective duties and obligations thereunder to the same extent as if this Security Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Debtor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any of the contracts and agreements included in the Collateral by reason of this Security Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

2.3 Authorization to File Financing Statements. Debtor hereby irrevocably authorizes Secured Party at any time and from time to time to file in any UCC jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Chapter 9 of the UCC, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by subchapter E of Chapter 9 of the UCC for the sufficiency or filing office acceptance of any financing statement or amendment, including (A) whether Debtor is an organization, the type of organization and any organization identification number issued to Debtor and (B) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. Debtor agrees to furnish any such information to Secured Party promptly upon request.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

Debtor represents and warrants to Secured Party that:

3.1 Title, Etc. Debtor has good and valid rights in and title to the Collateral with respect to which it has purported to grant a security interest hereunder, free and clear of all Liens except for Liens permitted under Section 4.1.6. This Security Agreement constitutes a legal, valid and binding obligation of Debtor and creates a security interest which is enforceable against Debtor in all now owned and hereafter acquired Collateral. When financing statements

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have been filed in the office of the Secretary of State of Delaware, Secured Party will have a fully perfected first priority security interest in that Collateral in which a security interest may be perfected by filing, subject only to Liens permitted under Section 4.1.6.

3.2 [Intentionally Omitted.]

3.3 Principal Location. Debtor’s mailing address, and the location of its chief executive office and of the books and records relating to the Receivables, is the address for notices provided for in the Loan Agreement. Debtor has no places of business except those disclosed in writing to the Secured Party.

3.4 Property Locations. The Inventory, Equipment and Fixtures are located solely at the locations disclosed in writing to the Secured Party.

3.5 Deposit, Commodity, and Securities Account. Debtor will identify all deposit, commodity, and securities accounts owned by Debtor and the institutions holding such accounts upon request by the Secured Party and at all times while an Event of Default exists. No Person other than Debtor has control over any Investment Property.

3.6 [Intentionally Omitted.]

3.7 No Other Names. Debtor has not conducted business under any name except the name in which it has executed this Security Agreement.

3.8 [Intentionally Omitted.]

3.9 Accounts and Chattel Paper. The names of the obligors, amounts owing, due dates and other information with respect to the Accounts and Chattel Paper are and will be correctly stated in all records of Debtor relating thereto and in all invoices and reports with respect thereto furnished to Secured Party by Debtor from time to time. As of the time when each Account or each item of Chattel Paper arises, Debtor shall be deemed to have represented and warranted that such Account or Chattel Paper, as the case may be, and all records relating thereto, are genuine and in all respects what they purport to be.

3.10 No Financing Statements. No financing statement describing all or any portion of the Collateral which has not lapsed or been terminated naming Debtor as debtor has been filed in any jurisdiction except (i) financing statements naming the Secured Party as the secured party, and (ii) as permitted by Section 4.1.6.

3.11 Federal Employer Identification Number. Debtor’s Federal employer identification number is 75-1638027.

3.12 Pledged Securities and Other Investment Property. Upon request of the Secured Party and at all times while an Event of Default exists, Debtor shall provide a complete and accurate list of the Instruments, Securities and other Investment Property owned by Debtor. Debtor represents and warrants that (i) all Instruments, Securities or other types of Investment Property owned by it which are shares of stock in a corporation or ownership interests in a partnership or limited liability company have been (to the extent such concepts are relevant with

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respect to such Instrument, Security or other type of Investment Property) duly and validly issued, are fully paid and non-assessable and (ii) with respect to any certificates delivered to the Secured Party representing an ownership interest in a partnership or limited liability company, either such certificates are Securities as defined in Article 8 of the UCC of the applicable jurisdiction as a result of actions by the issuer or otherwise, or, if such certificates are not Securities, Debtor has so informed Secured Party so that Secured Party may take steps to perfect its security interest therein as a General Intangible.

ARTICLE IV

COVENANTS

From the date of this Security Agreement, and thereafter until this Security Agreement is terminated:

4.1 General.

4.1.1 Inspection. Debtor will permit Secured Party, by its representatives and agents (i) to inspect the Collateral, (ii) to examine and make copies of the records of Debtor relating to the Collateral and (iii) to discuss the Collateral and the related records of Debtor with, and to be advised as to the same by, Debtor’s officers and employees (and, in the case of any Receivable, with any person or entity which is or may be obligated thereon), all at such reasonable times and intervals as Secured Party may determine, and, subject to the provisions of the Loan Agreement, all at Debtor’s expense.

4.1.2 Taxes. Debtor will comply with Section 7.4 of the Loan Agreement.

4.1.3 Records and Reports. Debtor will maintain complete and accurate books and records with respect to the Collateral, and furnish to Secured Party such reports relating to the Collateral as Secured Party shall from time to time reasonably request. Debtor will note in its books and records the security interest of Secured Party under this Security Agreement.

4.1.4 Financing Statements and Other Actions; Defense of Title. Debtor will execute and deliver to Secured Party all financing statements and other documents and take such other actions as may from time to time be requested by Secured Party in order to maintain a first perfected security interest in and, in the case of Investment Property, Deposit Accounts, Letter-of-Credit-Rights, and Electronic Chattel Paper, Control of, the Collateral. Debtor will take any and all actions necessary to defend title to the Collateral against all persons and to defend the security interest of the Secured Party in the Collateral and the priority thereof against any Lien not expressly permitted hereunder.

4.1.5 Disposition of Collateral. Debtor will not sell, lease or otherwise dispose of the Collateral except (i) when no Event of Default is continuing, dispositions specifically permitted pursuant to the Loan Agreement, (ii) while an Event of Default exists and Debtor receives a notice from Secured Party instructing Debtor to cease such transactions, sales or leases of Inventory in the ordinary course of business, and (iii) until such time as Debtor receives a notice from Secured Party pursuant to Article VII, proceeds of Inventory and Receivables collected in the ordinary course of business.

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4.1.6 Liens. Debtor will not create, incur, or suffer to exist any Lien on the Collateral except (i) the security interest created by this Security Agreement, and (ii) other Liens permitted pursuant to the Loan Agreement.

4.1.7 Change in Location, Jurisdiction of Organization or Name. Debtor will not (i) have any Inventory, Equipment or Fixtures or proceeds or products thereof (other than Inventory and proceeds thereof being disposed of as permitted by Section 4.1.5) at a location other than a location known to the Secured Party in writing, (ii) maintain records relating to the Receivables at a location other than at the address for notices specified in the Loan Agreement, (iii) change its name or taxpayer identification number, (iv) change its mailing address, or (v) change its jurisdiction of organization, in each instance unless Debtor shall have given Secured Party not less than 20 days’ prior written notice thereof and such change will not adversely affect the validity, perfection or priority of Secured Party’s security interest in the Collateral.

4.1.8 Other Financing Statements. Debtor will not sign or authorize the signing on its behalf of any financing statement naming it as debtor covering all or any portion of the Collateral, except as permitted by Section 4.1.6.

4.2 Receivables.

4.2.1 Certain Agreements on Receivables. Debtor will not make or agree to make any discount, credit, rebate or other reduction in the original amount owing on a Receivable included in the Borrowing Base or, to the extent included in the Borrowing Base, accept in satisfaction of a Receivable less than the original amount thereof, except that, unless an Event of Default exists, Debtor may grant discounts, credits, rebates or other reductions in connection with Accounts arising from the sale of Inventory in good faith in accordance with its present policies and the ordinary course of business so long as the amounts thereof are promptly deducted from the Borrowing Base.

4.2.2 Collection of Receivables. Except as otherwise provided in this Security Agreement, Debtor will collect and enforce, at Debtor’s sole expense, all amounts due or hereafter due to Debtor under the Receivables.

4.2.3 Delivery of Invoices. Debtor will deliver to Secured Party immediately upon its request during the continuance of an Event of Default duplicate invoices with respect to each Account bearing such language of assignment as Secured Party shall specify.

4.2.4 Disclosure of Counterclaims on Receivables. If (i) any discount, credit or agreement to make a rebate or to otherwise reduce the amount owing on a Receivable exists or (ii) to the knowledge of Debtor, any dispute, setoff, claim, counterclaim or defense exists or has been asserted or threatened with respect to a Receivable, Debtor will disclose such fact to Secured Party in writing in connection with the inspection by the

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Secured Party of any record of Debtor relating to such Receivable and in connection with any invoice or report (including Borrowing Base Reports) furnished by Debtor to Secured Party relating to such Receivable.

4.3 Inventory and Equipment.

4.3.1 Maintenance of Goods. Debtor will do all things necessary to maintain, preserve, protect and keep the Inventory and the Equipment as required in Section 7.3 of the Loan Agreement.

4.3.2 Insurance. Debtor will comply with Section 7.5 of the Loan Agreement.

4.3.3 [Intentionally Omitted.]

4.3.4 Safekeeping of Inventory. Secured Party shall not be responsible for (i) the safekeeping of the Inventory; (ii) any loss or damage thereto or destruction thereof occurring or arising in any manner or fashion from any cause; (iii) any diminution in the value of Inventory or (iv) any act or default of any carrier, warehouseman, bailee or forwarding agency or any other Person in any way dealing with or handling the Inventory, except to the extent that Debtor incurs any loss, cost, claim or damage from any of the foregoing as a result of the gross negligence or willful misconduct of Secured Party. All risk of loss, damage, distribution or diminution in value of the Inventory shall, except as noted in the previous sentence, be borne by Debtor.

4.3.5 [Intentionally Omitted.]

4.3.6 [Intentionally Omitted.]

4.4 Instruments, Securities, Chattel Paper, and Documents. Debtor will (i) deliver to Secured Party immediately upon execution of this Security Agreement the originals of all Chattel Paper, Securities and Instruments (if any then exist) to the extent they evidence a right to payment or have an aggregate value in excess of $5,000, (ii) hold in trust for Secured Party upon receipt and immediately thereafter deliver to Secured Party (x) any Chattel Paper, Securities and Instruments constituting Collateral or (y) a Control Agreement, as applicable, to the extent they evidence a right to payment or have an aggregate value in excess of $5,000, and (iii) upon Secured Party’s request, deliver to Secured Party (and thereafter hold in trust for Secured Party upon receipt and immediately deliver to Secured Party) any Document evidencing or constituting Collateral. While an Event of Default exists, the dollar limitations found in the preceding sentence shall not apply.

4.5 Uncertificated Securities and Certain Other Investment Property. Debtor will permit Secured Party from time to time to cause the appropriate issuers (and, if held with a securities intermediary, such securities intermediary) of uncertificated securities or other types of Investment Property not represented by certificates which are Collateral with an aggregate value in excess of $5,000 to mark their books and records with the numbers and face amounts of all such uncertificated securities or other types of Investment Property not represented by certificates and all rollovers and replacements therefor to reflect the Lien of Secured Party

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granted pursuant to this Security Agreement. Debtor will take any actions necessary to cause (i) the issuers of uncertificated securities which are Collateral and which are Securities and (ii) any financial intermediary which is the holder of any Investment Property, to cause Secured Party to have and retain Control over such Securities or other Investment Property with an aggregate value in excess of $5,000. Without limiting the foregoing, Debtor will, with respect to Investment Property with an aggregate value in excess of $5,000 held with a financial intermediary, cause such financial intermediary to enter into a control agreement with the Secured Party in form and substance satisfactory to Secured Party.

4.6 Stock and Other Ownership Interests.

4.6.1 Changes in Capital Structure of Issuers. Without the consent of Secured Party while an Event of Default exists, Debtor will not vote any of the Instruments, Securities or other Investment Property in favor of any resolution, consent or motion to dissolve, liquidate, retire any Instruments, Securities or Investment Property evidencing ownership, reduce its capital or merge or consolidate with any other entity.

4.6.2 Issuance of Additional Securities. Without the consent of Secured Party while an Event of Default exists, Debtor will not permit or suffer the issuer of privately held corporate securities or other ownership interests in a corporation, partnership, joint venture or limited liability company constituting Collateral to issue any such securities or other ownership interests, any right to receive the same or any right to receive earnings, except to Debtor or proportionally (including with respect to the Debtor’s interest).

4.6.3 Registration of Pledged Securities and other Investment Property. Debtor will permit any registerable Collateral to be registered in the name of Secured Party or its nominee at any time while an Event of Default continues.

4.6.4 Exercise of Rights in Pledged Securities and other Investment Property. Debtor will permit Secured Party or its nominee at any time while an Event of Default continues, without notice, to exercise all voting and corporate rights relating to the Collateral, including, without limitation, exchange, subscription or any other rights, privileges, or options pertaining to any corporate securities or other ownership interests or Investment Property in or of a corporation, partnership, joint venture or limited liability company constituting Collateral and the Stock Rights as if it were the absolute owner thereof.

4.6.5 Issuance of Securities. Debtor shall not permit any limited partnership interests or ownership interests in a limited liability company which are included within the Collateral to at any time constitute a Security or consent to the issuer of any such interests taking any action to have such interests treated as a Security unless (i) all certificates or other documents constituting such Security have been delivered to Secured Party and such Security is properly defined as such under Article 8 of the UCC of the applicable jurisdiction, whether as a result of actions by the issuer thereof or otherwise, or (ii) Secured Party has entered into a control agreement with the issuer of such Security or with a securities intermediary relating to such Security and such Security is defined as such under Article 8 of the UCC of the applicable jurisdiction, whether as a result of actions by the issuer thereof or otherwise.

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4.7 Accounts.

4.7.1 Account Warranties. Debtor warrants and represents that (i) Secured Party may, in determining which Accounts listed on any Borrowing Base Report are Eligible Accounts, rely without independent investigation on all statements or representations made by it on or with respect to any such Borrowing Base Report and, (ii) unless otherwise indicated in writing by Debtor (in which case such Account shall not be considered an Eligible Account), each of the criteria set forth in the definition of “Eligible Account” has been met with respect to each Account included as an Eligible Account on any Borrowing Base Report.

4.7.2 Verification of Accounts. Secured Party shall have the right, at any time or times hereafter, in its name or in the name of a nominee of Secured Party, to verify the validity, amount or any other matter relating to any Accounts, by mail, telephone, telegraph or otherwise.

4.7.3 Disputed Accounts; Limitation on Modification of Accounts. Debtor shall give Secured Party prompt written notice of any Accounts in excess of $25,000 previously shown as Eligible Accounts on a Borrowing Base Report which are in dispute between any Account Debtor and Debtor. Each Borrowing Base Report shall identify all disputed Accounts (which shall not be included as Eligible Accounts) and disclose with respect thereto, in reasonable detail, the reason for the dispute, all claims related thereto and the amount in controversy. Debtor will not, without Secured Party’s prior written consent, grant any extension of the time for payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partly, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon other than trade discounts granted in the ordinary course of business of Debtor, except that, unless an Event of Default exists, Debtor may grant discounts, credits, rebates or other reductions in connection with Accounts arising from the sale of Inventory in good faith in accordance with its present policies and the ordinary course of business so long as the amounts thereof are promptly deducted from the Borrowing Base.

4.7.4 Appointment of the Agent as Attorney-in-Fact. Debtor hereby irrevocably designates, makes, constitutes and appoints Secured Party (and all persons designated by Secured Party), exercisable during the continuance of an Event of Default, as its true and lawful attorney-in-fact, and authorizes Secured Party, in Debtor’s or Secured Party’s name, to: (i) demand payment of Accounts; (ii) enforce payment of Accounts by legal proceedings or otherwise; (iii) exercise all of Debtor’s rights and remedies with respect to proceedings brought to collect an Account; (iv) sell or assign any Account upon such terms, for such amount and at such time or times as Secured Party deems advisable; (v) settle, adjust, compromise, extend or renew an Account; (vi) discharge and release any Account; (vii) take control in any manner of any item of payment or proceeds thereof; (viii) prepare, file and sign Debtor’s name on any proof of claim in bankruptcy or

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other similar document against an Account Debtor; (ix) endorse Debtor’s name upon any items of payment or proceeds thereof and deposit the same in Secured Party’s account on account of the Obligations; (x) endorse Debtor’s name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto; (xi) sign Debtor’s name on any verification of Accounts and notices thereof to Account Debtor; (xii) notify the post office authorities to change the address for delivery of Debtor’s mail to an address designated by Secured Party, have access to any lock box or postal box into which any of Debtor’s mail is deposited, and open and dispose of all mail addressed Debtor, and (xiii) do all acts and things which are necessary, in Secured Party’s sole discretion, to fulfill Debtor’s obligations under this Security Agreement.

4.7.5 Notice to Account Debtor. Secured Party may, in its sole discretion, at any time or times after an Event of Default has occurred and is continuing, and without prior notice to Debtor, notify any or all Account Debtors that the Accounts have been assigned to Secured Party and that Secured Party has a security interest therein. Secured Party may direct any or all Account Debtors to make all payments upon the Accounts directly to Secured Party. Secured Party shall furnish Debtor with a copy of such notice.

4.8 Deposit Accounts. Debtor will (i) upon Secured Party’s request, notify each bank or other financial institution in which it maintains a Deposit Account or other deposit (general or special, time or demand, provisional or final) of the security interest granted to Secured Party hereunder and cause each such bank or other financial institution to acknowledge such notification in writing and (ii) upon Secured Party’s request, deliver to each such bank or other financial institution a control agreement, in form and substance acceptable to Secured Party, transferring dominion and control over each such account to Secured Party.

4.9 [Intentionally Omitted.]

4.10 Warehouse Receipts Non-Negotiable. Debtor agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt is issued with respect to any of its inventory, such warehouse receipt or receipt in the nature thereof shall not be “negotiable” (as such term is used in Section 7-104 of the UCC).

4.11 Mortgagee’s and Landlord Waivers. Debtor shall cause each mortgagee of real property owned by Debtor (upon request by Secured Party) and each landlord of real property leased by Debtor to execute and deliver instruments satisfactory in form and substance to Secured Party by which such mortgagee or landlord waives their rights, if any, in the Collateral.

4.12 Compliance with Agreements. Debtor shall comply with Section 7.9 of the Loan Agreement.

4.13 Compliance with Laws. Debtor shall comply with Section 7.8 of the Loan Agreement.

4.14 Commercial Tort Claims. If Debtor at any time holds or acquires Commercial Tort Claims in excess of $100,000 in the aggregate, Debtor shall immediately notify Secured

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Party in writing of the details thereof and grant to Secured Party in writing a security interest therein or lien thereon and in the Proceeds thereof, in form and substance satisfactory to Secured Party.

4.15 Letters-of-Credit Rights. If Debtor is at any time a beneficiary under a letter of credit now or hereafter issued in favor of Debtor with a face amount of $10,000 or more or that, when aggregated with all other such letters of credit, exceeds $25,000 or more in the aggregate, Debtor shall promptly notify Secured Party thereof in writing and, at Secured Party’s request while an Event of Default exists, Debtor shall, pursuant to an agreement in form and substance satisfactory to Secured Party, either (a) arrange for the issuer or any confirmer of such letter of credit to consent to an assignment to Secured Party of the proceeds of any drawing under the letter of credit or (b) arrange for Secured Party to become the transferee beneficiary of the letter of credit.

4.16 Further Assurances. At any time and from time to time, upon the request of Secured Party, and at the sole expense of Debtor, Debtor shall promptly execute and deliver all such further instruments and documents and take such further action as Secured Party may deem necessary to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Security Agreement, including, without limitation, (a) the execution and filing of such financing statements as Secured Party may require and (b) the deposit of all certificates of title issuable with respect to any of the Collateral and noting thereon the security interest hereunder. A carbon, photographic, or other reproduction of this Security Agreement or of any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement. Debtor shall promptly endorse and deliver to Secured Party all documents, instruments, and chattel paper that it now owns or may hereafter acquire.

ARTICLE V

DEFAULT

5.1 Acceleration and Remedies. Upon the occurrence and during the continuance of an Event of Default under the Loan Agreement or any other Loan Document, Secured Party may exercise any or all of the following rights and remedies:

5.1.1 Those rights and remedies provided in this Security Agreement, the Loan Agreement, or any other Loan Document, provided that this Section 5.1.1 shall not be understood to limit any rights or remedies available to Secured Party prior to an Event of Default.

5.1.2 Those rights and remedies available to a secured party under the UCC (whether or not the UCC applies to the affected Collateral) or under any other applicable law (including, without limitation, any law governing the exercise of a bank’s right of setoff or bankers’ lien) when a debtor is in default under a security agreement.

5.1.3 Without notice except as specifically provided in Section 8.1 or elsewhere herein, sell, lease, assign, grant an option or options to purchase or otherwise dispose of

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the Collateral or any part thereof in one or more parcels at public or private sale, for cash, on credit or for future delivery, and upon such other terms as are commercially reasonable.

5.2 Debtor’s Obligations Upon Event of Default. Upon the request of Secured Party after the occurrence and during the continuance of an Event of Default, Debtor will:

5.2.1 Assembly of Collateral. Assemble and make available to Secured Party the Collateral and all records relating thereto at any place or places specified by Secured Party.

5.2.2 Secured Party Access. Permit Secured Party, by Secured Party’s representatives and agents, to enter any premises where all or any part of the Collateral, or the books and records relating thereto, or both, are located, to take possession of all or any part of the Collateral and to remove all or any part of the Collateral.

5.3 License. Secured Party is hereby granted a license or other right to use, following the occurrence and during the continuance of an Event of Default, without charge, Debtor’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, customer lists and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral, and, following the occurrence and during the continuance of an Event of Default, Debtor’s rights under all licenses and all franchise agreements shall inure to Secured Party’s benefit. In addition, Debtor hereby irrevocably agrees that Secured Party may, following the occurrence and during the continuance of an Event of Default, sell any of Debtor’s Inventory directly to any Person, including without limitation Persons who have previously purchased Debtor’s Inventory from Debtor and in connection with any such sale or other enforcement of Secured Party’s rights under this Security Agreement, may sell Inventory which bears any trademark owned by or licensed to Debtor and any Inventory that is covered by any copyright owned by or licensed to Debtor and Secured Party may finish any work in process and affix any trademark owned by or licensed to Debtor and sell such Inventory as provided herein.

ARTICLE VI

WAIVERS, AMENDMENTS AND REMEDIES

No delay or omission of Secured Party to exercise any right or remedy granted under this Security Agreement shall impair such right or remedy or be construed to be a waiver of any Event of Default, or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. No waiver, amendment or other variation of the terms, conditions or provisions of this Security Agreement whatsoever shall be valid unless in writing signed by Secured Party and then only to the extent in such writing specifically set forth. All rights and remedies contained in this Security Agreement or by law afforded shall be cumulative and all shall be available to Secured Party until the Secured Obligations have been paid in full.

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ARTICLE VII

PROCEEDS; COLLECTION OF RECEIVABLES

7.1 Lockboxes. Upon request of Secured Party, Debtor shall execute and deliver to Secured Party irrevocable lockbox agreements in the form provided by or otherwise acceptable to Secured Party, which agreements shall be accompanied by an acknowledgment by the bank where the lockbox is located of the Lien of Secured Party granted hereunder and of irrevocable instructions to wire all amounts collected therein to a special collateral account at Secured Party.

7.2 Collection of Receivables. Upon the occurrence and continuation of a an Event of Default, Secured Party may at any time in its sole discretion, by giving Debtor written notice, elect to require that the Receivables be paid directly to Secured Party. In such event, Debtor shall, and shall permit Secured Party to, promptly notify the Account Debtors or obligors under the Receivables of the Banks’ interest therein and direct such Account Debtors or obligors to make payment of all amounts then or thereafter due under the Receivables directly to Secured Party. Upon receipt of any such notice from Secured Party, Debtor shall thereafter hold in trust for Secured Party, all amounts and proceeds received by it with respect to the Receivables and Other Collateral and immediately and at all times thereafter deliver to Secured Party all such amounts and proceeds in the same form as so received, whether by cash, check, draft or otherwise, with any necessary endorsements. Secured Party shall hold and apply funds so received as provided by the terms of Sections 7.3 and 7.4.

7.3 Special Collateral Account. Secured Party may require all cash proceeds of the Collateral to be deposited in a special non-interest bearing cash collateral account with Secured Party and held there as security for the Secured Obligations. Debtor shall not have control whatsoever over said cash collateral account. If no Event of Default has occurred or is continuing, Secured Party shall from time to time deposit the collected balances in said cash collateral account into Debtor’s general operating account with Secured Party. If any Event of Default has occurred and is continuing, Secured Party may, from time to time, apply the collected balances in said cash collateral account to the payment of the Secured Obligations whether or not the Secured Obligations shall then be due.

7.4 Application of Proceeds. After the occurrence and during the continuation of an Event of Default, the proceeds of the Collateral shall be applied by Secured Party to payment of the Secured Obligations in such manner and order as Secured Party may elect in its sole discretion.

ARTICLE VIII

GENERAL PROVISIONS

8.1 Notice of Disposition of Collateral. Any notice of the time and place of any public sale or the time after which any private sale or other disposition of all or any part of the Collateral may be made shall be deemed reasonable if sent to Debtor, addressed as set forth in Article IX, at least 10 days prior to (i) the date of any such public sale or (ii) the time after which any such private sale or other disposition may be made.

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8.2 Compromises and Collection of Collateral. Debtor and Secured Party recognize that setoffs, counterclaims, defenses and other claims may be asserted by obligors with respect to certain of the Receivables, that certain of the Receivables may be or become uncollectible in whole or in part and that the expense and probability of success in litigating a disputed Receivable may exceed the amount that reasonably may be expected to be recovered with respect to a Receivable. In view of the foregoing, Debtor agrees that Secured Party may at any time and from time to time, if an Event of Default has occurred and is continuing, compromise with the obligor on any Receivable, accept in full payment of any Receivable such amount as Secured Party in its discretion shall determine or abandon any Receivable, and any such action by Secured Party shall be commercially reasonable so long as Secured Party acts in good faith based on information known to it at the time it takes any such action.

8.3 Secured Party Performance of Debtor’s Obligations. Without having any obligation to do so, Secured Party may perform or pay any obligation which Debtor has agreed to perform or pay in this Security Agreement and Debtor shall, reimburse Secured Party for any amounts paid by Secured Party pursuant to this Section 8.3. Debtor’s obligation to reimburse Secured Party pursuant to the preceding sentence shall be a Secured Obligation payable on demand.

8.4 Authorization for Secured Party to Take Certain Action. Debtor irrevocably authorizes Secured Party at any time and from time to time in the sole discretion of Secured Party and appoints Secured Party as its attorney in fact (i) to execute on behalf of Debtor as debtor and to file financing statements necessary or desirable in the Secured Party’s sole discretion to perfect and to maintain the perfection and priority of Secured Party’s security interest in the Collateral, (ii) to indorse and collect any cash proceeds of the Collateral, (iii) to file a carbon, photographic or other reproduction of this Security Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as the Secured Party in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of Secured Party’s security interest in the Collateral, (iv) to contact and enter into one or more agreements with the issuers of uncertificated securities which are Collateral and which are Securities or with financial intermediaries holding other Investment Property as may be necessary or advisable to give Secured Party Control over such Securities or other Investment Property, (v) after the occurrence and during the continuance of an Event of Default, to enforce payment of the Receivables in the name of Secured Party or Debtor, (vi) to apply the proceeds of any Collateral received by Secured Party to the Secured Obligations as provided in Article VII and (vii) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder), and Debtor agrees to reimburse Secured Party on demand for any payment made or any expense incurred by Secured Party in connection therewith, provided that this authorization shall not relieve Debtor of any of its obligations under this Security Agreement or under the Loan Agreement.

8.5 Specific Performance of Certain Covenants. Debtor acknowledges and agrees that a breach of any of the covenants contained in Sections 4.1.4, 4.1.6, 4.4, 5.3, or 8.7 or in Article VII will cause irreparable injury to Secured Party, that Secured Party has no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of Secured Party to seek and obtain specific performance of other obligations of Debtor contained in this Security Agreement, that the covenants of Debtor contained in the Sections referred to in this Section 8.5 shall be specifically enforceable against Debtor.

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8.6 Use and Possession of Certain Premises. Upon the occurrence and during the continuance of an Event of Default, Secured Party shall be entitled to possess and use any premises owned or leased by Debtor where any of the Collateral or any records relating to the Collateral are located until the Secured Obligations are paid or the Collateral is removed therefrom, whichever first occurs, without any obligation to pay Debtor for such use and occupancy.

8.7 Dispositions Not Authorized. Debtor is not authorized to sell or otherwise dispose of the Collateral except as set forth in Section 4.1.5 and notwithstanding any course of dealing between Debtor and the Secured Party or other conduct of the Secured Party, no authorization to sell or otherwise dispose of the Collateral (except as set forth in Section 4.1.5) shall be binding upon Secured Party unless such authorization is in writing signed by Secured Party.

8.8 Benefit of Agreement. The terms and provisions of this Security Agreement shall be binding upon and inure to the benefit of Debtor, Secured Party and their respective successors and assigns, except that Debtor shall not have the right to assign its rights or delegate its obligations under this Security Agreement or any interest herein, without the prior written consent of Secured Party.

8.9 Survival of Representations. All representations and warranties of Debtor contained in this Security Agreement shall survive the execution and delivery of this Security Agreement.

8.10 Taxes and Expenses. Debtor will comply with Section 11.1 of the Loan Agreement.

8.11 Headings. The title of and section headings in this Security Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Security Agreement.

8.12 Termination. This Security Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until (i) the Loan Agreement has terminated pursuant to its express terms and (ii) all of the Secured Obligations have been indefeasibly paid and performed in full and no commitments of Secured Party which would give rise to any Secured Obligations are outstanding.

8.13 Entire Agreement. This Security Agreement embodies the entire agreement and understanding between Debtor and Secured Party relating to the Collateral and supersedes all prior agreements and understandings between Debtor and Secured Party relating to the Collateral.

8.14 CHOICE OF LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

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8.15 INDEMNITY. DEBTOR HEREBY AGREES TO INDEMNIFY SECURED PARTY AND ITS RESPECTIVE SUCCESSORS, ASSIGNS, AGENTS, ATTORNEYS, AND EMPLOYEES, FROM AND AGAINST ANY AND ALL LIABILITIES, DAMAGES, PENALTIES, SUITS, COSTS, AND EXPENSES OF ANY KIND AND NATURE (INCLUDING, WITHOUT LIMITATION, ALL EXPENSES OF LITIGATION OR PREPARATION THEREFOR WHETHER OR NOT SECURED PARTY IS A PARTY THERETO) IMPOSED ON, INCURRED BY OR ASSERTED AGAINST SECURED PARTY OR THEIR RESPECTIVE SUCCESSORS, ASSIGNS, AGENTS, ATTORNEYS, AND EMPLOYEES, IN ANY WAY RELATING TO OR ARISING OUT OF THIS SECURITY AGREEMENT, OR THE MANUFACTURE, PURCHASE, ACCEPTANCE, REJECTION, OWNERSHIP, DELIVERY, LEASE, POSSESSION, USE, OPERATION, CONDITION, SALE, RETURN OR OTHER DISPOSITION OF ANY COLLATERAL (INCLUDING, WITHOUT LIMITATION, LATENT AND OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE BY THE SECURED PARTY OR DEBTOR, AND ANY CLAIM FOR PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT); PROVIDED, HOWEVER, THAT NOTHING HEREIN SHALL EXCUSE SECURED PARTY FROM RESPONSIBILITY FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

ARTICLE IX

NOTICES

9.1 Sending Notices. Any notice required or permitted to be given under this Security Agreement shall be sent (and deemed received) in the manner and to the addresses set forth in the Loan Agreement.

9.2 Change in Address for Notices. Each Debtor and Secured Party may change the address for service of notice upon it by a notice in writing to the other parties as provided for in the Loan Agreement.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, Debtor and Secured Party have executed this Pledge and Security Agreement as of the date first above written.

DEBTOR:
RF MONOLITHICS, INC.
By:	/s/ Harley E Barnes III
Name:	Harley E Barnes III
Title:	Chief Financial Officer
SECURED PARTY:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:	/s/ Linda G. Davis
Name:	Linda G. Davis
Title:	Vice President

AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT - SIGNATURE PAGE

EX-10.33

Exhibit 10.33

[                    ], 2006

RF Monolithics, Inc.

4441 Sigma Road

Dallas, Texas 75244

Re: Lock-Up Agreement (the “Agreement”)(Executive)

Ladies and Gentlemen:

1. The undersigned shareholder of Cirronet Inc., a Georgia corporation (“Cirronet”), understands that RF Monolithics, Inc., a Delaware corporation (“Parent”), and CI Acquisition, Inc., a Georgia corporation and a wholly owned subsidiary of Parent (the “Merger Subsidiary”), have entered into an Agreement and Plan of Merger, dated as of [            ], 2006 (as the same may be amended and restated from time to time, the “Merger Agreement”), with Cirronet, Robert M. Gemmell and the Shareholders’ Representative (as identified therein) pursuant to which Merger Subsidiary will merge with and into Cirronet. In connection with the transactions contemplated by the Merger Agreement, holders of shares of Cirronet common stock outstanding immediately prior to the Effective Time (“Cirronet Common Stock”) will receive, among other things, the right to acquire shares of common stock of Parent (the “Parent Common Stock”), and each option to purchase Cirronet Common Stock that is unexpired, unexercised and outstanding immediately prior to the Effective Time (the “Cirronet Options”) will be assumed or exchanged by Parent in accordance with the Merger Agreement. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Merger Agreement.

2. In order to facilitate the transactions contemplated by the Merger Agreement and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, unless Parent shall consent thereto in writing, the undersigned agrees that it will not, during the period commencing on the date hereof and ending on the first anniversary of the Closing Date, offer to sell, sell, transfer, pledge, hypothecate, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise transfer or dispose of, or reduce the undersigned’s interest in or risk relating to, including, without limitation, by entering into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Parent Common Stock, whether any such swap or transaction is to be settled in shares of Parent Common Stock or other securities, in cash or otherwise (each a “Transfer”), fifty percent (50%) of the shares of Parent Common Stock (i) issued to the undersigned in accordance with the terms of the Merger Agreement, (ii) issuable to the undersigned upon the exercise of any

Cirronet Option assumed or exchanged by Parent in accordance with the terms of the Merger Agreement (it being understood that the undersigned may Transfer all shares of Parent Common Stock issued upon any partial exercise of any such option provided that the undersigned does not Transfer more than the 50% of the aggregate number of shares of Parent Common Stock issuable upon the exercise in full of such options), or (iii) otherwise acquired or beneficially owned by the undersigned as a result of the transactions contemplated by the Merger Agreement (collectively, the “Restricted Stock”).

3. Notwithstanding the foregoing, the restrictions on Transfer set forth in this Agreement shall not apply to (i) transactions relating to shares of Parent Common Stock or other securities acquired in open market transactions after the Effective Date, or (ii) the following Transfers: (A) gifts of Restricted Stock to family members (or trusts for the direct or indirect benefit of family members); (B) charitable contributions of Restricted Stock made by the holder of such Restricted Stock; or (C) Transfers to “affiliates”, limited partners, members or shareholders of the undersigned; provided that in the case of any Transfer pursuant to clause (A), (B) or (C), each transferee agrees in writing as a condition precedent to such Transfer to be bound by the terms hereof. The term “affiliate” shall have the meaning given such term in Rule 144 under the Securities Act of 1933, as amended.

4. It is understood that if the Merger Agreement shall be terminated in accordance with the provisions thereof at any time prior to the Effective Time, this Agreement shall terminate.

5. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement may not be amended, modified, revoked or terminated in any respect without the written consent of the undersigned and Parent. This Agreement shall be binding upon the undersigned and the undersigned’s heirs, successors and assigns.

Very truly yours,
(print name of shareholder above)
By:
Name:
Title:
	(if applicable)

EX-10.34

Exhibit 10.34

[                    ], 2006

RF Monolithics, Inc.

4441 Sigma Road

Dallas, Texas 75244

Re: Lock-Up Agreement (the “Agreement”) (General)

Ladies and Gentlemen:

1. The undersigned shareholder of Cirronet Inc., a Georgia corporation (“Cirronet”), understands that RF Monolithics, Inc., a Delaware corporation (“Parent”), and CI Acquisition, Inc., a Georgia corporation and a wholly owned subsidiary of Parent (the “Merger Subsidiary”), have entered into an Agreement and Plan of Merger, dated as of [            ], 2006 (as the same may be amended and restated from time to time, the “Merger Agreement”), with Cirronet, Robert M. Gemmell and the Shareholders’ Representative (as identified therein) pursuant to which Merger Subsidiary will merge with and into Cirronet. In connection with the transactions contemplated by the Merger Agreement, holders of shares of Cirronet common stock outstanding immediately prior to the Effective Time (“Cirronet Common Stock”) will receive, among other things, the right to acquire shares of common stock of Parent (the “Parent Common Stock”), and each option to purchase Cirronet Common Stock that is unexpired, unexercised and outstanding immediately prior to the Effective Time (the “Cirronet Options”) will be assumed or exchanged by Parent in accordance with the Merger Agreement. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Merger Agreement.

2. In order to facilitate the transactions contemplated by the Merger Agreement and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, unless Parent shall consent thereto in writing, the undersigned agrees that it will not, during the period commencing on the date hereof and ending on the first anniversary of the Closing Date, offer to sell, sell, transfer, pledge, hypothecate, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise transfer or dispose of, or reduce the undersigned’s interest in or risk relating to, including, without limitation, by entering into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Parent Common Stock, whether any such swap or transaction is to be settled in shares of Parent Common Stock or other securities, in cash or otherwise (each a “Transfer”), fifty percent (50%) of the shares of Parent Common Stock issued to the undersigned in accordance with the terms of the Merger Agreement (other than upon the exercise of any Cirronet Option assumed or exchanged by Parent in accordance with the terms of the Merger Agreement) (collectively, the “Restricted Stock”).

3. Notwithstanding the foregoing, the restrictions on Transfer set forth in this Agreement shall not apply to (i) transactions relating to shares of Parent Common Stock or other securities acquired in open market transactions after the Effective Date, or (ii) the following Transfers: (A) gifts of Restricted Stock to family members (or trusts for the direct or indirect benefit of family members); (B) charitable contributions of Restricted Stock made by the holder of such Restricted Stock; or (C) Transfers to “affiliates”, limited partners, members or shareholders of the undersigned; provided that in the case of any Transfer pursuant to clause (A), (B) or (C), each transferee agrees in writing as a condition precedent to such Transfer to be bound by the terms hereof. The term “affiliate” shall have the meaning given such term in Rule 144 under the Securities Act of 1933, as amended.

4. It is understood that if the Merger Agreement shall be terminated in accordance with the provisions thereof at any time prior to the Effective Time, this Agreement shall terminate.

5. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. This Agreement may not be amended, modified, revoked or terminated in any respect without the written consent of the undersigned and Parent. This Agreement shall be binding upon the undersigned and the undersigned’s heirs, successors and assigns.

Very truly yours,
(print name of shareholder above)
By:
Name:
Title:
	(if applicable)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following listed Registration Statements on Form S-8 of RF Monolithics, Inc. of our report dated November 17, 2006 relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K of RF Monolithics, Inc. for the year ended August 31, 2006: 333-83492, 333-000366, 333-01420, 333-23669, 333-59643, 333-83667, 333-83689, 333-34912, 333-58530, 333-84612, 333-104021, 333-113885 and 333-137439.

/s/ MCGLADREY & PULLEN LLP

Dallas, Texas

November 17, 2006

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Post-Effective Amendment No.1 to Registration Statement Nos. 333-83492, 333-34912, 333-104021 on Form S-8, Registration Statements Nos. 333-000366, 333-01420, 333-23669, 333-59643, 333-83667, 333-83689, 333-58530, 333-84612, 333-113885 and 333-137439 on Form S-8 of our report dated November 18, 2004 relating to the financial statements of RF Monolithics, Inc. for the year ended August 31, 2004 appearing in this Annual Report on Form 10-K of RF Monolithics, Inc. for the year ended August 31, 2006.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

November 17, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David M. Kirk, certify that:

1. I have reviewed the annual report on Form 10-K for the year ended August 31, 2006 of RF Monolithics, Inc., filed with the Securities and Exchange Commission on November 17, 2006 (the “Report”);

2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E.];

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluation; and

d) Disclosed in the Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 17, 2006	/s/ David M. Kirk
	David M. Kirk
	Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Harley E Barnes III, certify that:

1. I have reviewed the annual report on Form 10-K for the year ended August 31, 2006 of RF Monolithics, Inc., filed with the Securities and Exchange Commission on November 17, 2006 (the “Report”);

2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E.];

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluation; and

d) Disclosed in the Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 17, 2006	/s/ Harley E Barnes III
	Harley E Barnes III
	Chief Financial Officer

EX-32.1

Exhibit 32.1

RF MONOLITHICS, INC.

CERTIFICATE PURSUANT TO SECTION 906

OF SARBANES – OXLEY ACT OF 2002

The undersigned, David M. Kirk, Chief Executive Officer and President of RF Monolithics, Inc. (the “Company”), DOES HEREBY CERTIFY that:

1. The Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 17th day of November, 2006.

	/s/ David M. Kirk
Name:	David M. Kirk
Title:	Chief Executive Officer and President

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

RF MONOLITHICS, INC.

CERTIFICATE PURSUANT TO SECTION 906

OF SARBANES – OXLEY ACT OF 2002

The undersigned, Harley E Barnes III, Chief Financial Officer of RF Monolithics, Inc. (the “Company”), DOES HEREBY CERTIFY that:

1. The Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2006 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 17th day of November, 2006.

	/s/ Harley E Barnes III
Name:	Harley E Barnes III
Title:	Chief Financial Officer

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.