**UNITEDSTATES**SECURITIES ANDEXCHANGE COMMISSION

**Washington,D.C. 20549**

**FORM 10-KSB**

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe fiscal year ended March 31, 2005**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**Forthe transition period from               to               **

**CommissionFile Number 0-27250**

**AMLCOMMUNICATIONS, INC.**

(Exact name of Registrantas specified in its charter)
| **DELAWARE**                                                           | **77-0130894**                            |
|------------------------------------------------------------------------|-------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)       | (I.R.S. Employer  Identification No.)     |
| **1000 AVENIDA ACASO, CAMARILLO,  CALIFORNIA**                         | **93012**(Zip Code)                       |
| (Address of principal executive offices)                               | ** **                                |
| **(805) 388-1345**                                                |
| (Issuer’s telephone number, including area code)                  |
| Securities registered pursuant to Section 12(b) of  the Act: |
| Title of each class                                                    | Name of each exchange on which registered |
| **None**                                                               | **None**                                  |
| Securities registered pursuant to Section 12(g) of  the Act: |
| Title of Class                                                         |
| **Common Stock, $.01 par value**                                       |

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x  No o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. o

Issuer’s revenues for itsmost recent fiscal year: $8,650,000

The aggregate market valueof the voting and non-voting common equity held by non-affiliates of theRegistrant on June 17, 2005 was approximately $7,198,511. The per sharestock price for computational purposes was $0.95, based on the closing saleprice per share for the Registrant’s common stock on the OTC Bulletin Board on June 17,2005. This value is not intended to be a representation as to the value orworth of the Registrant’s common stock. The number of non-affiliates of theRegistrant has been calculated by subtracting the number of shares held bypersons affiliated with the Registrant from the number of outstanding shares.

The number of shares ofthe Registrant’s common stock outstanding on June 17, 2005 was 10,067,116.

DOCUMENTS INCORPORATED BYREFERENCE: Portions of the Registrant’s definitive Proxy Statement for theAnnual Meeting of Stockholders to be held on September 9, 2005, areincorporated by reference into Part III of this Form 10-KSB.The Proxy Statement will be filed within 120 days after the end of thefiscal year covered by this report.

TransitionalBusiness Disclosure Format (Check One). Yes o  No x

 

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**AML Communications, Inc.Index to Form 10KSB**
|                   | ** ** | ** **                                                                                                                  | ** ** | **Page** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Part I**   |       |                                                                                                                        |       |
| Item  1.          |       | Description of Business                                                                                                     |       | 1        |       |
| Item  2.          |       | Description of Property                                                                                                     |       | 9        |       |
| Item 3.           |       | Legal Proceedings                                                                                                           |       | 9        |       |
| Item  4.          |       | Submission of Matters to a  Vote of Security Holders                                                                        |       | 9        |       |
| **Part II**  |       |                                                                                                                        |       |     |       |
| Item  5.          |       | Market for Common Equity and  Related Stockholder Matters                                                                   |       | 10       |       |
| Item  6.          |       | Management’s Discussion and  Analysis or Plan of Operation                                                             |       | 11       |       |
| Item 7.           |       | Financial Statements                                                                                                        |       | F-25     |       |
| Item  8.          |       | Changes In and Disagreements  With Accountants on Accounting and Financial Disclosure                                  |       | 47       |       |
| Item  8A.         |       | Controls and Procedures                                                                                                     |       | 47       |       |
| Item 8B           |       | Other Information                                                                                                           |       | 47       |       |
| **Part III** |       |                                                                                                                        |       |     |       |
| Item  9.          |       | Directors, Executive  Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange Act |       | 48       |       |
| Item  10.         |       | Executive Compensation                                                                                                      |       | 48       |       |
| Item  11.         |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                             |       | 48       |       |
| Item  12.         |       | Certain Relationships and  Related Transactions                                                                             |       | 48       |       |
| Item  13.         |       | Exhibits                                                                                                                    |       | 48       |       |
| Item  14.         |       | Principal Accountant Fees  and Services                                                                                     |       | 50       |       |
| **SIGNATURES**    |       | 51                                                                                                                          |       |
|                   |            |                                                                                                                             |            |          |            |  |  |

 

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**Introductory Notes—Forward Looking Statements andCertain Terminology**

Some of thestatements made by us in this Annual Report on Form 10-KSB are forward-lookingin nature, including but not limited to, statements relating to our futurerevenue, product development, demand, acceptance and market share, grossmargins, levels of research and development, our management’s plans andobjectives for our current and future operations, and other statements that arenot historical facts. Forward-looking statements include, but are notlimited to, statements that are not historical facts, and statements includingforms of the words “intend”, “believe”, “will”, “may”, “could”, “expect”, “anticipate”,“plan”, “possible”, and similar terms. Actual results could differ materiallyfrom the results implied by the forward looking statements due to a variety offactors, many of which are discussed throughout this Annual Report andparticularly in the sections titled “Additional Factors That May AffectFuture Results” and “Factors Affecting Business, Operating Results andFinancial Condition”, both of which are included in the section titled “Management’sDiscussion and Analysis of Plan of Operation”. Readers are cautioned not toplace undue reliance on these forward-looking statements, which speakonly as of the date hereof. We undertake no obligation to publicly release anyrevisions to these forward-looking statements that may reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. Factors that could cause actual results to differmaterially from those expressed in any forward-looking statement made by usinclude, but are not limited to:

·        ourability to finance our activities and maintain our financial liquidity;

·        ourability to attract and retain qualified, knowledgeable employees;

·        theimpact of general economic conditions on our business;

·        postponements,reductions, or cancellations in orders from new or existing customers;

·        thelimited number of potential customers for our products;

·        thevariability in gross margins on our products;

·        ourability to design and market new products successfully;

·        ourfailure to acquire new customers in the future;

·        deteriorationof business and economic conditions in our markets;

·        intenselycompetitive industry conditions with increasing price competition; and

·        therate of growth in the defense markets.

In this document, thewords “we,” “our,” “ours,” and “us” refer to AML Communications, Inc. andour division, Microwave Power, Inc.

**PART I**

**ITEM 1. DESCRIPTION OF BUSINESS**

**Introduction**

We currently design, manufacture, and market radiofrequency (RF) and microwave, low noise, medium and high power amplifiers for avariety of frequency ranges and transmission protocols serving primarily thedefense microwave market. Our business is comprised of two reportable segmentsconsisting of amplifiers and related products that are designed, manufacturedand marketed by AML Communications, Inc. for the defense microwave andwireless communications market (AML) and high power microwave amplifiers thatare designed, manufactured and marketed by our division Microwave Power, Inc.(MPI) for the defense market. Our defense industry products are used primarilyin electronic systems for tactical aircraft, ships, ground systems, and missilesystems. These products are sold directly by 

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us as well as throughindependent sales representatives. We had only one reportable segment in fiscalyear ended March 31, 2004.

We were incorporated inCalifornia in 1986 as Advanced Milliwave Laboratories, Incorporated. Earlyin 1994, we changed our name to AML Communications, Inc. In December 1995,in conjunction with the initial public offering of our common stock, we changedour state of incorporation from California to Delaware. In May 1996, wemoved our principal office and manufacturing facility to our current location,1000 Avenida Acaso, Camarillo, California, 93012.

**Background**

We were founded to develop and manufacture hybridmicrocircuit microwave and RF amplifiers to support the communications market.In 1994, we became active in the Wireless market and developed a multicarrierlinear power amplifier supporting this market in the 300-450 MHz range. In late1994, we developed a multicarrier linear RF power amplifier specifically forboosting signal strengths in the cellular communications market and marketedthis multicarrier product directly to the domestic cellular service providers.During 1995 and 1996, we developed derivative multicarrier cellular products atalternative power levels to support differing needs in the service providermarket.

In the fourth quarter of fiscal 1997, we experienced asignificant decrease in our revenue, attributable to several factors. Originalequipment manufacturers (OEMs) offered significantly reduced prices on theirimproved base station products, and the service providers began to outsourcethe infrastructure build out and maintenance to their OEM equipment providerswho used their own equipment in the cell site. Also, the mobile communicationsindustry focused substantial financial and human resources on the build out ofthe nascent PCS services, and competitors began to offer similar or improvedproducts within the domestic US market.

As a result, we decided to change our market focus andconcentrate on selling to the OEM customer base. Late in fiscal 1997, weentered the satellite communications gateway market by offering a high powerlinear amplifier for data transmission applications in a Low Earth Orbit (LEO)network. In fiscal 1998, we received significant revenue from an OEM in theSouth American market and introduced products for the PCS markets and thetwo-way messaging market. We also invested heavily in wireless products for theKorean and European OEMs.

During fiscal 1999, we developed a new generation ofour original cellular multicarrier products and continued to develop anddiversify our customer base. We experienced significant negative impacts to ourrevenue because of the delay and cancellation of programs.

In August 1999, we received our ISO 9001certification, a uniform worldwide quality management system standard andundertook the transition of our production technology from traditional batchassembly to a flexible, self-balancing, one piece flow process. We believe thissubstantially increased our capacity and production efficiency to supportgrowth.

In January 2000, to expand our Defense Microwaveproduct line, we purchased a product line and certain assets of a companyserving the military small signal amplifier market. This purchase was intendedto bolster our Defense Microwave product line and position that segment of ourbusiness for future growth in the market.

Since March 2001, we have concentrated ourresearch and development on defense customers and have expanded our MicrowaveIntegrated Circuits (MIC) facilities.

We believe our future success depends upon our abilityto broaden our product offerings, continue to increase our defense microwavecustomer base, and capture volume product delivery opportunities with goodgross margins. While we continually attempt to expand our customer base, wecannot give any 

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assurance that a majorcustomer will not reduce, delay, or eliminate its purchases from us. Such areduction would have a material adverse effect on our business, results ofoperations, and financial condition. Additionally, our future depends on ourability to generate new products, mostly as part of a standard line of products(i.e. products we developed that are intended to be sold to many customers).

We believe that in orderto maintain or improve our existing gross margins in the near term, we mustachieve manufacturing cost reductions, and in the long term develop newproducts that incorporate advanced features that generate higher gross margins.There is no assurance that we will be able to develop products that willgenerate higher gross margins, or that we will be able to reduce manufacturingcosts.

**Business Strategy**

The return of Jacob Inbar and the other co-founders inFebruary 2001, resulted in our re-direction toward the defense markets. Assuch, we moved rapidly to utilize our knowledge base in Defense Microwaverelated design and manufacturing to offer new products, as well as variationsof existing products. The results of this strategy have been an increase inrevenues for Defense related products from $3.7 million in fiscal 2003 to$6.3 million in fiscal 2004, and an increase to $7.9 million in fiscal2005.

Utilizing our extensive knowledge in (MIC) designcapabilities, we have expanded the products we offer as part of our full linecatalog. Such products are designed for and marketed to the Defense Microwavemarket. We also utilize the MIC design capabilities toward higher value addedproducts such as subsystems.

Due to the adverse effects of the global downturn inthe wireless telecommunications infrastructure spending, we will limit thelevel of new product introductions to this market to those which will provideadequate margins or those in which potential or existing customers will sharethe costs of the new product development. Therefore, we do not intend tointroduce new products for the Telecom Wireless Market.

On May 25, 2004, we signed a definitive agreementfor the acquisition of Microwave Power, Inc. which was completed on June 18,2004. MPI was merged into our wholly owned subsidiary, with the subsidiary asthe surviving entity. The total consideration for the acquisition was$3,028,000. Pursuant to the acquisition agreement, 2,117,108 shares asconsideration for the acquisition and 21,174 shares to be issued to the brokerwere committed, or authorized for issuance by our board of directors, as of June 18,2004. There was no change in MPI’s management and we entered into employmentagreements with two of MPI’s senior officers, its past President and Secretary.MPI will continue to operate as our division from its facility in Santa Clara,which is owned by MPI’s prior shareholders and leased to us.

The MPI acquisitionwas driven by a number of key factors, including:

1)              MPI’s semi-monolithic,gold filled via’s, air bridge and microwave-monolithic-ceramic (MMCC)technology provide access to processes that we believe are complimentary andadditive to those available to AML prior to the acquisition.

2)              MPI’sproduct base addresses higher power and higher frequency sectors of themicrowave market. This acquisition was intended to strengthen our productofferings to this market by adding higher power microwave amplifiers.

**Markets**

We sell our RF/Microwave amplifier products primarilyinto various segments of the Defense Microwave marketplace. In fiscal 2005,from the AML segment, we derived approximately 76.5% of our revenues from theDefense Microwave market, 0.1% from the PCS and two-way messaging market, and8.6% from Cellular Coverage Enhancement products. In comparison, in fiscal 2004we derived approximately 90.8% of our revenues from the Defense Microwavemarket, 0.1% from the PCS and 

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two-way messagingmarket, and 9.1% from Cellular Coverage Enhancement products. The MPI segmentaccounted for 14.8% of our revenues from the Defense microwave and othermarkets in fiscal 2005.

*Defense Microwave Amplifiers.  *Thesehybrid microwave circuits utilizing MIC technology are sold to Defense OEMcustomers with broadband, microwave frequency, component requirements. Theseparts typically support applications including surveillance, signal detection,satellite communication, radar, and telemetry. They are used in both thetransmission and reception signal paths. The technology permits accurate,reproducible, volume products supporting broad bandwidths and higherfrequencies to be designed and manufactured. Moderate volume requirements andcustom design requirements characterize this market.

*Cellular and PCS.  *Cellularnetworks utilize a number of base stations with high power antennas to serve ageographical region. Each region is broken down into a number of smallergeographical areas, or “cells.” Each cell has its own base station which useswireless technology to receive subscribers calls and transmit those callsthrough the wireline Public Switched Telephone Network (PSTN). Cellularnetworks operate within the 800 and 900 MHz bandwidths of the radio spectrum.PCS networks operate in a substantially similar manner as cellular networks,except that PCS networks operate at 1800 and 1900 MHz bandwidths and utilizeonly digital transmission protocols. Transmissions at the higher frequenciesutilized by PCS networks have shorter transmission waves as compared to cellularfrequency transmissions, which tends to limit the distances PCS transmissionscan travel without significant degradation. Lower frequency signals penetrateinto buildings and other obstacles better than higher frequency signals.Therefore, PCS networks operating at the higher frequency ranges should requiresmaller operating cells and more base stations than existing cellular networksto cover the same total geographic region. To the Cellular and PCS markets, weprovide linear multi-carrier RF low noise amplifiers, which are locatedin base stations and work to increase the signal strength of the receivedsignal.

*Two-Way Messaging.  *Thetwo-way messaging networks consist of a substantial number of local andnationwide transceivers that distribute and collect information from numeroushandheld wireless messaging handsets. These handsets allow the user to performfunctions such as accessing the internet, retrieving and responding to e-mail,and instant messaging, among others. The two-way messaging protocols are beingadapted to deliver greater amounts of digital information, requiring highpower, linear amplification for transmission from the base stations, and lownoise tower mount receive amplifiers to maximize the sensitivity of the basestation reception. We have provided low noise tower-mount receive****amplifiers and RF power amplifiers to two-way messaging OEM’sas well as to several network operators.

**Products**

**AML Communications, Inc. Segment**

We designed and/or manufactured during the year lownoise and power amplifiers that were sold primarily into the Defense Microwavemarkets.

*Defense Microwave.  *Weproduce standard catalog and custom hybrid microwave amplifiers. We alsoproduce derivative products that are based upon minor modifications of catalogitems. The frequencies for these products range from 50kHz to 26GHz. Powerlevels range from less than one milliwatt to several hundred watts.

*Cellular and PCS.  *We haveoffered and continue to offer our coverage and capacity enhancing power and lownoise amplifiers to the cellular and PCS marketplace. Within this product lineare linear multicarrier RF power amplifiers suitable for use in theamplification of analog and digital communications formats. These productsrange in power levels from 30 to 140 watts and provide flexiblefeatures/options such as AC or DC supply operation, replaceable input modulesthat allow wide variation and combination of signal gain and connection types.For the PCS market, we have developed several RF 

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low noise receive andsingle channel power amplifiers for various OEMs. These products offercost effective amplification of their respective formats to support the OEMrequirements. Typical power levels range from 4 watts to 80 watts.

*Two-Way Messaging.  *We havedeveloped a range of receive products to support the two-way messaging market.These products include tower mount receive amplifiers, RF power amplifiers, andbase station receive multi-couplers. We believe these products offer excellentperformance in terms of maximizing receive sensitivity while minimizing theeffects of interference from alternative services. We also offer derivativeproducts of our cellular RF power amplifier product line to support the two-waymessaging base station transmission requirements.

Our power amplifiers rangein price from $500 to over $10,000 per amplifier, depending upon technology,complexity, quantity, and implementation.

**Microwave Power, Inc. Segment**

*Defense Microwave and other.  *Wemanufacture solid state microwave amplifiers operating in the frequency rangefrom to 1 to 40 GHz with output power from 10 mW to 500 W. This proprietarytechnology is especially designed for broadband and high power. Some typicalapplications include telecommunications, radar, simulators, transmitters andtest instrumentation. Most of the units are available either rack mounted or asconnectorized modules.

Our transmit poweramplifiers range in price from $2,000 to over $45,000 per amplifier, dependingupon the technology, complexity, quantity, and implementation. Our receiveproducts range in price from $1,200 to $2,000 per amplifier, depending uponsystem requirements and implementation.

**Customers**

AML sells products to wireless and Defense OEMmanufacturers worldwide, including Raytheon, Boeing, Lockheed Sanders, NorthropGrumman, Rockwell, ITT, and L3-Communications. We also sell products towireless network operators such as Cingular Wireless and Verizon Wireless.

MPI sells products to System Integrators primarily inthe defense sector and particularly to Specialized Test Equipment Manufacturers.The list of customers includes Northrup Grumman, Boeing, Lockheed Martin,Raytheon, Agilent, Aeroflex, and several National Defense Laboratories.

For the fiscal year ended March 31, 2005, ourlargest customer was Raytheon, which accounted for approximately 12.8% of netsales. Government of Israel Ministry of Defense was our second largest customeraccounting for approximately 8.2% of net sales. For the fiscal year ended March 31,2004, our largest customer was Raytheon, which accounted for approximately13.3% of net sales, and DFAS was our second largest customer with approximately12.4% of net sales. The loss of either of these customers, or a significantloss, reduction or rescheduling of orders from any of our customers could havea material adverse effect on our business, results of operations and financialcondition.

We rely heavily onacquiring new customers. The acquisition rate for new Defense Microwavecustomers during fiscal 2005 was approximately 10 new customers per quarter forthe AML segment and approximately 4 new customers per quarter for MPI segment,compared to approximately 4 new customers per quarter for AML segment forfiscal 2004. There was only one reportable segment for the fiscal year ended March 31,2004.

**Marketingand Distribution; International Sales**

We sell our AML Communications, Inc. products andMicrowave Power, Inc. products through a combination of a technicallyproficient internal sales and marketing resources and a network of 

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independent salesrepresentatives selected for their familiarity with our potential customers andtheir knowledge of the Defense microwave markets. Both the internal sales andmarketing personnel and the independent sales representatives generate productsales, provide product and customer service, and provide customer feedback forproduct development. In addition, the independent sales representatives receivesupport from our internal sales and marketing personnel, which currentlyconsists of four people.

Our marketing efforts are focused on establishing anddeveloping long-term relationships with potential customers. Sales cycles forcertain of our products are lengthy, typically ranging from six months to twoyears. Our customers typically conduct significant technical evaluations of ourproducts before making purchase commitments. In addition, as is customary in theindustry, sales are made through standard purchase orders, which can be subjectto cancellation, postponement, or other types of delays. While certaincustomers provide us with forecasted needs, they are not bound by suchforecasts.

During the fiscal year ended March 31, 2005,international sales were $2.4 million or 28.4% of net sales as compared to $1.0million or 14.8% of net sales for the fiscal year ended March 2004.

Thefollowing table summarizes the international sales by segment for the fiscalyear ended March 31, 2005:
| ** **           | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **           | ** ** | **(Dollars in thousands)** | ** ** |
| International  sales |       | $                                    | 2,145      |       | 24.8       | %       | $          | 310        |       | 3.6       | %          | $          | 2,455      |   | 28.4 | % |
| Domestic sales       |       | 5,219                                |       | 60.4       |       | 976     |       | 11.2       |       | 6,195     |       | 71.6       |       |
| Total Sales          |       | $                                    | 7,364      |       | 85.2       | %       | $          | 1,286      |       | 14.8      | %          | $          | 8,650      |   | 100.0 | % |

 

AML was the onlyreportable segment in the fiscal year ended 2004.

**Warranty**

Our warranty varies byproduct type and typically covers defects in material and workmanship for oneyear from the date of delivery. We perform warranty obligations and othermaintenance services at our facility in Southern California and our facility inNorthern California.

**Product Development**

We invest significant resources in the research anddevelopment of new methods to improve amplifier performance, including reducednoise and increased efficiency in the RF amplification process as well asseeking to reduce the cost and increase the manufacturing efficiency of new andexisting products.

The acquisition of MPI hasadded to our existing technology, with their semi-monolithic, gold filled via’s,dielectric bridge and microwave-monolithic-ceramic (MMCC) technology processes.Our combined research and development staff consisted of 15 people as of March 31,2005. Expenditures for research and development amounted to approximately$913,000 in fiscal 2005 and $723,000 in fiscal 2004.

**Competition**

The Defense Microwave industry is highly competitive.Our main competitors include Teledyne Defense, Miteq, CTT, and Endwave DefenseSystems. Although most of the competitors have significantly higher resourcesthan we have, we believe that our technical abilities in implementing MICamplifiers do not differ to any great degree. We utilize our technologicalknowledge as well as price to compete effectively. We intend to apply theknow-how and technology of MPI towards gaining a technological advantage overour competitors.

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We have experiencedsignificant price competition and expect price competition in the sale ofRF/Microwave amplifiers to increase. No assurance can be given that our competitorswill not develop new technologies or enhancements to existing products orintroduce new products that will offer superior price or performance features.We expect our competitors to offer new and existing products at pricesnecessary to gain or retain market share. Some of our competitors havesubstantial financial resources, which may enable them to better withstandsustained price competition or a market downturn. There can be no assurancethat we will be able to compete successfully in the pricing of our products, orotherwise.

**Manufacturing and Suppliers**

Our headquarters and our AML manufacturing facilityare located in Camarillo, California. Our manufacturing process involves theassembly of numerous individual components and precise fine-tuning byproduction technicians. The parts and materials we use consist primarily ofspecialized printed circuit boards, specialized subassemblies, fabricatedhousings, and small electric circuit components, such as integrated circuits,semiconductors, resistors and capacitors.

ISO 9001 is****a uniformworldwide quality management system standard. Numerous customers and potentialcustomers throughout the world, particularly in Europe, require their suppliersbe ISO certified. In addition, many customers require their suppliers topurchase components only from subcontractors that are ISO certified. We arecurrently in the process of preparing for re-certification of the ISO 9001standard.

MPI’s manufacturing facility is located in SantaClara, California. Depending on the specific requirements, we use a combinationof three basic technologies: Integration of internally matched GaAs FETs usingMICs (Microwave Integrated Circuits), Integration of GaAs Monolithics (MMIC’s)using various techniques, including Multi-Chip Modules, and our own proprietaryMMIC (Microwave Monolithic Integrated Circuits) technology. We manufacture inhouse all the ceramic integrated circuits, both MIC’s and MMIC’s.

We currently procure, andexpect to continue to procure, certain components from single sourcemanufacturers due to unique component designs as well as certain quality andperformance requirements. In addition, in order to take advantage of volumepricing discounts, we purchase certain customized components from singlesources. These single source suppliers consist of Pico Electronics for theirpower supplies, Johanson Technologies for their ceramic capacitors, SandvikOsprey LTD for their osprey materials, and NEC and Fujitsu for theirsemiconductors. Although we did not experience shortages during fiscal year2005, we have experienced this in the past, and may again in the future,experience shortages of single-source components. In such event, we mayhave to make adjustments to both product designs and production schedules,which could result in delays in production and delivery of products. Suchdelays could have an adverse effect on our operating results and financialcondition.

**Intellectual Property**

We rely on trade secrets and execute confidentialityand non-disclosure agreements with our employees and limit access to anddistribution of our proprietary information. These efforts allow us to relyupon the knowledge and experience of our management and technical personnel andour ability to market our existing products and to develop new products. Thedeparture of any of our management and technical personnel, the breach of theirconfidentiality and non-disclosure obligations with us, or the failure toachieve our intellectual property objectives may have a material adverse effecton our business, financial condition and results of operations.

The proprietary technologies of our MPI segment andare primarily protected through patent and trade secret protection. As of March 31,2005, we owned three U.S. issued patents and one foreign patent, and MPI had nopatent applications pending. The four patents expire at various dates from May 2007to 

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September 2009.Additionally, MPI has two registered trademarks: the MPI Company logo, and theterm “MMCC” (monolithic microwave ceramic circuits).

We believe our success depends upon the knowledge andexperience of our management and technical personnel and our ability to marketour existing products and to develop new products. We do not have non-competeagreements with our employees who are employed on an “at-will” basis.Therefore, employees may, and have, left us to go to work for a competitor.While we believe that we have adequately protected our proprietary technology,and we will take all appropriate and reasonable legal measures to protect it,the use of our processes by a competitor could have a material adverse effecton our business, financial condition and results of operations.

Our ability to compete successfully and achieve futurerevenue growth will depend, in part, on our ability to protect our proprietarytechnology and operate without infringing upon the rights of others. We may notbe able to successfully protect our intellectual property and our intellectualproperty or proprietary technology may otherwise become known or be independentlydeveloped by competitors. In addition, the laws of certain countries in whichour products have been or may be sold may not protect our products andintellectual property rights to the same extent as the laws of the UnitedStates.

The inability to protectour intellectual property and proprietary technology could have a materialadverse effect on our business, financial condition and results of operations.As the number of patents, copyrights and other intellectual property rights inour industry increases, and as the coverage of these rights and thefunctionality of the products in the market further overlap, we believe thatcompanies in our industry may face more frequent infringement claims. We may inthe future be notified that we are infringing upon certain patent or otherintellectual property rights of others. Although we are not aware of anypending or threatened intellectual property lawsuits against us, we cannotguarantee that such litigation or infringement claims will not occur in the future.Such litigation or claims could result in substantial costs and diversion ofresources and could have a material adverse effect on our business, results ofoperations and financial condition. A third party claiming infringement mayalso be able to obtain an injunction or other equitable relief, which couldeffectively block our ability or our customer’s ability to distribute, sell, orimport allegedly infringing products. If it appears necessary or desirable, wemay seek licenses from third parties covering intellectual property that we areallegedly infringing. No assurance can be given, however, that any suchlicenses could be obtained on terms acceptable to us, if at all. The failure toobtain the necessary licenses or other rights could have a material adverseeffect on our business, financial condition and results of operations.

**Employees**

As of March 31, 2005,we had 70 full-time employees, including 15 in research and development; 43 inmanufacturing, production engineering, and quality assurance; 8 inadministration; and 4 in sales, marketing, order entry, and customer support.We believe the success of our business depends, in part, on our ability toattract and retain qualified personnel, particularly qualified scientific,technical and key management personnel. Our employees are not governed bycollective bargaining agreements. We believe our relationships with ouremployees are good.

**Environmental Regulations**

We are subject to federal,state and local governmental regulations relating to the storage, discharge,handling, emission, generation, manufacture, and disposal of toxic or otherhazardous substances used to manufacture our products. We believe we arecurrently in compliance in all material respects with such regulations. Failureto comply with current or future regulations could result in the imposition ofsubstantial fines on us, suspension of production, alteration of ourmanufacturing processes, cessation of 

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ouroperations, or other actions which could materially and adversely affect ourbusiness, financial condition, and results of operations.

**ITEM 2. DESCRIPTION OF PROPERTY**

Our AML administrative,engineering, and manufacturing facility is located in a 25,017 square footleased building in Camarillo, California. The lease for this space expires in April 2008.Our MPI division leases a 3,868 square foot industrial/office condominiumlocated at 3350 Scott Boulevard in Santa Clara, California. The lease for thisspace expires in June 2006. We believe that our current facilities are inreasonable condition and provide adequate expansion capabilities.

**ITEM 3. LEGAL PROCEEDINGS**

We may be subject to, fromtime to time, various legal proceedings relating to claims arising out of ouroperations in the ordinary course of our business. We are not currently a partyto any legal proceedings, the adverse outcome of which, individually or in theaggregate, would have a material adverse effect on the business, financialcondition, or results of operations of the Company.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

Not applicable

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**PART II**

**ITEM5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

***Market Information***

Ourcommon stock currently trades on NASDAQ’s OTC Bulletin Board under the symbol “AMLJ.OB”.Our common stock traded on the Nasdaq Small Cap Market from October 8, 2001to August 13, 2002 and on the Nasdaq National Market prior to that time.The table below sets forth for the periods indicated the high and low bidprices for the Company’s common stock for the periods it traded on the OTCBulletin Board. The bid prices represent inter-dealer quotations, withoutadjustments for retail mark-ups, markdowns or commissions and may notnecessarily represent actual transactions. The source of the information forthe high and low bid prices is the OTC Bulletin Board.
| ** **                             | ** ** | **Price Range of  Common Stock** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| Fiscal year ended  March 31, 2004 |       |                                            |       |   |   |
| First quarter                          |       | $0.24                                           |       | $0.20 |   |
| Second quarter                         |       | $0.58                                           |       | $0.52 |   |
| Third quarter                          |       | $1.50                                           |       | $1.26 |   |
| Fourth quarter                         |       | $1.87                                           |       | $1.60 |   |
| Fiscal year ended  March 31, 2005 |       |                                            |       |   |   |
| First quarter                          |       | $1.63                                           |       | $0.65 |   |
| Second quarter                         |       | $1.25                                           |       | $1.01 |   |
| Third quarter                          |       | $1.32                                           |       | $0.85 |   |
| Fourth quarter                         |       | $1.43                                           |       | $1.11 |   |

 

At June 17, 2005there were approximately 96 holders of record of our common stock. This numberdoes not include the number of persons whose stock is in nominee or in “streetname” accounts through brokers.

***Dividends***

We have not paid cash dividendsand do not anticipate paying cash dividends in the foreseeable future. Weexpect to utilize future earnings to finance future growth. The actual amountof any dividends paid would be subject to the discretion of our Board ofDirectors and would depend on operations, financial and business requirements,compliance with bank covenants, and other factors.

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*Equity Compensation Plans*

The following table gives informationabout our common stock that may be issued under our existing equitycompensation plans as of March 31, 2005:

**EquityCompensation Plan Information**
| **Plan Category**                                       | ** ** | ** ** | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options  and Rights  (a)** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options  and Rights  (b)** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans  (Excluding Securities  Reflected in Column (a))  (c)** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       |       | 1,988,738  |                                                                                                                                       |       |                                                                                                   | $          | 1.00                                                                                                                                                                                                                  |       |   |   | 254,136 |   |   |
| Equity  compensation plans not approved by security holders  |       |       | None       |                                                                                                                                       |       |                                                                                                   | None       |                                                                                                                                                                                                                  |       |   | None |   |   |
| Total                                                        |       |       | 1,988,738  |                                                                                                                                       |       |                                                                                                   | $          | 1.00                                                                                                                                                                                                                  |       |   |   | 254,136 |   |   |

 

In July 2003, we raised $245,000 ($100,000 ofwhich was a conversion from an advance received in June 2003) from currentofficers and directors and $43,000 from other investors in the form of notespayable with warrants attached. The funds were used for working capital. Thepromissory notes bear interest at the rate of 8% and have a two-year maturity.Warrants to purchase a total of 240,000 shares of our common stock were issuedin connection with the funding. The per share exercise price of the warrants is$0.24. The warrants expire five years from the date of issuance. We have valuedthese warrants at $35,000 and are expensing this value over the term of thenotes payable. For the twelve months ended March 31, 2005, a total of$22,000 was charged to the consolidated statement of operations. On November 2, 2004, the Board of Directorsapproved the early payoff of these notes payable and these notes were paid infull on November 9, 2004.

Thefollowing warrants were exercised during the fiscal year ended March 31,2005:
| **Notes and Warrants in the name of:** | ** ** | ** ** | ** ** | **Number of  Shares  Exercised** | ** ** | **Title of  Security** | ** ** | **Date of  Exercise and  Issuance of Shares** | ** **          | **Payment  Received** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------|---------------------|-----------------------|------------|
| Oliver Family  Trust                                                 |       |       | 8,333      |                                  |       | Common  Stock               |       |                                                              | Oct .22, 2004       |                  |       | $ | 2,000 |   |
| Bob M. Hawkins                                                       |       |       | 27,500     |                                  |       | Common  Stock               |       |                                                              | Jan. 13,  2005 |                  |       | $ | 6,600 |   |
| Gerald M. Starek  Trust                                              |       |       | 16,667     |                                  |       | Common  Stock               |       |                                                              | Mar. 08,  2005 |                  |       | $ | 4,000 |   |
|                                                                 |       |       | 52,500     |                                  |       |                        |       |                                                              |                |                  |       | $ | 12,600 |   |

 

**ITEM6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**

**Overview**

We design, manufacture, and market RF and microwave,low noise, medium and high power amplifiers for a variety of frequency rangesand transmission protocols serving primarily the defense microwave market. Ourbusiness is comprised of two reportable segments, AML, which represented 85.2%of 2005 product revenue, and MPI, which represented 14.8% of 2005 productrevenue. We had only one reportable segment, AML, in fiscal 2004.

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Our AML segment includes low noise and poweramplifiers with frequencies that range from 50kHz to 26GHz. In February 2001,we made a strategic decision to focus our resources on the defense markets. Assuch, we moved rapidly to utilize our knowledge base in Defense Microwaverelated design and manufacturing to offer new products, as well as variationsof existing products. The results of this strategy have been an increase inrevenues for Defense related products from $3.7 million in fiscal 2003 to $6.3million in fiscal 2004, and an increase to $6.6 million in fiscal 2005.

We consider the AML segment to be our core businessand devote most of our management time and other resources to improving theprospects for this segment. Virtually all of our sales and marketing expensesare in the AML segment. The majority of our research and development spendingis dedicated to this segment, as well.

Our MPI segment includessolid state microwave amplifiers operating in the frequency range from to 1 to40 GHz with output power from 10 mW to 500 W. In June 2004, we acquiredMicrowave Power, Inc. and operate it as a division of AML. The MPIdivision operates independently, with its own marketing, production, andgeneral management team.

**Results of Operations**

The following tablesummarizes our results of operations both in dollars and as a percentage of netsales for the fiscal years ended March 31, 2004 and 2005.

**Forthe fiscal year ended March 31, 2005:**
| ** **                              | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                                |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Defense Microwave  and other            |       | $                                    | 6,615      |       | 76.5       | %       | $          | 1,286      |       | 14.8      | %          | $          | 7,901      |   | 91.3 | % |
| PCS and wireless  messaging             |       | 5                                    |       | 0.1        |       | —  |       | —     |       | 5         |       | 0.1        |       |
| Cellular,  wireless telephony and other |       | 744                                  |       | 8.6        |       | —  |       | —     |       | 744       |       | 8.6        |       |
| Total net sales                         |       | 7,364                                |       | 85.2       | %          | 1,286   |       | 14.8       | %          | 8,650     |       | 100.0      | %          |
| Cost of goods  sold                     |       | 4,323                                |       | 49.9       |       | 443     |       | 5.2        |       | 4,766     |       | 55.1       |       |
| Gross profit                            |       | 3,041                                |       | 35.1       |       | 843     |       | 9.8        |       | 3,884     |       | 44.9       |       |
| Operating  expenses:                    |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Selling, general and administrative     |       | 1,701                                |       | 19.6       |       | 368     |       | 4.3        |       | 2,069     |       | 23.9       |       |
| Research and development                |       | 851                                  |       | 9.8        |       | 62      |       | 0.8        |       | 913       |       | 10.6       |       |
| Operating profit                        |       | 489                                  |       | 5.6        |       | 413     |       | 4.8        |       | 902       |       | 10.4       |       |
| Other (expense),  net                   |       | (87                                  | )          | (1.0       | )          | 48      |       | 0.5        |       | (39       | )          | (0.5       | )          |
| Profit before  income taxes             |       | 402                                  |       | 4.6        |       | 461     |       | 5.3        |       | 863       |       | 9.9        |       |
| Income tax  expense / (credit)          |       | (72                                  | )          | (0.8       | )          | —  |       | 0.0        |       | (72       | )          | (0.8       | )          |
| Net profit                              |       | $                                    | 474        |       | 5.4        | %       | $          | 461        |       | 5.4       | %          | $          | 935        |   | 10.8 | % |

 

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**Forthe fiscal year ended March 31, 2004:**
| ** **                                                             | ** ** | **AML**                          | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                             | ** ** | **(Dollars in  thousands)** | ** ** | ** ** | ** ** |
| Revenues                                                               |       |                             |       |       |       |   |   |
| Defense Microwave  and other                                           |       |                             | $          | 6,333      |       |   | 90.8 | % |
| PCS and wireless  messaging                                            |       |                             | 8          |       |       | 0.1 |   |
| Cellular,  wireless telephony and other                                |       |                             | 635        |       |       | 9.1 |   |
| Total net sales                                                        |       |                             | 6,976      |       |       | 100.0 |   |
| Cost of goods  sold                                                    |       |                             | 3,571      |       |       | 51.2 |   |
| Gross profit                                                           |       |                             | 3,405      |       |       | 48.8 |   |
| Operating  expenses:                                                   |       |                             |       |       |       |   |   |
| Selling, general and administrative                                    |       |                             | 1,376      |       |       | 19.7 |   |
| Research and development                                               |       |                             | 723        |       |       | 10.4 |   |
| Operating profit                                                       |       |                             | 1,306      |       |       | 18.7 |   |
| Other (expense),  net                                                  |       |                             | (75        | )          |       | 1.1 |   |
| Profit before  income taxes                                            |       |                             | 1,231      |       |       | 17.6 |   |
| Income tax  expense                                                    |       |                             | 98         |       |       | 1.4 |   |
| Net profit before cumulative effect of change in  accounting principle |       |                             | 1,133      |       |       | 16.2 |   |
| Cumulative effect of change in accounting principle                    |       |                             | 120        |       |       | 1.7 |   |
| Net profit                                                             |       |                             | $          | 1,013      |       |   | 14.5 | % |

 

AML was the only reportable segment in the fiscal yearended March 31, 2004.

**FiscalYears Ended March 31, 2005 and 2004**

*Net sales.  *Net sales forfiscal 2005 were $8.7 million, compared to $7.0 million in fiscal2004. The increase in net sales is attributable to continuous growth in thedefense sector coupled with revenues from our MPI division. The PCS productline of the AML segment made up $8,000, or 0.1% of net sales in fiscal 2004,decreasing to $5,000 or 0.2% of net sales in fiscal 2005. This decline is dueto the economic slow down in the wireless, PCS, and two-way messaging markets.We anticipate that sales of our PCS and two-way messaging products willcontinue to decrease due to reduced capital expenditures for new equipment byOEM’s and service providers given the current economic conditions within thewireless market. Sales of cellular and other products of the AML segment were$744,000, 8.6% of net sales in fiscal 2005, as compared to $635,000, 9.1% ofnet sales in fiscal 2004. In general, the global wireless communications marketremains weak. MIC sales of the AML segment continue to increase with sales of$6.6 million in fiscal 2005, 76.5% of net sales, compared to$6.3 million in fiscal 2004, 90.8% of net sales. We believe the increasein sales of MIC products is the result of our aggressive penetration of thefractured MIC market and an increase in demand for defense related MIC productsrelated to the procurement of upgrade, replacement, and spare parts for defenseapplications. If defense spending increases, we anticipate that MIC sales willcontinue to be a significant portion of our revenue. Sales to two customers,Raytheon and Government of Israel Ministry of Defense, represented 12.8% and8.2% of net sales in 2005, respectively, as compared to sales to two customers,Raytheon and DFAS, which represented 13.3% and 12.4% of net sales in 2004,respectively.

Additionally, on June 18, 2004, we acquiredMicrowave Power, Inc. (MPI) with the intent of achieving new channels tomarket and subsequently increase sales in the defense market. Prior to ouracquisition of MPI, we had only one reportable segment. The net sales from ourMPI segment was $1.3 million, 14.8% of net sales, for fiscal 2005***.***As with the AML segment, ifdefense spending increases, we anticipate that MIC sales will continue to be asignificant portion of our revenue.

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Domestic and international net sales wereapproximately 71.6% and 28.4% of our net sales, respectively, for the yearended March 31, 2005. For the year ended March 31, 2004, domestic andinternational net sales were approximately 85.2% and 14.8% of our net sales,respectively. Net sales are attributed to geographic areas based on thelocation of the customer to which our products are shipped. International netsales primarily consist of sales to customers in Israel, France and Turkey. Forthe year ended March 31, 2005 as compared to the year ended March 31,2004, international net sales have increased primarily as a result of thecontinued growth in the French market following the addition of a newrepresentative in 2004, as well as a general increase in demand in theinternational market. However, certain OEM customers take possession of ourproducts domestically and then distribute these products to their internationalcustomers. Because we account for all of those net sales as domestic revenues,we cannot be certain of the extent to which our domestic and international netsales is impacted by the practices of our customers.

*Gross profit.  *Gross profitfor fiscal 2005 was 3.9 million, or 44.9% of net sales, compared to agross profit in fiscal 2004, of $3.4 million, or 47.1% of net sales. Thedecrease in margin, as a percentage of sales, can be attributed to morecompetitive pricing in the MIC product line of our AML segment, which accountsfor 76.5% of our net sales. The gross profit for our MPI segment also decreasedas a percentage of sales as compared to the prior year. We attribute thisdecrease to the acquisition process, which caused a reduction in sales and adecrease in manufacturing efficiencies during the quarter ended September 30,2004. We expect our margins, as a percentage of sales, to maintain in 2006 asin 2005.

*Selling, general, and administrative costs.  *Selling,general and administrative costs for fiscal 2005 were $2.1 million, or 23.9% ofnet sales, compared to $1.4 million, or 19.7% of net sales, for fiscal2004. Of the increase, $368,000 is attributed to MPI’s selling andadministrative costs. Salaries and related benefits accounted for $221,000 ofthe remaining increase, which we believe was a necessary expenditure to retaintrained and qualified personnel and to stay competitive with the market. Theremaining costs are in direct correlation with maintaining public companyreporting requirements. Additionally, our board member fees were reinstated on April 1,2004, which were waived in previous years due to our economic situation.

*Research and development costs.  *Researchand development costs for fiscal 2005 were $913,000, or 10.6% of net sales,compared to $723,000, or 10.4% of net sales, for the corresponding period infiscal 2004. Of the increase, $62,000 is attributed to MPI’s engineering costs.The remaining increase is due to salaries and related benefits in connectionwith increasing our engineering staff by five, and expanding our research anddevelopment department so that we may continue to focus on the development ofnew products. These costs were offset by a reduction in depreciation expenses,as many assets reached full depreciation.

*Other expense, net.  *Otherexpense for fiscal 2005 was $39,000, as compared to $75,000 for fiscal 2004.The decrease in expense is due to reduction in interest expense from payingdown capital leases and switching from the accounts receivable financingagreement to a more traditional line of credit. The interest expense of $96,000was offset by interest income of $30,000 from short-term cash investments andby $27,000 of reversals from over-accrued liabilities.

In 2006, we expect total operating expenses toincrease, as we continue to invest in infrastructure and new productdevelopment. We expect operating expenses generally will increase more slowlythan increases in revenue.

*Income tax expense.  *Taxbenefit for the year ended March 31, 2005 was $72,000. For the year ended March 31,2004, we recorded a provision of $98,000 for income taxes. The CaliforniaFranchise Tax Board reversed its suspension of the utilization of loss carryforward benefits, so we reversed $90,000 of the $98,000 originally booked. Theremaining $8,000 was for AMT taxes for the fiscal year ended March 31,2004. This $90,000 credit was offset by $18,000 in federal income tax expensefor the year ended March 31, 2005.

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**Liquidity and Capital Resources**

Historically, we have financed our operationsprimarily from internally generated funds and, to a lesser extent, loans fromstockholders and capital lease obligations.

Between July 1, 2000 and December 31, 2001,we entered into capital leases for the purpose of acquiring production and testequipment valued in aggregate at $740,000. The terms of the leases range from36 months to 60 months and the interest charges range from 8.6% to 15.6%. Thetotal amount remaining on the leases at March 31, 2005 was $41,000.

In December 2001, we received a loan of $50,000from Dr. Tiberiu Mazilu, PhD, an officer and director of the Company.The promissory note called for quarterly interest payments to Dr. Mazilucommencing on September 30, 2002, with the interest payment calculatedquarterly and based on the prime interest rate plus 1.25%. The principal amountof the note was due on January 2, 2005 but would become due and payable bythe Company immediately upon the consolidation or merger of the Company intoanother entity, the death of Dr. Mazilu, or the Company’s termination of Dr. Mazilu’semployment with the Company. On November 2, 2004, the Board of Directorsapproved the early payoff of this note payable and the note was paid in full onNovember 9, 2004.

In December 2002, the Company entered into anon-cancelable capital lease to acquire test equipment valued in aggregate atapproximately $50,000. The terms of the lease call for 36 equal monthlypayments of $1,699 commencing in December 2002 and at an annual interestrate of 13.7%. The total amount remaining on the lease at March 31, 2005was approximately $13,000.

In July 2003, we raised $245,000 ($100,000 ofwhich was a conversion from an advance received in June 2003) from currentofficers and directors and $43,000 from other investors in the form of notespayable with warrants attached. The funds were used for working capital. Thepromissory notes bear interest at the rate of 8% and have a two-year maturity.Warrants to purchase a total of 240,000 shares of our common stock were issuedin connection with the funding. The per share exercise price of the warrants is$0.24. The warrants expire five years from the date of issuance. We have valuedthese warrants at $35,000 and are expensing this value over the term of thenotes payable. For the twelve months ended March 31, 2005, a total of$22,000 was charged to the consolidated statement of operations. On November 2, 2004, the Board of Directorsapproved the early payoff of these notes payable and these notes were paid infull on November 9, 2004.

On November 20, 2001 we entered into an AccountsReceivable Purchase Agreement with Silicon Valley Bank, which replaced anAccounts Receivable Financing Agreement we had entered into with the bank on November 20,2000. We paid the bank $7,500 upon execution of the Accounts ReceivablePurchase Agreement. Pursuant to the Accounts Receivable Purchase Agreement, thebank had the right (but not the obligation) to purchase receivables from us at80% of their face value, net of deferred revenue and offsets, if any. In September 2003,we modified our agreement with Silicon Valley Bank. Under the modificationagreement, the aggregate amount of all receivables purchased by the bank couldnot exceed $2,000,000. We were obligated to pay the bank a monthly financecharge which was computed as the greater of $6,500 or 1% above the prime rate,per annum, on the average daily account balance outstanding for the month. Wealso paid the bank a monthly collateral handling fee of 0.75% per month on theaverage daily account balance outstanding for the month. The bank refunds to usany amount remaining from paid accounts after deducting the 80% advance, themonthly finance charge, the collateral handling fee and any other adjustmentsmade or fees due pursuant to the Account Receivable Purchase Agreement. Thebank may require us to repurchase receivables it has purchased if they remainunpaid after 90 days from the invoice date, if the account debtor has filed (orhas filed against it) bankruptcy or other insolvency proceedings, if we breachthe Accounts Receivable Purchase Agreement or if the account debtor asserts anyclaim relating to the receivable.

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On July 6, 2004, we terminated our agreement withSilicon Valley Bank and entered into a new financing agreement with BridgeBank. We incurred a $25,000 early termination fee in connection with thetermination of the Receivables Financing agreement with Silicon Valley Bank.

At March 31, 2005, we had a line of creditagreement with Bridge Bank with credit limit of $1,500,000, of which $1,000,000may be used for cash advances against accounts receivables and $500,000 may beused for equipment advances. At March 31, 2005 we had an outstandingbalance of $80,000 under this agreement. Our ability to borrow under thisagreement varies based upon eligible accounts receivable and eligible equipmentpurchases. We are obligated to pay the bank a finance charge at a rate per yearequal to the prime rate, which in no event shall be less than 4.00%, plus 2.0%with respect to cash advances and a rate of such prime rate plus 3.5% withrespect to equipment advances. We must maintain certain financial requirements,including net profit after tax, on a quarterly basis, of at least $0.01, and adebt service coverage ratio of at least 1.25 to 1.00 with respect to equipmentadvances. We were in compliance with these requirements at March 31, 2005;however, there is no assurance that we will be in compliance at future dates.This agreement terminates on July 7, 2005 or upon a date that the bankchooses to terminate the agreement. Any unpaid balance is due and payablepursuant to the agreement on the termination date. If the agreement isterminated within the first 12 months following its execution on July 6,2004, we generally are required to pay a $15,000 fee to the bank. At March 31,2005, our remaining borrowing capacity was approximately $501,000 availableunder the accounts receivable agreement and $500,000 available under theequipment financing agreement.

At March 31, 2005, we had $1.6 million in cashand cash equivalents. Our operating activities provided cash of approximately$341,000 in fiscal 2005, primarily as a result of increased revenues, comparedto providing cash of $976,000 in 2004. The decrease in net cash provided byoperating activities in 2005 as compared to 2004 was mainly due to increase inaccounts receivable. For competitive and business expansion reasons, paymentterms have been extended for certain domestic and foreign customers. Net cashprovided from investing activities amounted to $726,000 in 2005, nearly $1.2million was received from the MPI acquisition, offset by net capital equipmentexpenditures of $464,000, as compared to $25,000 net cash provided by investingactivities in 2004. Net cash used in financing activities was $456,000 in 2005,$338,000 was the result of the paying off all notes payable and $136,000 usedin paying down capital lease obligations, as compared to $219,000 used infinancing activities in 2004. This was offset by $18,000 received in connectionwith the exercising of options and warrants.

We anticipate capital expenditures of approximately$702,000 in fiscal 2006. We believe that funds will be provided by ouroperating activities. However, we may choose to finance some of theseexpenditures through our financing agreement with Bridge Bank. At March 31,2005, we had a line of credit agreement with Bridge Bank, of which $500,000 maybe used for equipment advances at a rate of such prime rate plus 3.5%. At March 31,2005, our remaining borrowing capacity was $500,000 available under theequipment financing agreement.

In addition to the funds raised in July 2003, wemay attempt to procure additional sources of financing in the event that thecapital available as of March 31, 2005 is insufficient for our operatingneeds and capital expenditures. These sources may include, but are not limitedto, additional sales of our securities. There are, however, no assurances thatwe will be able to successfully obtain additional financing at terms acceptableto us. Failure to obtain such financing could have a material adverse effect onour ability to operate as a going concern.

Successful completion ofour development program and attaining profitable operations are dependent uponour maintaining a level of sales adequate to support our cost structure. Inaddition, realization of a major portion of the assets in the accompanyingbalance sheet is dependent upon our ability to meet our financing requirementsand the success of our plans to sell our products. The financial statements donot include any adjustments relating to the recoverability and classificationof recorded asset amounts or 

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amountsand classifications of liabilities that might be necessary should we be unableto continue in existence.

**Contractual Obligations**

Thefollowing table summarizes our contractual obligations, including purchasecommitments at March 31, 2005, and the effect that such obligations areexpected to have on our liquidity and cash flow in future periods.
| ** **                                 | ** ** | ** **                           | ** ** | **Payment due by period** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | ** **                           | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **Thereafter** | ** ** |
| ** **                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Long term lease  obligations               |       | —                               |       |                                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Capital lease  obligations                 |       | $                                    | 53         |                                     |       | $ | 52 |   |   |   | $ | 1 |   |   |   | — |   |   |   | — |   |   |
| Operating leases                           |       | $                                    | 665        |                                     |       | $ | 242 |   |   |   | $ | 406 |   |   |   | $ | 17 |   |   |   | — |   |   |
| Total contractual cash  obligations        |       | $                                    | 718        |                                     |       | $ | 294 |   |   |   | $ | 407 |   |   |   | $ | 17 |   |   |   | — |   |   |
|                                            |            |                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Critical Accounting Policies**

Our discussion and analysis of our financialconditions and results of operations are based upon our financial statements,which have been prepared in accordance with generally accepted accountingprinciples in the United States. The preparation of financial statementsrequires managers to make estimates and disclosures on the date of thefinancial statements. On an on-going basis, we evaluate our estimates,including, but not limited to, those related to revenue recognition. We useauthoritative pronouncements, historical experience, and other assumptions asthe basis for making judgments. Actual results could differ from thoseestimates. We believe that the following critical accounting policies affectour more significant judgments and estimates in the preparation of ourfinancial statements.

*Revenue recognition.  *Wegenerate our revenue through the sale of products. Our policy is to recognizerevenue when the applicable revenue recognition criteria have been met, whichgenerally include the following:

·        *Persuasiveevidence of an arrangement exists;*

·        *Delivery hasoccurred or services have been rendered;*

·        *Price is fixed or determinable; and*

·        *Collectibilityis reasonably assured*

Revenue from the sale of products is generally recognizedafter both the goods are shipped to the customer and acceptance has beenreceived, if required. Our products are custom made for our customers, whoprimarily consist of original engineer manufacturers (OEMs), and we do notaccept returns. Our products are shipped complete and ready to be incorporatedinto higher level assemblies by our customers. The terms of the customerarrangements generally pass title and risk of ownership to the customer at thetime of shipment.

Recording revenue from the sale of products involvesthe use of estimates and management judgment. We must make a determination atthe time of sale whether the customer has the ability to make payments inaccordance with arrangements. While we do utilize past payment history, and, tothe extent available for new customers, public credit information in making ourassessment, the determination of whether collectibility is reasonably assuredis ultimately a judgment decision that must be made by management.

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*Allowance for Doubtful Accounts*.   Wemaintain an allowance for doubtful accounts receivable based oncustomer-specific allowances, as well as a general allowance. Specificallowances are maintained for customers which are determined to have a highdegree of collectibility risk based on such factors, among others, as: (i) theaging of the accounts receivable balance; (ii) the customer’s past paymentexperience; or (iii) a deterioration in the customer’s financialcondition, evidenced by weak financial condition and/or continued pooroperating results, reduced credit ratings, and/or a bankruptcy filing. Inaddition to the specific allowance, we maintain a general allowance for all itsaccounts receivables which are not covered by a specific allowance. The generalallowance is established based on such factors, among others, as: (i) thetotal balance of the outstanding accounts receivable, including considerationsof the aging categories of those accounts receivable; (ii) past history ofuncollectible accounts receivable write-offs; and (iii) the overallcreditworthiness of the customer base. A considerable amount of judgment isrequired in assessing the realizability of accounts receivables. Should any ofthe factors considered in determining the adequacy of the overall allowancechange, an adjustment to the provision for doubtful accounts receivable may benecessary.

*Inventory.  *Inventories arestated at the lower of cost or market, cost being determined on the first-in,first-out method. Inventories are written down if the estimated net realizablevalue is less than the recorded value. We review the carrying cost of ourinventories by product each quarter to determine the adequacy of our reservesfor obsolescence. In accounting for inventories we must make estimatesregarding the estimated net realizable value of our inventory. This estimate isbased, in part, on our forecasts of future sales and age of the inventory.

*Intangible Assets*.   We testintangible assets with indefinite lives for impairment on an annual basis ormore frequently if certain events occur. If the assets are considered to beimpaired, the impairment to be recognized will be measured by the amount inwhich the carrying amount exceeds the fair value of the assets. For ourintangible assets with finite lives, including our customer lists, existingtechnology, and patents, we amortize the costs of the assets over their usefullives and assess impairment at least annually or whenever events andcircumstances suggest the carrying value of an asset may not be recoverable.Determining the life of the assets with finite lives is judgmental in natureand involves the use of estimates and assumptions. These estimates and assumptionsinvolve a variety of factors, including future market growth and conditions,forecasted revenues and costs and a strategic review of our business andoperations. We base our fair value estimates on assumptions we believe to bereasonable but that are unpredictable and inherently uncertain. Actual futureresults may differ from those estimates. In the event we determine that anintangible asset is impaired in the future, an adjustment to the value of theasset would be charged to earnings in the period such determination is made.

*Existing Technology.  *Ourexisting technology is based on a patent issued in 1990, which continues to bethe main technology of MPI. It is a substrate deposition technology that ismature and with no replacement technology forecasted.

**AdditionalFactors That May Affect Future Results**

Future operatingresults may be impacted by a number of factors that could cause actual resultsto differ materially from those stated herein, which reflect management’scurrent expectations. These factors include:

·        industry-specificfactors (including the reliance upon growth of the defense microwave market,significant competition characterized by rapid technological change, newproduct development, product obsolescence, and significant price erosion overthe life of a product);

·        our ability to timelydevelop and produce commercially viable products at competitive prices;

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·        our ability to produceproducts which meet the quality standards of both existing and potential newcustomers;

·        our ability to accuratelyanticipate customer demand;

·        our ability to manageexpense levels, in light of varying revenue streams;

·        the availability and costof components;

·        the impact of worldwideeconomic and political conditions on our business; and

·        The ability to integratepotential future acquisitions into our existing operations.

We believe that, to the extent that foreign sales arerecognized, we may face increased risk associated with political and economicinstability, compliance with foreign regulatory rules governing exportrequirements, tariffs and other trade barriers, differences in intellectualproperty protections, longer accounts receivable cycles, currency fluctuationsand general trade restrictions. If any of these risks materialize, they couldhave a material adverse effect on our business, results of operations, andfinancial condition.

We have evaluated the credit exposure associated withconducting business with foreign customers and have concluded that such risk isacceptable. Nevertheless, any significant change in the economy or adeterioration in United States trade relations or the economic or politicalstability of foreign markets could have a material adverse effect on ourbusiness, results of operations, and financial condition.

Sales to foreign customers are invoiced in U.S.dollars. Accordingly, we currently do not engage in foreign currency hedgingtransactions. However, as we expand further into foreign markets, we mayexperience greater risk associated with general business, political andeconomic conditions in those markets. At such time, we may seek to lessen ourexposure through currency hedging transactions. We cannot assure you that acurrency hedging strategy would be successful in avoiding currency exchangerelated losses. In addition, should the relative value of the U.S. dollar incomparison to foreign currencies increase, the resulting increase in the priceof our products to foreign customers could result in decreased sales whichcould have a material adverse impact on our business, results of operations,and financial condition.

We experience significant price competition and expectprice competition in the sale of our products to remain intense. We cannotassure you that our competitors will not develop new technologies or enhancementsto existing products or introduce new products that will offer superior priceor performance features. We expect our competitors to offer new and existingproducts at prices necessary to gain or retain market share. Several of ourcompetitors have substantial financial resources, which may enable them towithstand sustained price competition or a downturn in the pricing of theirproducts in the future. Substantially all of our competitors have, andpotential future competitors could have, substantially greater technical,marketing, distribution and other resources than we do and have, or could have,greater name recognition and market acceptance of their products andtechnologies.

The markets in which we compete are characterized byrapidly changing technology and continuous improvements in products andservices. Our future success depends on our ability to enhance our currentproducts and to develop and introduce, in a timely manner, new products thatkeep pace with technological developments, that meet or exceed industrystandards, that compete effectively on the basis of price, performance andquality, that adequately address OEM customer and end-user customerrequirements, and that achieve market acceptance. We believe that to remaincompetitive in the future we will need to continue to develop new products,which will require the investment of significant financial resources in newproduct development. In the event our newly developed products are not timelydeveloped or do not gain market acceptance, our business, results of operationsand financial condition could be materially adversely affected.

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Our quarterly and annualresults have in the past been, and will continue to be, subject to significantfluctuations due to a number of factors, any of which could have a materialadverse effect on our business, financial condition and results of operations.There can be no assurance that we will not experience such fluctuations in thefuture. We establish our expenditure levels for product development and otheroperating expenses based on expected revenues, and expenses are relativelyfixed in the short term. As a result, variations in timing of revenues cancause significant variations in quarterly results of operations. There can beno assurances that we will be profitable on a quarter-to-quarter basis in thefuture. We believe that period-to-period comparisons of our financial resultsare not necessarily meaningful and should not be relied upon as an indicationof future performance. Due to these factors, it is likely that in some futurequarter or quarters our revenues or operating results will not meet theexpectations of public stock market analysts or investors. In such event, themarket price of our common stock would be materially adversely affected.

**FactorsAffecting Business, Operating Results and Financial Condition**

*An investment in our securities is very speculativeand involves a high degree of risk. You should carefully consider the followingrisk factors, along with the other matters referred to in this Annual Report,before you decide to buy our securities. If you decide to buy our securities,you should be able to afford a complete loss of your investment.*

**Risks Associated With Our Business**

***Mostof our sales are made to the defense industry. Our business and financialresults could be adversely affected if defense spending is curtailed, whichwould cause the value of your investment to decline.***

As a percentage of total revenues, our net sales toour two largest customers; Raytheon and Government of Israel Ministry ofDefense, during the fiscal year ended March 31, 2005 totaled approximately21.0%, accounting for $1.8 million of our revenues in fiscal 2005. Thesecustomers rely on the defense industry for orders and the defense industryrelies upon the United States and foreign governments for funding. Changes infunding may occur if there is a change in the current administration or thegovernment reduces defense spending. A decrease in business from the defenseindustry to our customers would have a material adverse effect on our resultsof operations and financial condition and the value of your investment.

There is a risk that sales from the wireless sector may notrepeat. Although we have seen an increase in the revenues generated from the cellularmarket in the fiscal year ended March 31, 2005, there are no assurancesthat such an increase indicates a trend or that we will be able to secure anyadditional orders in the future.

***Our market is subject to rapidtechnological change, and to compete effectively, we must continually introducenew products or enhancements that achieve market acceptance.***

The market for our products is characterized by rapidlychanging technology, frequent new product introductions, changes in customerrequirements, and evolving industry standards. We believe that we have beensuccessful to date in investing in research and development to meet these needsand delivering products before our competitors. We believe that our futuresuccess will depend upon continued development and timely introduction ofproducts capable of collecting or processing new types of telecommunicationssignals. However, we expect that new technologies will continue to emerge. Ourfuture performance will depend on the successful development, introduction, andmarket acceptance of new and enhanced products that address these changes aswell as current and potential customer requirements. The introduction of newand enhanced products may cause our customers to defer or cancel orders forexisting products. There can be no assurance that we will be able to developand market new 

20

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products successfully in the future or respond effectivelyto technological changes, or that new products introduced by others will notrender our products or technologies noncompetitive or obsolete.

We also may not be able to develop the underlying coretechnologies necessary to create new products and enhancements or to licensethese technologies from third parties. Product development delays may resultfrom numerous factors, including:

·        changing productspecifications and customer requirements;

·        difficulties in hiring andretaining necessary technical personnel;

·        difficulties in reallocatingengineering resources and overcoming resource limitations;

·        difficulties with contractmanufacturers;

·        changing market orcompetitive product requirements; and

·        unanticipated engineeringcomplexities.

The development of new, technologically advanced productsis a complex and uncertain process requiring high levels of innovation and highlyskilled engineering and development personnel, as well as the accurateanticipation of technological and market trends. We may not be able toidentify, develop, manufacture, market, or support new or enhanced productssuccessfully, if at all, or on a timely basis. Further, our new products maynot gain market acceptance or we may not be able to respond effectively toproduct announcements by competitors, technological changes, or emergingindustry standards. Any failure to respond to technological change wouldsignificantly harm our business.

***Our business, operating results and financial conditioncould be negatively impacted if demand for our products is less than weanticipate or if we fail to hire qualified employees. As a result, the value ofyour securities may decline.***

Our growth depends on our ability to successfully developand market our products. The development and marketing of our products isdependent on a number of factors, including our ability to:

·        recruit and maintain a baseof qualified engineers;

·        initiate, develop andsustain corporate and government relationships;

·        attract, hire, integrate andretain qualified sales and sales support employees; and

·        accurately assess thedemands of the market.

Demand forour products might be less than we anticipate, or we may not be successful inrecruiting and maintaining the personnel we need to develop and sell ourproducts. In either case, our business, operating results and financialcondition could be negatively impacted and the value of your securities maydecline.

Our primary competitors are Teledyne Defense, Miteq, andEndwave Defense Systems. These competitors are much larger than we are and havemore in the way of financial and other resources than we have. We have tried tocreate a niche market in the manufacturing of microwave integrated circuits foruse by the defense industry however we have no contractual agreement withcontractors that requires them purchase minimum quantities with whom we dobusiness and we cannot assure you that these contractors will continue orderingparts from us or that they will order at the same or greater levels than theyhave done in the past. If our customers severely reduced their orders or ceasedordering from us altogether, our business, results of operations and financialcondition, as well as the value of your securities, could be materiallyadversely affected.

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***Unexpected increases in the cost to develop or manufactureour products under fixed-price contracts may cause us to experienceunreimbursed cost overruns.***

A significant portion of our revenue is derived fromfixed-price contracts. Under fixed-price contracts, unexpected increases in thecost to develop or manufacture a product, whether due to inaccurate estimatesin the bidding process, unanticipated increases in materials costs,inefficiencies, or other factors, are borne by us. We have experienced costoverruns in the past that have resulted in losses on certain contracts, and mayexperience additional cost overruns in the future. Such cost overruns wouldincrease our operating expenses, reduce our net income and earnings per share,and have a materially adverse effect on our future results of operations andfinancial condition.

***Our future revenues are inherently unpredictable, ouroperating results are likely to fluctuate from period to period, and if we failto meet the expectations of securities analysts or investors, our stock pricecould decline significantly.***

Our quarterly and annual operating results have fluctuatedin the past and are likely to fluctuate significantly in the future due to avariety of factors, some of which are outside our control. Accordingly, webelieve that period-to-period comparisons of our results of operations are notmeaningful and should not be relied upon as indications of future performance. Someof the factors that could cause our quarterly or annual operating results tofluctuate include conditions inherent in government contracting and ourbusiness such as the timing of cost and expense recognition for contracts, theUnited States Government contracting and budget cycles, and contract closeouts.Because we base our operating expenses on anticipated revenue trends and a highpercentage of our expenses are fixed in the short term, any delay in generatingor recognizing forecasted revenues could significantly harm our business. Fluctuationsin quarterly results, competition, or announcements of extraordinary eventssuch as acquisitions or litigation may cause revenues to fall below theexpectations of securities analysts and investors. In this event, the tradingprice of our common stock would significantly decline. In addition, there canbe no assurance that an active trading market will be sustained for our commonstock. The stock market in recent years has experienced extreme price andvolume fluctuations that have particularly affected the market prices of manytechnology companies. These fluctuations, as well as general economic andmarket conditions may adversely affect the future market price of our commonstock.

***Wemay engage in future acquisitions that dilute our stockholders equity and causeus to use cash, incur debt, or assume contingent liabilities.***

We completed ouracquisition of Microwave Power, Inc. on June 18, 2004. As part of ourbusiness strategy, we expect to continue to review opportunities to buy otherbusinesses or technologies that would complement our current products, expandthe breadth of our markets or enhance our technical capabilities, or that mayotherwise offer growth opportunities. If we buy other businesses, products ortechnologies in the future, we could:

·        incur significantunplanned expenses and personnel costs;

·        issue stock, or assumestock option plans that would dilute our current stockholders’ percentageownership;

·        use cash, which may resultin a reduction of our liquidity;

·        incur debt; or

·        assume liabilities.

These purchasesalso involve numerous risks, including:

·        problems integrating thepurchased operations, technologies, personnel or products;

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·        unanticipated costs, litigationand other contingent liabilities;

·        diversion of management’sattention from our core business;

·        adverse effects onexisting business relationships with suppliers and customers;

·        risks associated withentering into markets in which we have no, or limited, prior experience;

·        unconsummatedtransactions; and

·        potential loss of our keyemployees or the key employees of an acquired organizations.

We may not be able tosuccessfully integrate any businesses, products, technologies or personnel thatwe might acquire, or to realize expected benefits of acquisitions that mayoccur in the future. If this occurs, our business and financial results may beadversely affected.

**Risks Associated With Ownership ofOur Securities**

***We have not paid cash dividends andit is unlikely that we will pay cash dividends in the foreseeable future.***

We plan to use all of our earnings, to the extent we haveearnings, to fund our operations. We do not plan to pay any cash dividends inthe foreseeable future. We cannot guarantee that we will, at any time, generatesufficient surplus cash that would be available for distribution as a dividendto the holders of our common stock. You should not expect to receive cashdividends on our common stock.

***We have the ability to issue additional shares of ourcommon stock without asking for shareholder approval, which could cause yourinvestment to be diluted.***

Our Articles of Incorporation currently authorize the Boardof Directors to issue up to 15,000,000 shares of common stock. The power of theBoard of Directors to issue shares of common stock or warrants or options topurchase shares of common stock is generally not subject to shareholderapproval. Accordingly, any additional issuance of our common stock may have theeffect of further diluting your investment.

***We may raise additional capitalthrough a securities offering that could dilute your ownership interest.***

We require substantial working capital to fund our business.If we raise additional funds through the issuance of equity, equity-related orconvertible debt securities, these securities may have rights, preferences orprivileges senior to those of the holders of our common stock. The issuance ofadditional common stock or securities convertible into common stock by ourmanagement will also have the effect of further diluting the proportionateequity interest and voting power of holders of our common stock.

***There is no active public marketfor our securities, so you may not be able to liquidate your securities if youneed money.***

Trading of our common stock is sporadic. It is not likelythat an active market for our common stock will develop or be sustained soon. Youmay not be able to liquidate our securities if you need money.

***We are subject to the Penny Stock Rules andthese rules may adversely affect trading in our common stock.***

Our common stock is a “low-priced”security under rules promulgated under the Securities Exchange Act of 1934.In accordance with these rules, broker-dealers participating in transactions inlow-priced securities must first deliver a risk disclosure document whichdescribes the risks associated with such stocks, the broker-dealer’s duties inselling the stock, the customer’s rights and remedies and certain market andother information. Furthermore, the broker-dealer must make a suitabilitydetermination approving the customer for low-priced stock transactions based onthe customer’s financial situation, 

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investmentexperience and objectives. Broker-dealers must also disclose these restrictionsin writing to the customer, obtain specific written consent from the customer,and provide monthly account statements to the customer. The effect of theserestrictions probably decreases the willingness of broker-dealers to make amarket in our common stock, decreases liquidity of our common stock andincreases transaction costs for sales and purchases of our common stock ascompared to other securities.

**Quantitativeand Qualitative Disclosures About Market Risk**

We have some risk exposure from interest rates beingunfavorable. At March 31, 2005, our line of credit facilities were theonly debt facilities subject to variable interest rates. We will monitor thelevel of risk by keeping variable rate exposures at acceptable levels.

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**ITEM 7. FINANCIAL STATEMENTS**

**INDEX TO FINANCIALSTATEMENTS**
|                                                                                                           | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Reports of Independent  Registered Public Accounting Firm                                                 |       | F-26     |       |
| Balance Sheet as of  March 31, 2005                                                                  |       | F-28     |       |
| Statements  of Operations for the years ended March 31, 2004 and March 31, 2005                 |       | F-29     |       |
| Statements  of Stockholders’ Equity for the years ended March 31, 2004 and  March 31, 2005 |       | F-30     |       |
| Statements  of Cash Flows for the years ended March 31, 2004 and March 31, 2005                 |       | F-31     |       |
| Notes to Financial Statements                                                                             |       | F-32     |       |

 

F-25

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Boardof Directors and Shareholders

AML Communications, Inc.Camarillo, CA

We have audited the accompanying balance sheet of AMLCommunications, Inc. as of March 31, 2005, and the related statementsof operations, shareholders’ equity, and cash flows for the year then ended.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

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

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of AML Communications, Inc. asof March 31, 2005, and the results of its operations and its cash flowsfor the year then ended in conformity with accounting principles generallyaccepted in the United States of America.
| /s/  KABANI & COMPANY, INC. |   |
|--------------------------------------|--------|
| KABANI & COMPANY, INC.      |

 

F-26

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of DirectorsAML Communications, Inc.Camarillo, California

We have audited the accompanying statements ofoperations, stockholders’ equity, and cash flows of AML Communications, Inc.for the year ended March 31, 2004. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provided a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the results of operations andcash flows of AML Communications, Inc. for the year ended March 31,2004 in conformity with U.S. generally accepted accounting principles.

Asdescribed in Note 2 to the financial statements, the Company changed its methodof inventory overhead allocation during the year ended March 31, 2004.
| /s/ Singer Lewak Greenbaum & Goldstein  LLP |   |
|------------------------------------------------------|--------|
| SINGER LEWAK GREENBAUM & GOLDSTEIN LLP      |   |

 

Los Angeles, CaliforniaJune 4, 2004

F-27

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**AML COMMUNICATIONS, INC.BALANCE SHEETAS OF MARCH 31, 2005**
| **ASSETS**                                                                                            |   |       |      |
|-------------------------------------------------------------------------------------------------------|--------|------------|-----------|
| Current Assets:                                                                                       |   |       |      |
| Cash and cash equivalents                                                                             |   | $          | 1,588,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $50,000                               |   | 1,275,000  |      |
| Inventories, net                                                                                      |   | 1,730,000  |      |
| Advances paid to suppliers                                                                            |   | 16,000     |      |
| Other current assets                                                                                  |   | 142,000    |      |
| Total current assets                                                                                  |   | 4,751,000  |      |
| Property and Equipment:                                                                               |   |       |      |
| Property and Equipment, at cost                                                                       |   | 3,780,000  |      |
| Less—Accumulated depreciation and amortization                                                   |   | (3,134,000 | )         |
| Property and Equipment, net                                                                           |   | 646,000    |      |
| Intangible assets, net                                                                                |   | 1,485,000  |      |
| Deposits                                                                                              |   | 26,000     |      |
| Total Assets                                                                                          |   | $          | 6,908,000 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                        |   |       |      |
| Current Liabilities:                                                                                  |   |       |      |
| Accounts payable                                                                                      |   | $          | 196,000   |   |
| Advances received from customers                                                                      |   | 52,000     |      |
| Line of credit, net                                                                                   |   | 80,000     |      |
| Current portion of capital lease obligations                                                          |   | 52,000     |      |
| Accrued expenses:                                                                                     |   |       |      |
| Accrued payroll and payroll related expenses                                                          |   | 377,000    |      |
| Accrued federal income taxes                                                                          |   | 18,000     |      |
| Other accrued expenses                                                                                |   | 192,000    |      |
| Total current liabilities                                                                             |   | 967,000    |      |
| Capital lease obligations, net of current portion                                                     |   | 1,000      |      |
| Stockholders’  Equity:                                                                           |   |       |      |
| Common stock, $.01 par value: 15,000,000 shares authorized;  shares issued and outstanding 10,057,116 |   | 101,000    |      |
| Capital in excess  of par value                                                                       |   | 13,386,000 |      |
| Accumulated  deficit                                                                                  |   | (7,547,000 | )         |
| Total stockholders’ equity                                                                       |   | 5,940,000  |      |
| Total Liabilities  and equity                                                                         |   | $          | 6,908,000 |   |

 

The accompanying notes are an integral part of these financial statements.

F-28

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**AML COMMUNICATIONS, INC.STATEMENTS OF OPERATIONSFOR THE YEARS ENDED MARCH 31, 2004 AND 2005**
| ** **                                                                                  | ** ** | **For the Year Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                  | ** ** | **March 31,  2004**              | ** ** | **March 31,  2005** | ** ** |
| Net sales                                                                                   |       | $                                     | 6,976,000  |   | $ | 8,650,000 |   |
| Cost of goods  sold                                                                         |       | 3,571,000                             |       | 4,766,000 |   |
| Gross profit                                                                                |       | 3,405,000                             |       | 3,884,000 |   |
| Operating  Expenses:                                                                        |       |                                  |       |   |   |
| Selling, general and administrative                                                         |       | 1,376,000                             |       | 2,069,000 |   |
| Research and development                                                                    |       | 723,000                               |       | 913,000 |   |
| Total operating expenses                                                                    |       | 2,099,000                             |       | 2,982,000 |   |
| Profit from operations                                                                      |       | 1,306,000                             |       | 902,000 |   |
| Other income  (expense):                                                                    |       |                                  |       |   |   |
| Interest income                                                                             |       | 1,000                                 |       | 30,000 |   |
| Interest expense                                                                            |       | (124,000                              | )          | (96,000 | ) |
| Other                                                                                       |       | 48,000                                |       | 27,000 |   |
| Total other (expense)                                                                       |       | (75,000                               | )          | (39,000 | ) |
| Profit before provision for income taxes                                                    |       | 1,231,000                             |       | 863,000 |   |
| Provision for  income taxes                                                                 |       | 98,000                                |       | (72,000 | ) |
| Net profit before  change in method of inventory overhead allocation                        |       | $                                     | 1,133,000  |   | $ | 935,000 |   |
| Cumulative effect  from change in method of inventory overhead allocation                   |       | 120,000                               |       | — |   |
| Net profit                                                                                  |       | $                                     | 1,013,000  |   | $ | 935,000 |   |
| Basic earnings  per common share before change in method of inventory overhead allocation   |       | $                                     | 0.14       |   | $ | 0.10 |   |
| Loss per common  share from change in method of inventory overhead allocation          |       | $                                     | (0.01      | ) | — |   |
| Net earnings available to common shareholders                                               |       | $                                     | 0.13       |   | $ | 0.10 |   |
| Basic weighted  average number of shares of common stock outstanding                        |       | 7,838,000                             |       | 9,130,000 |   |
| Diluted earnings  per common share before change in method of inventory overhead allocation |       | $                                     | 0.12       |   | $ | 0.08 |   |
| Loss per common  share from change in method of inventory overhead allocation          |       | $                                     | (0.01      | ) | — |   |
| Diluted earnings per common share                                                           |       | $                                     | 0.11       |   | $ | 0.08 |   |
| Diluted weighted average  number of shares of common stock outstanding                      |       | 9,362,000                             |       | 11,028,000 |   |

 

The accompanying notes are an integral part of these financial statements.

F-29

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**AML COMMUNICATIONS, INC.STATEMENTS OF STOCKHOLDERS’EQUITYFOR THE YEARS ENDED MARCH 31, 2004 AND 2005**
| ** **                                                     | ** ** | ** **            | ** ** | ** **                                  | ** ** | ** **              | ** ** | **Retained**    | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------|------------|-------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                     | ** ** | ** **            | ** ** | **  Capital in  ** | ** ** | ** **              | ** ** | **Earnings/**   | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Excess of**                          | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Shares**            | ** ** | **Amount**                                  | ** ** | **Par Value**      | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Totals** | ** ** |
| Balance, March 31, 2003                                   |       | 7,829,456             |       | $                                           | 73,000     |                    | $          | 10,301,000      |       |       | —     |   |   |   | — |   |   | $ | (9,494,000 | ) | 880,000 |   |
| Options Exercised                                              |       | 8,128                 |       | —                                      |       | 1,000                   |       |            | —     |       |       |   | — |   |   | — | ** ** | 1,000 |   |
| Value of Warrants issued in connection with notes payable |       | —                |       | —                                      |       | 36,000                  |       |            | —     |       |       |   | — |   |   | — | ** ** | 36,000 |   |
| Net Income                                                     |       | —                |       | —                                      |       | —                  |       |            | —     |       |       |   | — |   |   | 1,013,000 | ** ** | 1,013,000 |   |
| Balance, March 31, 2004                                   |       | 7,837,584             |       | $                                           | 73,000     |                    | $          | 10,338,000      |       |       | —     |   |   |   | — |   |   | $ | (8,481,000 | ) | 1,930,000 |   |
| Adjustments*                                                   |       |                  |       | 5,000                                       |       | (5,000                  | )          |            |       |       |       |   |   |   |   | (1,000 | ) | (1,000 | ) |
| Options Exercised                                              |       | 28,750                |       | 1,000                                       |       | 5,000                   |       |            | —     |       |       |   | — |   |   | — | ** ** | 6,000 |   |
| Warrants Exercised                                             |       | 52,500                |       | 1,000                                       |       | 12,000                  |       |            | —     |       |       |   | — |   |   | — | ** ** | 13,000 |   |
| Shares Issued in Connection with MPI Acquisition               |       | 2,138,282             |       | 21,000                                      |       | 3,036,000               |       |            | —     |       |       |   | — |   |   | — | ** ** | 3,057,000 |   |
| Net Income                                                     |       | —                |       | —                                      |       | —                  |       |            | —     |       |       |   | — |   | ** ** | 935,000 | ** ** | 935,000 |   |
| Balance,  March 31, 2005                                  |       | 10,057,116            |       | 101,000                                     |       | 13,386,000              |       |            | —     |       |       |   | — |   |   | $ | (7,547,000 | ) | 5,940,000 |   |

----

*                    Reclassificationfrom additional paid-in-capital to common stock at par value of $0.01 foroptions exercised in fiscal year ended March 31, 2002

The accompanying notes are an integral part of these financial statements.

F-30

----

**AML COMMUNICATIONS, INC.STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED MARCH 31, 2004 AND 2005**
| ** **                                                                                | ** ** | **For the Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                | ** ** | **March 31,  2004**              | ** ** | **March 31,  2005** | ** ** |
| Cash Flows from Operating Activities:                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net Profit                                                                                |       | $                                     | 1,133,000  |   | $ | 935,000 |   |
| Adjustments to reconcile net profit to net cash  provided by operating activities:        |       |                                  |       |   |   |
| Debt discount fees                                                                        |       | 13,000                                |       | 22,000 |   |
| Depreciation and  amortization                                                            |       | 251,000                               |       | 254,000 |   |
| Bad debt expense                                                                          |       | (2,000                                | )          | 16,000 |   |
| Loss (gain) from  cumulative effect of change in method of inventory overhead calculation |       | (120,000                              | )          |   |   |
| Loss (gain) on sale of  fixed assets                                                      |       | (48,000                               | )          | (2,000 | ) |
| Changes in assets and liabilities:                                                        |       |                                  |       |   |   |
| Decrease (increase) in:                                                                   |       |                                  |       |   |   |
| Accounts receivable                                                                       |       | (54,000                               | )          | (518,000 | ) |
| Inventories                                                                               |       | (56,000                               | )          | (121,000 | ) |
| Other current assets                                                                      |       | (1,000                                | )          | 11,000 |   |
| Other assets                                                                              |       | —                                |       | 184,000 |   |
| Increase (decrease) in:                                                                   |       |                                  |       |   |   |
| Accounts payable                                                                          |       | (212,000                              | )          | (296,000 | ) |
| Accrued state income  taxes                                                               |       | 98,000                                |       | (274,000 | ) |
| Accrued expenses                                                                          |       | (26,000                               | )          | 130,000 |   |
| Net cash provided by  operating activities                                                |       | $                                     | 976,000    |   | $ | 341,000 |   |
| Cash Flows from Investing Activities:                                                     |       |                                  |       |   |   |
| Purchases of property  and equipment                                                      |       | (23,000                               | )          | (464,000 | ) |
| Proceeds from the sale  of property and equipment                                         |       | 48,000                                |       | 40,000 |   |
| Cash received in the MPI  acquisition                                                     |       | —                                |       | 1,150,000 |   |
| Net cash provided by  investing activities                                                |       | $                                     | 25,000     |   | $ | 726,000 |   |
| Cash Flows from Financing Activities:                                                     |       |                                  |       |   |   |
| Proceeds from exercise  of stock options                                                  |       | 1,000                                 |       | 5,000 |   |
| Proceeds from exercise  of warrants                                                       |       | —                                |       | 13,000 |   |
| Proceeds from line of  credit, net                                                        |       | (402,000                              | )          | — |   |
| Proceeds (payments)  notes payable—related parties                                   |       | 245,000                               |       | (295,000 | ) |
| Proceeds (payments)  notes payable—investors                                         |       | 43,000                                |       | (43,000 | ) |
| Principal payments on  capital lease obligations, net                                     |       | (106,000                              | )          | (136,000 | ) |
| Net cash provided by  (used in) financing activities                                      |       | (219,000                              | )          | (456,000 | ) |
| Net increase in Cash and  Cash Equivalents                                                |       | 782,000                               |       | 611,000 |   |
| Cash and Cash  Equivalents, beginning of period                                           |       | 195,000                               |       | 977,000 |   |
| Cash and Cash  Equivalents, end of period                                                 |       | $                                     | 977,000    |   | $ | 1,588,000 |   |
| Supplemental disclosures of cash flow information:                                        |       |                                  |       |   |   |
| Cash paid during the period for:                                                          |       |                                  |       |   |   |
| Interest                                                                                  |       | $                                     | 124,000    |   | $ | 96,000 |   |
| Income Taxes                                                                              |       | —                                |       | $ | (72,000 | ) |
| Debt incurred to  purchase equipment                                                      |       | $                                     | 21,000     |   | — |   |
| Unamortized debt discount fees                                                            |       | $                                     | 22,000     |   | — |   |

 

The accompanying notes are an integral part of these financial statements.

F-31

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2005**

**1. Line of Business**

AML Communications, Inc.(the “Company”) is a designer, manufacturer, and marketer of amplifiers andrelated products that address the defense microwave and wireless communicationsmarkets. The Company currently conducts its operations through two reportablesegments: (1) amplifiers and related products that are designed,manufactured, and marketed by the Company, and (2) high power microwaveamplifiers that are designed, manufactured, and marketed through its division,Microwave Power, Inc.

**2. Summary of Significant Accounting Policies**

*Basis ofPresentation*

The accompanying financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States. However, certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been omitted or condensed pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”). In the opinion of management,all adjustments (consisting of normal recurring adjustments) necessary for afair presentation have been included.

*Concentration ofCash*

The Company considers allliquid investments with an original maturity of three months or less to be cashequivalents. As of March 31, 2005, the Company had cash and cashequivalent balances totaling $1,290,000 in financial institutions, which werein excess of federally insured amounts.

*Credit Risk*

The Company performs ongoing credit evaluations of itscustomers’ financial conditions and generally does not require collateral onaccounts receivable, therefore, the accounts receivable are unsecured and theCompany is at risk to the extent that such amounts become non-collectable.During fiscal 2005, the Company had sales to two customers that represented12.8% and 8.2% of net sales, respectively, as compared to fiscal 2004, in whichthe Company had sales to two customers, which represented 13.3% and 12.4% ofnet sales, respectively. As of March 31, 2005, these two customerscomprised 13.0% and 5.2%, of accounts receivable, respectively.

The Company’s customersare comprised primarily of defense sub contractors, cellular service providers,and original equipment manufacturers (“OEMs”). Customers are located primarilythroughout the United States. However, the Company also sells to customersworldwide. During the fiscal year ended March 31, 2005, internationalsales were $2.5 million, or 28.4% of net sales, as compared to internationalsales of $1 million, or 14.8% of net sales in fiscal year ended March 31,2004.

*Revenue Recognition*

We generate ourrevenue through the sale of products. Our policy is to recognize revenue whenthe applicable revenue recognition criteria have been met, which generallyinclude the following:

·        *Persuasive evidence of an arrangement exists;*

·        *Delivery has occurred or services have been rendered;*

F-32

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summaryof Significant Accounting Policies (Continued)**

·        *Price is fixed or determinable; and*

·        *Collectibility is reasonably assured*

Revenue from the sale of products is generallyrecognized after both the goods are shipped to the customer and acceptance hasbeen received, if required. Our products are custom made for our customers, whoprimarily consist of original engineer manufacturers (OEMs), and we do notaccept returns. Our products are shipped complete and ready to be incorporatedinto higher level assemblies by our customers. The terms of the customerarrangements generally pass title and risk of ownership to the customer at thetime of shipment.

Recording revenue from thesale of products involves the use of estimates and management judgment. We mustmake a determination at the time of sale whether the customer has the abilityto make payments in accordance with arrangements. While we do utilize pastpayment history, and, to the extent available for new customers, public creditinformation in making our assessment, the determination of whethercollectibility is reasonably assured is ultimately a judgment decision thatmust be made by management.

*Inventories andChange in Accounting Principle*

Inventories are stated at the lower of cost or market,cost being determined on the first-in, first-out method. Inventories arewritten down if the estimated net realizable value is less than the recordedvalue. We review the carrying cost of our inventories by product each quarterto determine the adequacy of our reserves for obsolescence. In accounting forinventories we must make estimates regarding the estimated net realizable valueof our inventory. This estimate is based, in part, on our forecasts of futuresales and age of the inventory.

Inventoriesinclude costs of materials, and manufacturing overhead on work in process andfinished goods, and consist of the following:
| ** **                     | ** ** | **March 31, 2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| Raw materials,  net of reserve |       |                         | $          | 1,043,000 |   |   |
| Work in process                |       |                         | 425,000    |   |   |
| Finished goods                 |       |                         | 262,000    |   |   |
|                           |       |                         | $          | 1,730,000 |   |   |

 

The reserve for inventory at March 31, 2005 was$516,000.

Management has reviewedthe accounting policies regarding the application of overhead to itsinventories and has ceased the application of overhead to its raw materials forthe fiscal year ended March 31, 2004. In connection with the change in themethod of inventory overhead allocation, the Company offset $275,000 of rawmaterials overhead relating to inventory balances at March 31, 2003,against inventory reserve during the year ended March 31, 2004. A total of$120,000 of this offset has been released to the statement of operations as of March 31,2004.

F-33

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summaryof Significant Accounting Policies (Continued)**

*Depreciation andAmortization*

Propertyand equipment are being depreciated and amortized on the straight-line basisover the following estimated useful lives:
| Machinery and  equipment |   | 3 to 5 years  |   |
|--------------------------|--------|---------------|--------|
| Furniture and  fixtures  |   | 5 years       |   |
| Leasehold improvements   |   | Life of lease |   |

 

Included in property and equipment is approximately$83,000 of equipment, which is leased under non-cancelable leases, andaccounted for as capital leases, which expire through January 2006. Theaccumulated depreciation included in the property and equipment for theseleases is approximately $63,000.

Depreciation expense for the years ended March 31,2005 and March 31, 2004 was $254,000 and $251,000 respectively. Includedin the accumulated depreciation is the depreciation for capital leases, whichamounted to $61,000 as of March 31, 2005.

The Company capitalizes expenditures that materiallyincrease asset lives and charges ordinary repairs and maintenance to operationsas incurred. When assets are sold or otherwise disposed of, the cost andrelated depreciation or amortization is removed from the accounts and anyresulting gain or loss is included in other income (expense) in theaccompanying statements of operations.

Propertyand equipment consist of the following:
| ** **               | ** ** | **March 31, 2005** | ** ** |
|--------------------------|------------|------------------------------|------------|
| Machinery and  equipment |       |                         | $          | 2,968,000 |   |   |
| Furniture and  fixtures  |       |                         | 147,000    |   |   |
| Leasehold  improvements  |       |                         | 665,000    |   |   |
|                     |       |                         | $          | 3,780,000 |   |   |

 

*Intangible Assets*

The Company accounts for its intangible assets underthe applicable guidelines of SFAS 142 “goodwill and other intangible assets”and SFAS 144 “accounting for the impairment or disposal of long lived assets”.Where intangible assets have finite lives, they are amortized over their usefullife unless factors exist to indicate that the asset has been impaired. TheCompany evaluates if the assets are impaired annually or on an interim basis ifan event occurs or circumstances change to suggest that the assets value hasdiminished. Under SFAS 144, when deemed necessary, the Company completes theevaluation of the recoverability of its long-lived assets by comparing thecarrying amount of the assets against the estimated undiscounted future cashflows associated with them. If such evaluations indicate that the futureundiscounted cash flows of long-lived assets are not sufficient to recover thecarrying value of such assets, the assets are adjusted to their estimated fairvalues. Under SFAS 142 intangible assets with indefinite useful lives arerequired to be tested annually for impairment or whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. If the assets are 

F-34

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summaryof Significant Accounting Policies (Continued)**

considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount exceeds the fair value of the assets. During the year ended March 31,2005, the Company recognized no impairment.

At March 31, 2005,intangibles consist of the following:
| **Intangibles**           | ** ** | ** ** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated   Amortization ** | ** ** | **Net** | ** ** |
|---------------------------|------------|------------|------------|-----------------------------|------------|-------------------------------------------|------------|---------|------------|
| Amortized intangibles:    |       |       |       |                        |       |                                      |       |    |       |
| Patents                   |       | $          | 189,000    |                        |       | $                                         | (20,000    | )       |       | $ | 169,000 |   |
| Existing Technology       |       | 961,000    |       |                        | (71,000    | )                                         |       | 890,000 |       |
| Customer List             |       | 339,000    |       |                        | (94,000    | )                                         |       | 245,000 |       |
| Unamortized  intangibles: |       |       |       |                        |       |                                      |       |    |       |
| Trademarks                |       | 181,000    |       |                        | —     |                                      |       | 181,000 |       |
|                      |       | $          | 1,670,000  |                        |       | $                                         | (185,000   | )       |       | $ | 1,485,000 |   |

 

The Company assigned an 8 year life to patents, a 12year life to Existing Technology, and a 3 year life to Customer Lists. All aresubject to amortization. Trademarks were assigned as having an indefinite life.

Amortizationexpense from continuing operation for the year ended March 31, 2005 was$185,000. The Company expects the amortization expenses for the next five years to beas follows:
| **Year Ending March 31,** | ** ** | ** ** | ** ** | **Annual Amount** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------|------------|
| 2006                                     |       |       | $          | 216,000                |       |   |
| 2007                                     |       |       | $          | 216,000                |       |   |
| 2008                                     |       |       | $          | 122,000                |       |   |
| 2009                                     |       |       | $          | 103,000                |       |   |
| 2010                                     |       |       | $          | 103,000                |       |   |

 

*Warranty andCustomer Support*

The Company typicallywarrants its products against defects in materials and workmanship for a periodof one year from the date of shipment. A provision for estimated futurewarranty and customer support is recorded when products are shipped. To date,warranty and customer support costs have not been material.

*Earnings Per Share*

Statement of Financial Accounting Standards No. 128,“Earnings per share” requires the presentation of basic earnings per share anddiluted earnings per share. Basic and diluted earnings per share computationsare presented by the Company conform to the standard and are based on theweighted average number of shares of Common Stock outstanding during the year.

Basic earnings per share is computed by dividing netincome or loss by the weighted average number of shares outstanding for theyear. “Diluted” earnings per share is computed by dividing net income or loss 

F-35

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summaryof Significant Accounting Policies (Continued)**

by the total of theweighted average number of shares outstanding, and the dilutive effect ofoutstanding stock options (applying the treasury stock method).

The Company had 1,898,000 of granted stock options andwarrants that were exercisable as of March 31, 2005 and 1,524,000 ofgranted stock options and warrants exercisable at March 31, 2004.

The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per share computations:
| **Year ended March 31, 2005** | ** ** | ** ** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                       |       |       |       |                |       |       |       |               |       |
| Net income available to common stockholders       |       | $          | 935,000    |                | 9,130,000  |       |       | $                  | 0.10       |   |   |
| Effect of  dilutive securities:                   |       |       |       |                |       |       |       |               |       |
| Stock options                                     |       |       |       | 1,635,000           |       |       |       |               |       |
| Warrants                                          |       |       |       | 263,000             |       |       |       |               |       |
| Diluted earnings  per share:                      |       | $          | 935,000    |                | 11,028,000 |       |       | $                  | 0.08       |   |   |

 
| **Year ended March 31, 2004**                                                              | ** ** | ** ** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings per  shares:                                                                                    |       |       |       |                |       |       |       |               |       |
| Net income available to common stockholders before  change in method of inventory overhead allocation          |       | $          | 1,133,000  |                | —     |       |       | $                  | 0.14       |   |   |
| Loss per common share from change in method of  inventory overhead allocation                                  |       | (120,000   | )          | —              |       |       | $          | (0.01              | )          |   |
| Net income available to common shareholders                                                                    |       | $          | 1,013,000  |                | 7,838,000  |       |       | $                  | 0.13       |   |   |
| Effect of dilutive  securities:                                                                                |       |       |       |                |       |       |       |               |       |
| Stock options and Warrants                                                                                     |       | —     |       | 1,524,000           |       |       | —     |               |       |
| Diluted income available to common stockholders  before change in method of inventory overhead allocation |       | $          | 1,133,000  |                | —     |       |       | $                  | 0.12       |   |   |
| Loss per common share from change in method of inventory  overhead allocation                                  |       | (120,000   | )          | —              |       |       | $          | (0.01              | )          |   |
| Net income available to common shareholders                                                                    |       | $          | 1,013,000  |                | 9,362,000  |       |       | $                  | 0.11       |   |   |
| Diluted earnings per  share:                                                                                   |       | $          | 1,013,000  |                | 9,362,000  |       |       | $                  | 0.11       |   |   |

 

*Segments*

The Company has two reportable segments consisting of(1) AML Communications, Inc. (“AML”) and (2) the MicrowavePower, Inc. (“MPI”). Our AML segment designs, manufactures, and marketsamplifiers and related products that address the defense microwave and wirelesscommunications markets. These products are manufactured and sold throughoperations in Camarillo, California. Our MPI segment designs, manufactures, andmarkets high power microwave amplifiers. These products are manufactured andsold through operations in Santa Clara, California. The Company evaluatesperformance based on sales, gross profit margins and operating profit beforeincome taxes.

F-36

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summary of Significant Accounting Policies**(Continued)

The following isinformation for the Company’s reportable segments for the year ended March 31,2005:

**For the year ended March 31,2005:**
| ** **                                                   | ** ** | **AML**                              | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|---------|------------|-----------------|------------|-----------|------------|
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
| Revenue                                                      |       | $                                    | 7,364      |    | $          | 1,286           |       |      | —     |   |   | $ | 8,650 |   |
| Gross Profit                                                 |       | 3,041                                |       | 843     |       |            | —     |      |       | 3,884 |   |
| Depreciation & amortization (includes  intangibles) |       | 231                                  |       | 208     |       |            | —     |      |       | 439 |   |
| Interest expense                                             |       | 96                                   |       | —  |       |            | —     |      |       | 96 |   |
| Other, net                                                   |       | 2,240                                |       | 174     |       |            | —     |      |       | 2,414 |   |
| Profit from continuing operations before tax                 |       | $                                    | 402        |    | $          | 461             |       |      | —     |   |   | $ | 863 |   |
| Identifiable assets                                          |       | 3,196                                |       | 3,712   |       |            | —     |      |       | 6,908 |   |
| Capital  Expenditures                                        |       | 437                                  |       | 27      |       |            | —     |      |       | 464 |   |

 

The Company had onereportable segment for the year ended March 31, 2004.

*Use of Estimate inPreparation of Financial Statements*

The preparation offinancial statements, in conformity with generally accepted accountingprinciples, requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

*Product Lines*

The Company operates astwo reportable business segments. The AML segment designs and manufactures RFand microwave, power and low noise, medium and high power amplifiers for avariety of frequency ranges and transmission protocols serving the DefenseMicrowave, Commercial Microwave, and Wireless Communications Markets. The MPIsegment manufactures solid state microwave amplifiers. This proprietarytechnology is especially designed for broadband and high power. Some typicalapplications

F-37

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2. Summary of Significant AccountingPolicies (Continued)**

includetelecommunications, radar, simulators, transmitters and test instrumentation.The revenues earned by each product line are as follows:

**For the Fiscal Year Ended March 31, 2005:**
| ** **                   | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                     |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Defense microwave  and other |       | $                                    | 6,615      |       | 76.5       | %       | $          | 1,286      |       | 14.8      | %          | $          | 7,901      |   | 91.3 | % |
| PCS and two-way  messaging   |       | 5                                    |       | .1         |       | —  |       | —     |       | 5         |       | .1         |       |
| Cellular and  other          |       | 744                                  |       | 8.6        |       | —  |       | —     |       | 744       |       | 8.6        |       |
| Total net sales              |       | $                                    | 7,364      |       | 85.2       | %       | $          | 1,286      |       | 14.8      | %          | $          | 8,650      |   | 100.0 | % |

 

**Forthe Fiscal Year Ended March 31, 2004:**
| ** **                   | ** ** | **AML**                          | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                   | ** ** | **(Dollars in  thousands)** | ** ** | ** ** | ** ** |
| Revenues                     |       |                             |       |       |       |   |   |
| Defense microwave  and other |       |                             | $          | 6,333      |       |   | 90.8 | % |
| PCS and two-way  messaging   |       |                             | 8          |       |       | 0.1 |   |
| Cellular and  other          |       |                             | 635        |       |       | 9.1 |   |
| Total net sales              |       |                             | $          | 6,976      |       |   | 100.0 | % |

 

The Company had onereportable segment in the fiscal year ended March 31, 2004.

*Research and Development Costs*

Research and developmentcosts for fiscal 2005 were $913,000, or 10.6% of net sales, compared to$723,000, or 10.4% of net sales, for the corresponding period in fiscal 2004.Of the increase, $62,000 is attributed our MPI segment’s engineering costs.Research and development costs are charged to expense as incurred.

*Fair Value of Financial Instruments*

The Company measures itsfinancial assets and liabilities in accordance with generally acceptedaccounting principles. For certain of the Company’s financial instruments,including cash and cash equivalents, accounts receivable, notes payable—relatedparties, accounts payable, and accrued expenses, the carrying amountsapproximate fair value due to their short maturities. The amount shown forshort-term loans also approximates fair value because current interest ratesoffered to the Company for short-term loans of similar maturities aresubstantially the same or the difference is immaterial.

*Stock-Based Compensation*

In December 2002, theFASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”),“Accounting for Stock-Based Compensation-Transition and Disclosure”. ThisStatement 

F-38

----

**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2.Summary of Significant Accounting Policies (Continued)**

amendsSFAS 123, “Accounting for Stock-Based Compensation”, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, SFAS 148 amendsthe disclosure requirements of Statement 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results.

Thefollowing table presents pro forma disclosures required by SFAS No. 148 ofnet income (loss) and basic and diluted earnings (loss) per share as ifstock-based employee compensation had been recognized during the year ended March 31,2005. The compensation expense for these periods has been determined under thefair value method using the Black-Scholes pricing model, and assumes gradedvesting.
| **For the year ended ended:**                   | ** ** | ** ** | ** ** | **March 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|
| Net  income as reported                                             |       | $          | 1,013,000  |                     | $          | 935,000                  |       |
| Less:  stock-based compensation expense, net of related tax effects |       | (109,000   | )          | (71,000                  | )          |
| Pro  forma net income                                               |       | $          | 904,000    |                     | $          | 864,000                  |       |
| Basic  earnings per share—as reported                          |       | $          | 0.13       |                     | $          | 0.10                     |       |
| Diluted  earnings per share—as reported                        |       | $          | 0.11       |                     | $          | 0.08                     |       |
| Basic  earnings per share—pro forma                            |       | $          | 0.12       |                     | $          | 0.09                     |       |
| Diluted earnings per share—pro  forma                          |       | $          | 0.10       |                     | $          | 0.07                     |       |

 

The assumptions used in calculating thefair value of options granted using the Black-Scholes option-pricing model areas follows:
| Risk-free interest rate      |   | 6.0        | %      |
|------------------------------|--------|------------|--------|
| Expected life of the options |   | 4.55 years |   |
| Expected volatility          |   | 117.42     | %      |
| Expected dividend yield      |   | —     |   |

 

In December 2004, the FASB issued FASB Statement No. 123R,“Share-Based Payment, an Amendment of FASB Statement No. 123” (“FAS No. 123R”).FAS No. 123R requires companies to recognize in the statement ofoperations the grant date fair value of stock options and other equity-basedcompensation issued to employees. FAS No. 123R is effective beginning inthe Company’s fourth quarter of fiscal 2006. The Company is evaluating theimpact of the adoption of this standard on its financial statements.

*Advertising Costs*

The Company expensesadvertising costs as incurred. Advertising costs for the years ended March 31,2005 and 2004 were $60,000 and $28,000, respectively.

*Recently Issued Accounting Pronouncements*

In April 2003, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandard (SFAS) No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging 

F-39

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**2.Summary of Significant Accounting Policies (Continued)**

Activities. The Statementfurther clarifies accounting for derivative instruments. The company believesthe adoption of this Statement will have no material impact on its financialstatements.

In May 2003, the FASB issued Statement of FinancialAccounting Standards No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” (“SFAS 150”).SFAS 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Many ofthose instruments were previously classified as equity. SFAS 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003. We do not believe the adoption ofSFAS 150 will have a material impact on our consolidated financialstatements.

In December 2004,the FASB issued SFAS Statement No. 153, “Exchanges of Non-monetary Assets.”The Statement is an amendment of APB Opinion No. 29 to eliminate theexception for non-monetary exchanges of similar productive assets and replacesit with a general exception for exchanges of non-monetary assets that do nothave commercial substance. The Company will evaluate the impact of thisstandard on its financial statements.

In March 2004, the Emerging Issues Task Force (“EITF”)reached a consensus on Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments.”The EITF reached a consensus about the criteria that should be used todetermine when an investment is considered impaired, whether that impairment isother-than-temporary, and the measurement of an impairment loss and how thatcriteria should be applied to investments accounted for under SFAS No. 115,“ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.” EITF 03-01also included accounting considerations subsequent to the recognition ofother-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. Additionally, EITF 03-01 includes new disclosure requirements forinvestments that are deemed to be temporarily impaired. In September 2004,the Financial Accounting Standards Board (FASB) delayed the accountingprovisions of EITF 03-01; however the disclosure requirements remain effectivefor annual reports ending after June 15, 2004. The Company will evaluatethe impact of EITF 03-01 once final guidance is issued.

**3. Debt and Lease Commitments**

*Accounts ReceivableFinancing*

At March 31, 2005, wehad a line of credit agreement with Bridge Bank with credit limit of$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. At March 31,2005 we had an outstanding balance of $80,000 under this agreement. Our abilityto borrow under this agreement varies based upon eligible accounts receivableand eligible equipment purchases. We are obligated to pay the bank a financecharge at a rate per year equal to the prime rate, which in no event shall beless than 4.00%, plus 2.0% with respect to cash advances and a rate of suchprime rate plus 3.5% with respect to equipment advances. We must maintaincertain financial requirements, including net profit after tax, on a quarterlybasis, of at least $0.01, and a debt service 

F-40

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**3. Debtand Lease Commitments (Continued)**

coverage ratio of at least 1.25 to 1.00 with respectto equipment advances. We were in compliance with these requirements at March 31,2005; however, there is no assurance that we will be in compliance at futuredates. This agreement terminates on July 7, 2005 or upon a date that thebank chooses to terminate the agreement. Any unpaid balance is due and payablepursuant to the agreement on the termination date. If the agreement isterminated within the first 12 months following its execution on July 6,2004, we generally are required to pay a $15,000 fee to the bank. At March 31,2005, our remaining borrowing capacity was approximately $501,000 availableunder the accounts receivable agreement and $500,000 available under theequipment financing agreement.

*Capital andOperating Lease Obligations*

The Company leases its office space, manufacturingfacility and certain equipment under long-term operating leases expiring atvarious dates from June 2006 through April 2008. Total rent expenseunder these operating leases was approximately $244,000 and $146,000 during theyears ended March 31, 2005 and 2004, respectively. Included in propertyand equipment is approximately $110,000 of equipment, which is leased undernon-cancelable leases, accounted for as capital leases, which expire through January 2006.The effective interest rate for these leases range from 8.6% to 15.0%. Theaccumulated depreciation under capital leases amounted to $61,000 as of March 31,2005.

Totalminimum lease payments under the above leases are as follows:
| ** **                               | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------------|------------|-----------|------------|
| Year ending  March 31,              |       |                    |       |                      |       |      |       |   |   |   |   |
| 2006                                     |       |                    | 52,000     |                      |       |      | 242,000    |   |   | 294,000 |   |
| 2007                                     |       |                    | 1,000      |                      |       |      | 208,000    |   |   | 209,000 |   |
| 2008                                     |       |                    | —     |                      |       |      | 198,000    |   |   | 198,000 |   |
| 2009                                     |       |                    | —     |                      |       |      | 17,000     |   |   | 17,000 |   |
| 2010                                     |       |                    | —     |                      |       |      | —     |   |   |   |   |
| Thereafter                               |       |                    | —     |                      |       |      | —     |   |   | — |   |
|                                     |       |                    | $          | 53,000                    |       |      |       | $ | 665,000 |   |   | $ | 718,000 |   |
| Less—Amount  representing interest  |       |                    | —     |                      |       |      |       |   |   |   |   |
| Present value of  minimum lease payments |       |                    | $          | 53,000                    |       |      |       |   |   |   |   |   |
| Less—Current  portion               |       |                    | (52,000    | )                         |       |      |       |   |   |   |   |
|                                     |       |                    | $          | 1,000                     |       |      |       |   |   |   |   |   |
|                                     |       |                    |       |                      |       |      |       |   |   |   |   |
|                                          |            |                         |            |                           |            |           |            |  |  |  |  |  |  |  |

 

**4.Income Taxes**

The Company accounts for income taxes under theprovisions of Statement of Financial Accounting Standards No. 109 (“SFAS 109”).Under SFAS 109, deferred income tax assets or liabilities are computedbased on the temporary difference between the financial statement and incometax bases of assets and liabilities using the currently enacted marginal incometax rate. Deferred income tax expenses or credits are based on the changes inthe deferred income tax assets or liabilities from period to period.

F-41

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**4.Income Taxes** (Continued)

Thecomponents of the income tax provision for the years ended March 31, 2004and 2005, were as follows:
| ** **                     | ** ** | **March 31, 2004** | ** ** | **March 31, 2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Current                        |       |                         | $          | 98,000                       |       |   |   | $ | (72,000 | ) |   |
| Deferred                       |       |                         | —     |                         |       |   | 325,000 |   |   |
| Change in  Valuation Allowance |       |                         |       |                         |       |   | (325,000 | ) |   |
|                           |       |                         | $          | 98,000                       |       |   |   | $ | (72,000 | ) |   |

 

Differencesbetween the benefit from income taxes and income taxes at the statutory federalincome tax rate for years ended March 31, 2004 and 2005 are asfollows:  
| ** **                                              | ** ** | **March 31, 2004** | ** ** | **March 31, 2005** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **Amount**                   | ** ** | **Percent**                  | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Income tax  expense (benefit) at statutory federal rate |       | $                            | 378,000    |                         |       | 34.0 | % |   | $ | 278,000 |   |   | 34.0 | % |   |
| State income  taxes, net of federal income tax          |       | 98,000                       |       |                         | 8.0        |   |   | (97,000 | ) |   | (11.8 | ) |   |
| Effect of  permanent differences                        |       | 2,000                        |       |                         | 0.2        |   |   | 64,000 |   |   | 7.8 |   |   |
| Change in  valuation allowance                          |       | (380,000                     | )          |                         | (34.2      | ) |   | (325,000 | ) |   | (39.7 | ) |   |
| Other                                                   |       | —                       |       |                         | —     |   |   | 8,000 |   |   | 0.9 |   |   |
|                                                    |       | $                            | 98,000     |                         |       | 8.0 | % |   | $ | (72,000 | ) |   | (8.8 | )% |   |

 

Under SFAS 109, deferred tax assets may berecognized for temporary differences that will result in deductible amounts infuture periods and for loss carry forwards. A valuation allowance is recognizedif, based on the weight of available evidence, it is more likely than not thatsome portion or all of the deferred tax asset will not be realized.

A detail of the Company’sdeferred tax assets and liabilities as of March 31, 2005 follows:
| **Deferred Tax Assets and liabilities** | ** ** | ** ** | ** ** | **Balance** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------|------------|
| Inventory  reserves                                         |       | $          | 137,000    |        |
| Allowance for  doubtful accounts                            |       | 20,000     |       |
| Accrued vacation                                            |       | 64,000     |       |
| Accrued warranty  and customer support                      |       | 8,000      |       |
| Other                                                       |       | (35,000    | )          |
| General tax  credit carry-forwards                          |       | 1,374,000  |       |
| Net operating  loss carry-forwards                          |       | 3,242,000  |       |
| Depreciation                                                |       | (135,000   | )          |
|                                                        |       | 4,675,000  |       |
| Valuation  allowance                                        |       | (4,675,000 | )          |
| Total                                                       |       | $          | —     |        |

 

As of March 31, 2005,the Company had federal net operating loss carry-forwards ofapproximately $10 million, expiring at various dates through 2024.

F-42

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**5. Stockholders’ Equity**

*Stock Option Plan*

TheCompany’s Stock Incentive Plan provides for the granting of non-qualified andincentive stock options to purchase up to 3,000,000 shares of common stock forperiods not to exceed 10 years. Options typically vest 25% after one yearfrom the date of grant with remaining options vesting at a rate of 25% per yearthereafter. Options may be granted to employees, officers, directors andconsultants. Activity under this plan is as follows(1):
| ** **                          | ** ** | **Number ofShares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| Outstanding at  March 31, 2003 |       | 1,866,497                |       |                                           | $          | 1.83 |   |   |
| Granted                             |       | 210,300                  |       |                                           | 0.59       |   |   |
| Exercised                           |       | (8,125                   | )          |                                           | .20        |   |   |
| Canceled                            |       | (205,059                 | )          |                                           | 1.02       |   |   |
| Outstanding at  March 31, 2004 |       | 1,863,613                |       |                                           | $          | 1.79 |   |   |
| Granted                             |       | 192,000                  |       |                                           | 1.38       |   |   |
| Exercised                           |       | (28,750                  | )          |                                           | .18        |   |   |
| Canceled                            |       | (38,125                  | )          |                                           | .87        |   |   |
| Outstanding at  March 31, 2005 |       | 1,988,738                |       |                                           | $          | 1.00 |   |   |
| Exercisable at  March 31, 2005 |       | 1,634,000                |       |                                           | $          | 1.01 |   |   |

 

The weighted average fair value for options grantedduring each year was $0.96 and $0.53 for fiscal 2005 and fiscal 2004,respectively.

The number of common stock options available for grantas of each year was 254,136 for fiscal 2005 and 408,010 for fiscal 2004.

Optionsoutstanding at March 31, 2005 and related weighted average price and lifeinformation is as follows:
| **Range of Exercise Prices** | ** ** | ** ** | ** ** | **Total  Options  Outstanding** | ** ** | **Weighted Average  Remaining Life (Years)** | ** ** | **Total  Weighted  Average  Exercise Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|---------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| $0.11 – $  0.50              |       | 344,750    |       |                            | 7.92       |                                                        |       |                                              | $          | 0.15                     |       |                                       | 270,500    |   |   | $ | 0.15 |   |   |
| $0.51 – $  1.00              |       | 1,320,375  |       |                            | 6.67       |                                                        |       |                                              | $          | 0.90                     |       |                                       | 1,216,843  |   |   | $ | 0.91 |   |   |
| $1.01 – $  2.00              |       | 237,925    |       |                            | 7.79       |                                                        |       |                                              | $          | 1.45                     |       |                                       | 51,700     |   |   | $ | 1.69 |   |   |
| $2.01 – $  5.00              |       | 47,250     |       |                            | 4.75       |                                                        |       |                                              | $          | 3.24                     |       |                                       | 47,250     |   |   | $ | 3.24 |   |   |
| $5.01 – $15.75                         |       | 48,438     |       |                            | 1.63       |                                                        |       |                                              | $          | 9.69                     |       |                                       | 48,438     |   |   | $ | 9.69 |   |   |
| $0.11 – $15.75                         |       | 1,988,738  |       |                            | 6.68       |                                                        |       |                                              | $          | 1.11                     |       |                                       | 1,634,731  |   |   | $ | 1.14 |   |   |

 

**GRANTED**

For purposes of computing the pro forma disclosuresrequired by SFAS No. 123, the fair value of each option granted toemployees and directors is estimated using the Black-Scholes option-pricingmodel with the following weighted-average assumptions for the years endedMarch 31, 2005 and 2004: dividend yields 

F-43

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**5.Stockholders’ Equity (Continued)**

of 0% and 0%,respectively; expected volatility of 99% and 160%, respectively; risk-freeinterest rates of 4.42% and 2.9%, respectively; and expected lives of 4.55 and4.83, respectively. The weighted-average fair value of options grantedduring the year ended March 31, 2005 for which the exercise price equalsthe market price on the grant date was $1.00, and the weighted-averageexercise price was $1.40.

The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fully transferable.In addition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because the Company’semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

*Warrants*

In connection with the renewal of the Company’saccounts receivable financing facility through Silicon Valley Bank in November 2000,the Company sold Silicon Valley Bank warrants to purchase an aggregate of27,429 shares of the Company’s common stock at $2.1875 per common share andrecorded a charge of $59,000 for the year ended March 31, 2001. Thesewarrants expire in November 2007, and as of March 31, 2005, none ofthe shares related to these warrants have been exercised.

In connection with the March 2001 privateplacement of $500,000 by a group of investors led by Jacob Inbar, we issuedwarrants to the non-employee investors to purchase a total of 40,000 shares ofour common stock at a price of $1.125. We did not record a charge in connectionto these warrants as the charge is considered to be immaterial to the financialstatements. These warrants expire in March 2006, and as of March 31,2005, none of the shares related to this warrant have been exercised.

In connection with the September 2001 privateplacement of $100,000 by a group of investors led by Jacob Inbar, we issuedwarrants to the non-employee investors to purchase a total of 8,000 shares ofour common stock at a price of $0.65. We did not record a charge in connectionto these warrants as the charge is considered to be immaterial to the financialstatements. These warrants expire in September 2006 and as of March 31,2005, none of the shares related to this warrant have been exercised.

In July 2003, weraised $245,000 ($100,000 of which was a conversion from an advance received inJune 2003) from current officers and directors and $43,000 from otherinvestors in the form of notes payable with warrants attached. The funds wereused for working capital. The promissory notes bear interest at the rate of 8%and have a two-year maturity. Warrants to purchase a total of 240,000 shares ofour common stock were issued in connection with the funding. The per shareexercise price of the warrants is $0.24. The warrants expire five years fromthe date of issuance. We have valued these warrants at $35,000 and areexpensing this value over the term of the notes payable. For fiscal year ended March 31,2005, a total of $22,000 was charged to the consolidated statement ofoperations. On November 2, 2004, theBoard of Directors approved the early payoff of these notes payable and thesenotes were paid in full on November 9, 2004. As of March 31, 2005,52,500 shares related to these warrants have been exercised.

F-44

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**7. Employee Benefit Plan**

The Company has a definedcontribution 401(k) employee retirement plan (the “Plan”). Under the termsof this Safe Harbor Plan, (covering the period of 4/1/05 to 3/31/06) theQualified Matching Contribution is defined as follows: The matchingcontribution of 100% of salary deferral contributions up to 3% of pay, plus 50%of salary deferral contributions from 3% to 5% of pay for the plan year, fiscalyear ended March 31, 2006. The pay may be restricted to the annual paylimit announced by the IRS*. (* This limit will be adjusted to reflect anyannual cost-of living increases announced by the IRS.) All eligible employeesmay participate in this plan. After meeting the three-month minimum ofemployment with the Company, employees become eligible and may choose to enrollat the next quarterly open enrollment.

**8. Legal Proceedings**

The Company may besubject, from time to time, to various legal proceedings relating to claimsarising out of its operations in the ordinary course of its business. TheCompany currently is not party to any legal proceedings, the adverse outcome ofwhich, individually or in the aggregate, management believes would have amaterial adverse effect on the business, financial condition or results ofoperations of the Company.

**9. Related Party Transactions**

In December 2001, we received a loan of $50,000from Dr. Tiberiu Mazilu, PhD, our officer and director. Thepromissory note calls for quarterly interest payments to Dr. Mazilucommencing on September 30, 2002, with the interest payment calculatedquarterly and based on the prime interest rate plus 1.25%. The principal amountof the note is due on January 2, 2005 but would become due and payable byus immediately upon the consolidation or merger of our Company into anotherentity, the death of Dr. Mazilu, or our termination of Dr. Mazilu’semployment with us. On November 2, 2004, the Board of Directors approvedthe early payoff of this note payable and the note was paid in full on November 9,2004.

In July 2003, weraised $245,000 ($100,000 of which was a conversion from an advance received inJune 2003) from current officers and directors and $43,000 from otherinvestors in the form of notes payable with warrants attached. The funds wereused for working capital. The promissory notes bear interest at the rate of 8%and have a two-year maturity. Warrants to purchase a total of 240,000 shares ofour common stock were issued in connection with the funding. The per shareexercise price of the warrants is $0.24. The warrants expire five years fromthe date of issuance. We have valued these warrants at $35,000 and are expensingthis value over the term of the notes payable. For the year ended March 31,2005, a total of $22,000 was charged to the consolidated statement ofoperations. On November 2, 2004, theBoard of Directors approved the early payoff of these notes payable and thesenotes were paid in full on November 9, 2004.

**10. Acquisition of Microwave Power, Inc.**

On May 25, 2004, the Company signed a definitiveagreement for the acquisition of Microwave Power, Inc. (“MPI”), which wascompleted on June 18, 2004. MPI was merged into the Company’s wholly ownedsubsidiary, with the subsidiary as the surviving entity. The totalconsideration for the acquisition was 

F-45

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**AML COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (Continued) March 31, 2005**

**10.Acquisition of Microwave Power, Inc. (Continued)**

$3,028,000. Pursuant tothe acquisition agreement, 2,117,108 shares as consideration for theacquisition and 21,174 shares to be issued to the broker were committed, orauthorized for issuance by our board of directors, as of June 18, 2004.The difference between the amount of “net assets acquired” and the purchaseprice consists of approximately $145,000 in transactional costs andapproximately $30,000 (21,174 shares at $1.43 per share) worth of shares of thecommon stock issued to the broker. Transactional costs include legal,accounting, and appraisal fees. There was no change in MPI’s management and theCompany entered into employment agreements with two of MPI’s senior officers,its past President and Secretary. MPI will continue to operate as the Company’sdivision from its facility in Santa Clara, which is owned by MPI’s priorshareholders and leased to the Company.

The Microwave Power, Inc.(MPI) acquisition was driven by a number of key factors, including:

1.)           MPI’s semi-monolithic,gold filled via’s, air bridge and microwave-monolithic-ceramic (MMCC)technology provide access to processes that the Company believes arecomplimentary and additive to those available to AML prior to the acquisition.

2.)           MPI’s product baseaddresses higher power and higher frequency sectors of the microwave market. Thisacquisition is intended to strengthen the Company’s product offerings to thismarket by adding higher power microwave amplifiers.

A summary of the condensedbalance sheet of MPI as of June 18, 2004 is as follows:
| ** **                   | ** ** | **June 18, 2004** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| Cash                         |       | $                           | 1,150,000  |   |
| Receivables                  |       | 124,000                     |       |
| Inventory                    |       | 494,000                     |       |
| Property and  equipment, net |       | 61,000                      |       |
| Intangible assets            |       | 1,670,000                   |       |
| Total assets  acquired       |       | $                           | 3,499,000  |   |
| Current  liabilities         |       | (295,000                    | )          |
| Net assets  acquired         |       | $                           | 3,204,000  |   |

 

Of the 1,670,000 of acquired intangible assets,$189,000 was assigned to patents (8 year useful life), $961,000 was assigned toExisting Technology (12 year useful life), and $339,000 was assigned toCustomer Lists (3 year useful life). All are subject to amortization. Thebalance of $181,000 was assigned to trademarks, which have an indefinite lifeand therefore should not be amortized.

Consolidatedpro forma results of operations as if the Company had acquired MPI as of March 31,2005 and 2004 are as follows:
| **Microwave Power Inc.  (“MPI”)** | ** ** | ** **      | ** ** | **March 31,  2005** | ** ** | **March 31,  2004** | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                            | ** ** | **(Unaudited)** | ** ** | **(Unaudited)**          | ** ** |
| Revenue                                               |       | $               | 8,904,000  |                     | $          | 8,733,000                |       |
| Net Income                                            |       | 926,000         |       | 1,573,000                |       |
| Basic and diluted  earnings per share                 |       | $               | 0.10       |                     | $          | 0.20                     |       |

 

F-46

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**ITEM8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

On September 30, 2004, Singer Lewak Greenbaum &Goldstein, LLP (“SLGG”) resigned as our independent registered publicaccounting firm, effective immediately. On September 30, 2004, our AuditCommittee approved the engagement of Kabani & Company, Inc. asour independent registered public accounting firm for the fiscal year endingMarch 31, 2005.

The report issued by SLGG in connection with ourfinancial statements for each of our two most recent fiscal years endedMarch 31, 2004, and March 31, 2003, did not contain an adverseopinion or a disclaimer of opinion, nor was either such report qualified ormodified as to uncertainty, audit scope, or accounting principles, except thereport of the financial statements for us for the year ended March 31,2003 which contained a paragraph expressing substantial doubt regarding our abilityto continue as a going concern.

During the our two most recent fiscal years endedMarch 31, 2004, and March 31, 2003, and the later interim period precedingthe resignation of SLGG on September 30, 2004, there have been nodisagreements with SLGG on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedure, whichdisagreement (as defined in Item 304(a)(1)(iv) of Regulation S-B), if notresolved to the satisfaction of SLGG, would have caused SLGG to make areference to the subject matter of such disagreement in connection with itsreports, and there occurred no events as defined in Item 304(a)(1)(iv)(B)of Regulation S-B.

During the our two mostrecent fiscal years ended March 31, 2004 and March 31, 2003, and thelater interim period through the date of our engagement with Kabani &Company, Inc. on September 30, 2004, neither we nor anyone on ourbehalf consulted with Kabani & Company, Inc. regarding any of thematters or events set forth in Item 304(a)(2)(i) and (ii) ofRegulation S-B.

**ITEM 8A. CONTROLS AND PROCEDURE**

(a)   *Evaluation of disclosure controls and procedures*.   Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Director of Finance, of the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, ourChief Executive Officer and Director of Finance concluded that our disclosurecontrols and procedures were effective as of the end of the applicable periodto ensure that the information required to be disclosed by the Company inreports that it files or submits under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Director of Finance, as appropriate to allow timely decisionsregarding required disclosures.

(b)   *Changes in internal controls over financialreporting*.   There was no change in our internal control overfinancial reporting during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

**ITEM 8B. OTHER INFORMATION**

Not Applicable

47

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**PART III**

**ITEM9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT**

Information required bythis item is incorporated by reference to the information under the captions “ExecutiveCompensation” and “Election of Directors” in the Company’s definitive proxystatement for the 2005 Annual Meeting of Stockholders to be held on September 9,2005.

**ITEM 10. EXECUTIVE COMPENSATION**

Information required bythis item is incorporated by reference to the information under the captions “ExecutiveCompensation” and “Election of Directors” in the Company’s definitive proxystatement for the 2005 Annual Meeting of Stockholders to be held on September 9,2005.

**ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

Information required bythis item is incorporated by reference to the information under the caption “PrincipalStockholders” in the Company’s definitive proxy statement for the 2005 AnnualMeeting of the Stockholders to be held on September 9, 2005.

**ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

Information required bythis item is incorporated by reference to the information under the caption “CertainRelationships and Related Transactions” in the Company’s definitive proxystatement for the 2005 Annual Meeting of Stockholders to be held on September 9,2005.

**ITEM13. EXHIBITS AND REPORTS ON FORM 8-K**

**(a)****                               Thefollowing are attached as Exhibits to this Form 10-KSB:**
| 2.1   |   | Merger Agreement entered into as of May 25,  2004 by and among AML Communications Inc., a Delaware corporation, AML  Holdings, LLC, a California limited liability company and Microwave Power, Inc.,  a California corporation(1) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Certificate of Incorporation(2)                                                                                                                                                                                                              |
| 3.2   |   | Bylaws(2)                                                                                                                                                                                                                                    |
| 10.1  |   | Form of Indemnity Agreement(2)                                                                                                                                                                                                          |
| 10.2  |   | Lease, dated March 11, 1996, between the  Company and Parr-Bohn Properties, Ltd. II, a California Limited  Partnership(3)                                                                                                               |
| 10.3  |   | Intellectual Property Security Agreement(4)                                                                                                                                                                                                  |
| 10.4  |   | Loan and Security Agreement dated November 10,  2000 between the Company and Silicon Valley Bank(5)                                                                                                                                     |
| 10.5  |   | Intellectual Property Security Agreement dated  November 10, 2000 between the Company and Silicon Valley Bank(5)                                                                                                                        |
| 10.6  |   | Warrant to purchase stock dated November 9,  2000 between the Company and Silicon Valley Bank(5)                                                                                                                                        |
| 10.7  |   | Accounts Receivable Purchase Agreement dated  November 20, 2001 between AML Communications, Inc. and Silicon Valley  Bank(6)                                                                                                            |
| 10.8  |   | Promissory Note dated December 30, 2001 between  Tiberiu, Mazilu, and AML Communications Inc.(6)                                                                                                                                        |
| 10.9  |   | Accounts Receivable  Purchase Modifications Agreement dated September 24, 2003 between  Silicon Valley Bank and AML Communications(7)                                                                                                   |
| 10.10 |   | Form of Promissory Note date July 16, 2003  between the Company and the following: Jacob Inbar, Tiberiu Mazilu, Edwin McAvoy,  Gerald Starek, Bob M. Hawkins, and The Oliver Family Trust(7)                                       |

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| 10.11 |   | Form of Warrant dated July 16, 2003  between the Company and the following: Jacob Inbar, Tiberiu Mazilu, Edwin  McAvoy, Gerald Starek, Bob M. Hawkins, and The Oliver Family Trust(7) |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Fourth Amended and Restated 1995 Stock Option  Agreement at June 10, 2002(8)                                                                                                               |
| 10.13 |   | Parr-Bohn Properties First Amendment to lease of  1000 Avenida Acaso, Camarillo, CA.(8)                                                                                                         |
| 10.14 |   | Employment Agreement with Dr. Marina Bujatti,  of MPI, dated June 18, 2004.(8)                                                                                                        |
| 10.15 |   | Employment Agreement with Dr. Franco Sechi, of  MPI, dated June 18, 2004.(8)                                                                                                          |
| 10.16 |   | Interim Lease and Proposed Lease Terms(9)                                                                                                                                                       |
| 10.17 |   | Financing Agreement dated July 8, 2004 with  Bridge Bank(10)                                                                                                                               |
| 10.18 |   | Enterprise Agreement Number 4627 dated  August 26, 2004(11)*                                                                                                                               |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm(12)                                                                                                                                   |
| 31.1  |   | Certification by the Chief Executive Officer(12)                                                                                                                                                |
| 31.2  |   | Certification by the Director of Finance(12)                                                                                                                                                    |
| 32    |   | Certification pursuant to Section 906 of the  Sarbanes Oxley Act(12)                                                                                                                       |

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(1)          Previously filed withthe Securities and Exchange Commission as Exhibit 10.13 to the company’s Form 10KSBfor the fiscal year ended March 31, 2004.

(2)          Previously filed withthe Securities and Exchange Commission as an exhibit to the RegistrationStatement on Form SB-2 No. 33-99102-LA andincorporated herein by reference.

(3)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-KSBfor fiscal year ended March 31, 1996 and incorporated herein by reference

(4)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 1999 and incorporated herein byreference.

(5)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended September 30, 2000 and incorporated herein byreference.

(6)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2001 and incorporated herein byreference.

(7)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2002 and incorporated herein byreference.

(8)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-KSBfor the fiscal year ended March 31, 2004 and incorporated herein byreference.

(9)          Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 8-Kdated July 6, 2004 and incorporated herein by reference.

(10)   Previously filed with theSecurities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended June 30, 2004 and incorporated herein by reference.

(11)   Previously filed with theSecurities and Exchange Commission as an exhibit to the Company’s Form 8-Kdated September 1, 2004 and incorporated herein by reference.

(12)   Filedherewith.

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*                    Confidentialtreatment requested as to certain portions, which portions were omitted andfiled separately with the Securities and Exchange Commission.

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**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The following table setsforth fees billed to us by our auditors during the fiscal years ended March 31,2005 and March 31, 2004 for: (i) services rendered for the audit ofour annual financial statements and the review of our quarterly financialstatements, (ii) services by our auditor that are reasonably related tothe performance of the audit or review of our financial statements and that arenot reported as Audit Fees, (iii) services rendered in connection with taxcompliance, tax advice and tax planning, and (iv) all other fees forservices rendered. “All other fees” include fees related to (or paid for) inthe fiscal year ended March 31, 2005 and fees related to fiscal year endedMarch 31, 2004. Included in the “Audit Related Fees” for the fiscal yearended March 31, 2004, is $21,000 for audit services directly related tothe Microwave Power Inc, (“MPI”) acquisition. Additionally, there were $70,000in audit fees directly related to the MPI acquisition during fiscal year ended March 31,2005, which were capitalized acquisition costs and included in the PurchasePrice Allocation.
| ** ** | ** **          | **For the period ending** | ** ** |
|------------|---------------------|------------------------------------------|------------|
| ** ** | ** **          | **March 31, 2005**             | ** ** | **March 31, 2004** | ** ** |
| (i)        | Audit fees          |                                     |       | $ | 73,000 |   |   |   | $ | 46,000 |   |   |
| (ii)       | Audit related  fees |                                     |       | 34,000 |   |   |   | 25,000 |   |   |
| (iii)      | Tax fees            |                                     |       | — |   |   |   | — |   |   |
| (iv)       | All other fees      |                                     |       | 2,000 |   |   |   | 2,000 |   |   |
|       |                |                                     | $          | 109,000 |   |   |   | $ | 73,000 |   |   |

 

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| AML Communications, Inc. |   |
|-------------------------------|--------|
|                          | By:    | Jacob Inbar,  President and  Chief Executive Officer | Dated: June 29,  2005 |
|                               |        |  |  |

 

KNOW ALL THESE PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Jacob Inbar andSusan Kelley, and each of them, jointly and severally, his attorneys in fact,each with full power of substitution, for him in any and all capacities, tosign any and all amendments to this Report on Form 10-KSB, and to file thesame, with exhibits thereto and other documents in connection therewith, withthe Securities and Exchange Commission, hereby ratifying and confirming allthat each said attorneys-in-fact or his substitute or substitutes, may do orcause to be done by virtue hereof.

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.
|                        | **Signature** | ** **                              | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------|---------------|-----------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/  JACOB INBAR       |          | President, Chief  Executive Officer and |       | June 29,  2005 |
| Jacob Inbar            |          | Chairman of the  Board                  |       |                |
| /s/  TIBERIU MAZILU    |          | Vice President-Engineering  and         |       | June 29,  2005 |
| Tiberiu Mazilu         |          | Director                                |       |                |
| /s/  EDWIN J. MCAVOY   |          | Secretary, Vice  President-Sales, and   |       | June 29,  2005 |
| Edwin J. McAvoy        |          | Director                                |       |                |
| /s/  SUSAN KELLEY      |          | Director of  Finance and Principal      |       | June 29,  2005 |
| Susan Kelley           |          | Accounting Officer                      |       |                |
| /s/  DAVID A. DERBY    |          | Director                                |       | June 29,  2005 |
| David A. Derby         |          |                                    |       |                |
| /s/  RICHARD W. FLATOW |          | Director                                |       | June 29,  2005 |
| Richard W. Flatow      |          |                                    |       |                |
| /s/  GERALD M. STAREK  |          | Director                                |       | June 29,  2005 |
| Gerald M. Starek       |          |                                    |       |                |

 

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