**UNITED STATES**

**SECURITIES AND EXCHANGE 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, 2006**

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

**Forthe transition period from               to               **

**CommissionFile Number 0-27250**

**AML COMMUNICATIONS, INC.**

(Exact name of Registrantas specified in its charter)

| **DELAWARE**                              | **77-0130894**                       |
|-------------------------------------------|--------------------------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer Identification No.) |
| incorporation or  organization)           | ** **                           |
| **1000  AVENIDA ACASO, CAMARILLO,**       | **93012**                            |
| **CALIFORNIA**                            | (Zip Code)                           |
| (Address of  principal executive offices) | ** **                           |

 

**(805) 388-1345**

(Issuer’stelephone number, including area code)

Securitiesregistered pursuant to Section 12(b) of the Act:

| Title of each class | Name of each exchange on which registered |
|---------------------|-------------------------------------------|
| **None**            | **None**                                  |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

Titleof Class

**Common Stock, $.01 par value**

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. o

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

Issuer’s revenues for its most recent fiscal year:$9,466,266

The aggregate market value of the voting andnon-voting common equity held by non-affiliates of the Registrant on June 15,2006 was approximately $7,861,428. The per share stock price for computationalpurposes was $1.03, based on the closing sale price per share for theRegistrant’s common stock on the OTC Bulletin Board on June 15, 2006. Thisvalue is not intended to be a representation as to the value or worth of theRegistrant’s common stock. The number of non-affiliates of the Registrant hasbeen calculated by subtracting the number of shares held by persons affiliatedwith the Registrant from the number of outstanding shares.

The number of shares of the Registrant’s common stockoutstanding on June 15, 2006 was 10,234,166.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of theRegistrant’s definitive Proxy Statement for the Annual Meeting of Stockholdersto be held on September 7, 2006, are incorporated by reference into Part IIIof this Form 10-KSB. The Proxy Statement will be filed within120 days after the end of the fiscal year covered by this report.

Transitional BusinessDisclosure Format (Check One). Yes o  No x

 

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**AMLCommunications, Inc.**

**Indexto Form 10KSB**

|                   | ** ** | ** **                                                                                      | ** ** | **Page**   | ** ** |
|-------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------|------------|
| **Part I**   |       |                                                                                            | ** ** |       | ** ** | ** ** |   |
| Item 1.           |       | Description of Business                                                                         |       |       | 2          | ** ** |   |
| Item 2.           |       | Description of Property                                                                         |       |       | 8          | ** ** |   |
| 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-23       | ** ** |   |
| 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 of the Registrant                                                 |       |       | 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                                                                                        |       |       | 49         | ** ** |   |
| Item 14.          |       | Principal Accountant Fees and Services                                                          |       |       | 51         | ** ** |   |
| **SIGNATURES**    |       |                                                                                            | 52         | ** ** |       |

 

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**Introductory Notes—ForwardLooking Statements and Certain Terminology**

Some of thestatements made by us in this Annual Report on Form 10-KSB areforward-looking in nature, including but not limited to, statementsrelating to our future revenue, product development, demand, acceptance andmarket share, gross margins, levels of research and development, our management’splans and objectives for our current and future operations, and otherstatements that are not historical facts. Forward-looking statements include,but are not limited to, statements that are not historical facts, andstatements including forms of the words “intend”, “believe”, “will”, “may”, “could”,“expect”, “anticipate”, “plan”, “possible”, and similar terms. Actual resultscould differ materially from the results implied by the forward lookingstatements due to a variety of factors, many of which are discussed throughoutthis Annual Report and particularly in the sections titled “Additional FactorsThat May Affect Future Results” and “Factors Affecting Business, OperatingResults and Financial Condition”, both of which are included in the sectiontitled “Management’s Discussion and Analysis of Plan of Operation”. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. We undertake no obligation to publiclyrelease any revisions to these forward-looking statements that mayreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. Factors that could cause actual results todiffer materially from those expressed in any forward-looking statement made byus include, but are not limited to:

·       our ability to finance ouractivities and maintain our financial liquidity;

·       our ability to attract andretain qualified, knowledgeable employees;

·       the impact of generaleconomic conditions on our business;

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

·       the limited number ofpotential customers for our products;

·       the variability in grossmargins on our products;

·       our ability to design  and market new products successfully;

·       our failure to acquire newcustomers in the future;

·       deterioration of businessand economic conditions in our markets;

·       intensely competitiveindustry conditions with increasing price competition; and

·       the rate of growth in thedefense markets.

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

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**PART I**

**ITEM 1. DESCRIPTIONOF BUSINESS**

**Introduction**

We currently design, manufacture, and market radiofrequency (RF) and microwave, low noise, medium and high power amplifiersserving primarily the defense microwave market. Our business is comprised of tworeportable segments consisting of amplifiers and related products that aredesigned, manufactured, and marketed by AML Communications, Inc. for thedefense microwave market (AML) and high power microwave amplifiers that aredesigned, 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 us as well as through independentsales representatives. We had two separate reportable segments (AML) and (MPI)in the fiscal year ended March 31, 2005 and the same two reportablesegments in the fiscal year ended March 31, 2006.

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. In1994, we became active in the Wireless market and developed a multicarrierlinear power amplifier supporting this market in the 300-450 MHz range.In late 1994, we developed a multicarrier linear RF power amplifierspecifically for boosting signal strengths in the cellular communicationsmarket and marketed this multicarrier product directly to the domestic cellularservice providers. During 1995 and 1996, we developed derivative multicarriercellular products at alternative power levels to support differing needs in theservice provider market.

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 batch 

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assembly to a flexible,self-balancing, one piece flow process. We believe this substantially increasedour capacity and production efficiency to support growth.

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 assurance that a major customer will not reduce, delay, oreliminate its purchases from us. Such a reduction would have a material adverseeffect on our business, results of operations, and financial condition. Additionally,our future depends on our ability to generate new products, mostly as part of astandard line of products (i.e. products we developed that are intended to besold 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 and to $9.1 million in fiscal 2006.

Utilizing our extensive knowledge in MicrowaveIntegrated Circuits (MIC) design capabilities, we have expanded the products weoffer as part of our full line catalog. Such products are designed for andmarketed to the Defense Microwave market. We also utilize our MIC designcapabilities toward the design of subsystems, an area that we continue toinvest in for long term defense projects. Investments in new subsystem productsremain at the center of our strategy because they offer productdifferentiation, opportunities for sole source positions and higher addedvalue.

The company seeks and was successful in securingcontracts with its major customers that span over a number of years. Theseprogram based contracts remain the focus of our Marketing strategy.

Utilizing MPI’s proprietary Microwave MonolithicCeramic Circuits (MMCC) technology, the company intends to expand production ofsuch amplifiers and subsystems at the AML Camarillo facility. This technologyoffers cost savings, by reducing hand mounted operations while increasingyields and reliability.

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 

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senior officers, its pastPresident and Secretary. MPI will continue to operate as our division from itsfacility in Santa Clara. On February 3, 2006 the company purchased thebuilding that houses MPI and is located at 3350 Scott Blvd. Bldg. 25 in SantaClara, California for a purchase price of $800,000. The building is beingfinanced by the Bank of America in the form of a promissory note in the amountof $640,000 and the Company  paying theloan in 83 regular payments of $4,425.88 each and one irregular last payment of$556,594.48. The Company’s final payment is due on February 10, 2013 andwill be for all principle and interest not yet paid. Payments include principleand interest.

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

1)              Technologically, MPI’ssemi-monolithic, gold filled via’s, air bridge and microwave-monolithic-ceramic(MMCC) technology provide access to processes that we believe are complimentaryand 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 was intended to strengthen our product offerings to this market byadding higher power microwave amplifiers.

**Markets**

We sell our RF/Microwave amplifier products primarilyinto various segments of the Defense Microwave marketplace. In fiscal 2006,from the AML segment, we derived approximately 73.2% of our revenues from theDefense Microwave market, 2.1% from the PCS and two-way messaging market, and1.2% from Cellular Coverage Enhancement products. In comparison, in fiscal2005, from the AML segment, we derived approximately 76.5% of our revenues fromthe Defense Microwave market, 0.1% from the PCS and two-way messaging market,and 8.6% from Cellular Coverage Enhancement products. The MPI segment accountedfor 23.5% of our revenues from the Defense microwave and other markets infiscal 2006 and 14.8% during 2005.

*Defense MicrowaveAmplifiers.*   These hybrid microwave circuitsutilizing MIC technology are sold to Defense OEM customers with broadband,microwave frequency, component requirements. These parts typically supportapplications including surveillance, signal detection, satellite communication,radar, and telemetry. They are used in both the transmission and receptionsignal paths. The technology permits accurate, reproducible, volume productssupporting broad bandwidths and higher frequencies to be designed andmanufactured. Moderate volume requirements and custom design requirementscharacterize this market.

**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. During Q1 of fiscal 2007, AML delivered the first product utilizingthe MMCC technology processed by MPI. It is expected that increasingly new AMLproduct development would use MMCC as an implementation technology due to itscost savings advantages.

*DefenseMicrowave.*   We produce standard catalog andcustom hybrid microwave amplifiers. We also produce derivative products thatare based upon minor modifications of catalog items. The frequencies for theseproducts range from 50kHz to 26GHz. Power levels range from less than onemilliwatt to several hundred watts. Integration of a number of amplifiers andother microwave components built by AML address the subsystem markets.

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

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**Microwave Power, Inc.Segment**

*DefenseMicrowave and Test Instrumentation.*   MPImanufactures solid state microwave amplifiers operating in the frequency rangefrom to 1 to 40 GHz with output power from 10 mW to 500 W. MPI proprietarytechnology Microwave Monolithic Ceramic Circuits (MMCC) is especially designedfor broadband and high power. Some typical applications includetelecommunications, radar, simulators, transmitters and test instrumentation. Mostof the units are available either rack mounted or as connectorized modules.

The MPI transmit poweramplifiers range in price from $2,000 to over $45,000 per amplifier, dependingupon the technology, complexity, quantity, and implementation.

**Customers**

AML sells products to Defense OEM manufacturersworldwide, including Raytheon, Boeing, Lockheed Sanders, Northrop Grumman,Rockwell, ITT, and L3-Communications. Additionally we export our productsto major OEM’S in the UK, France, Germany, Israel, Spain, Turkey, Singapore andJapan. The company seeks and was successful in securing contracts with itsmajor customers that span over a number of years. These program-based contractsremain the focus of our Marketing strategy

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, 2006, ourlargest customer was Raytheon; which accounted for approximately 12.3% of netsales. L3 Communications was our second largest customer accounting forapproximately 6.6% of net sales. For the fiscal year ended March 31, 2005,our largest customer was Raytheon, which accounted for approximately 12.8% ofnet sales. Government of Israel Ministry of Defense was our second largestcustomer accounting for approximately 8.2% of net sales. The loss of either ofthese customers, or a significant loss, reduction, or rescheduling of ordersfrom any of our customers could have a material adverse effect on our business,results of operations and financial condition.

We rely heavily onacquiring new customers. The acquisition rate for new Defense Microwavecustomers during fiscal 2006 was approximately 11 new customers per quarter forthe AML segment and approximately 2 new customers per quarter for the MPIsegment, compared to approximately 10 new customers per quarter for the AMLsegment and approximately 4 new customers per quarter for the MPI segment forthe fiscal year ended March 31, 2005.

**Marketing andDistribution; 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 independentsales representatives selected for their familiarity with our potentialcustomers and their knowledge of the Defense microwave markets. Both theinternal sales and marketing personnel and the independent salesrepresentatives generate product sales, provide product and customer service, andprovide customer feedback for product development. In addition, the independentsales representatives receive support from our internal sales and marketingpersonnel, which currently consists 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 inthe industry, sales are made through 

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standard purchase orders,which can be subject to cancellation, postponement, or other types of delays. Whilecertain customers provide us with forecasted needs, they are not bound by suchforecasts.

During the fiscal year ended March 31, 2006,international sales were $1.7 million or 17.9% of net sales as compared tointernational sales of $2.4 million or 28.4% of net sales for the fiscal yearended March 31, 2005. During the fiscal year we exported our products tomajor OEM’s in the UK, France, Germany, Israel, Spain, Turkey, Singapore andJapan.

Thefollowing table summarizes the international sales by segment for the fiscalyear ended March 31, 2006:

| ** **           | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **           | ** ** | **(Dollars in thousands)** | ** ** |
| International  Sales |       | $                                    | 1,328      |       | 14.1       | %       | $          | 373        |       | 3.9       | %          | $          | 1,701      |   | 17.9 | % |
| Domestic sales       |       | 5,917                                |       | 62.5       |       | 1,848   |       | 19.5       |       | 7,765     |       | 82.1       |       |
| Total Sales          |       | $                                    | 7,245      |       | 76.6       | %       | $          | 2,221      |       | 23.4      | %          | $          | 9,466      |   | 100.0 | % |

 

**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 14 people as of March 31,2006. Expenditures for research and development amounted to approximately$1,233,000 in fiscal 2006 and $913,000 in fiscal 2005.

**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.

We have experiencedsignificant price competition and expect price competition in the sale ofRF/Microwave amplifiers to increase. No assurance can be given that ourcompetitors will not develop new technologies or enhancements to existingproducts or introduce new products that will offer superior price orperformance features. We expect our competitors to offer new and existingproducts at prices necessary to gain or retain market share. Some of ourcompetitors have substantial financial resources, which may enable them tobetter withstand sustained price competition or a market downturn. There can beno assurance that we will be able to compete successfully in the pricing of ourproducts, or otherwise.

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**Manufacturing andSuppliers**

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 uniform worldwide quality managementsystem standard. Numerous customers and potential customers throughout theworld, particularly in Europe, require their suppliers be ISO certified. Inaddition, many customers require their suppliers to purchase components onlyfrom subcontractors that are ISO certified. We are currently certified to theISO 9001 standard.

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 Spectrum Control for theirfilters, Mimix for mmic parts, Johanson Technologies for their ceramiccapacitors, Sandvik Osprey LTD for their osprey materials, and NEC and Fujitsufor their semiconductors. Although we did not experience shortages duringfiscal year 2006, we have experienced this in the past, and may again in thefuture, experience shortages of single-source components. In such event,we may have to make adjustments to both product designs and productionschedules, which could result in delays in production and delivery of products.Such delays could have an adverse effect on our operating results and financialcondition.

**IntellectualProperty**

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 31,2006, 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 September 2009. Additionally, MPI has two registered trademarks: theMPI Company logo, and the term “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 believethat we have adequately protected our proprietary technology, and we will takeall appropriate and reasonable legal measures to 

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protect it, the use of ourprocesses by a competitor could have a material adverse effect on 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 beindependently developed by competitors. In addition, the laws of certaincountries in which our products have been or may be sold may not protect ourproducts and intellectual property rights to the same extent as the laws of theUnited States.

The inability to protectour intellectual property and proprietary technology could have a materialadverse effect on our business, financial condition and results of operations. Asthe number of patents, copyrights and other intellectual property rights in ourindustry increases, and as the coverage of these rights and the functionalityof the products in the market further overlap, we believe that companies in ourindustry may face more frequent infringement claims. We may in the future benotified that we are infringing upon certain patent or other intellectualproperty rights of others. Although we are not aware of any pending orthreatened intellectual property lawsuits against us, we cannot guarantee thatsuch litigation or infringement claims will not occur in the future. Suchlitigation 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, 2006,we had 71 full-time employees, including 14 in research and development; 45 inmanufacturing, production engineering, and quality assurance; 8 inadministration; and 4 in sales, marketing, order entry, and customer support. Webelieve the success of our business depends, in part, on our ability to attractand retain qualified personnel, particularly qualified scientific, technicaland key management personnel. Our employees are not governed by collectivebargaining agreements. We believe our relationships with our employees aregood.

**EnvironmentalRegulations**

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 our operations, or other actions whichcould materially and adversely affect our business, financial condition, andresults of operations.

**ITEM 2. DESCRIPTIONOF 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 2008and we intend to enter into a new lease at that time. Our MPI division operatesin a 3,868 square foot industrial/office condominium located at 3350 ScottBoulevard in Santa Clara, California. The building was purchased 

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February 3,2006. We believe that our current facilities are in reasonable condition andprovide adequate expansion capabilities.

**ITEM 3. LEGALPROCEEDINGS**

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.

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

Not applicable.

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**PART II**

**ITEM 5. MARKET FORCOMMON 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. Thetable below sets forth for the periods indicated the high and low bid pricesfor the Company’s common stock for the periods it traded on the OTC BulletinBoard. The bid prices represent inter-dealer quotations, without adjustmentsfor retail mark-ups, markdowns or commissions and may not necessarily representactual transactions.  The source of theinformation for the high and low bid prices is the OTC Bulletin Board.

| ** **                             | ** ** | **Price Range of  Common Stock** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| 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 |   |
| Fiscal year ended  March 31, 2006 |       |                                            |       |   |   |
| First quarter                          |       | $                                               | 1.44       |   | $ | 0.86 |   |
| Second quarter                         |       | $                                               | 1.45       |   | $ | 1.05 |   |
| Third quarter                          |       | $                                               | 1.40       |   | $ | 1.06 |   |
| Fourth quarter                         |       | $                                               | 1.36       |   | $ | 1.14 |   |

 

At June 16, 2006,there were approximately 91 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 cashdividends and do not anticipate paying cash dividends in the foreseeable future.We expect to utilize future earnings to finance future growth. The actualamount of 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***

Thefollowing table gives information about our common stock that may be issuedunder our existing equity compensation plans as of March 31, 2006:

**Equity Compensation 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)** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1995 Equity compensation  plans approved by security holders        |       |       | None       |                                                                                                                                       |       |                                                                                                   | None       |                                                                                                                                                                                                                  |       |   | None |   |   |
| 2005 Equity  compensation plans not approved by security holders(1) |       |       | 1,937,750  |                                                                                                                                       |       |                                                                                                   | $          | 1.06                                                                                                                                                                                                                  |       |   |   | 628,074 |   |   |
| Total                                                               |       |       | 1,937,750  |                                                                                                                                       |       |                                                                                                   | $          | 1.06                                                                                                                                                                                                                  |       |   |   | 628,074 |   |   |

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(1)          In November 2005,we established the 2005 Equity Incentive Plan (“2005 Plan”) with 150,000 sharesinitially approved and subject to the 2005 Plan. Incentive stock option awardsmay be granted under the 2005 Plan only to employees (including officers anddirectors who are also employees) of the Company or of a Parent or subsidiaryof the Company. All other awards (including nonqualified stock options,restricted stock or stock awards) under the 2005 Plan may be granted toemployees, officers, directors, consultants, independent contractors andadvisors of the Company or any Parent or Subsidiary of the Company, providedsuch consultants, contractors and advisors render bona fide services not inconnection with the offer and sale of securities in a capital-raisingtransaction. The Board of Directors has full authority to administer the 2005Plan, including but not limited to, the authority to designate eligiblepersons, grant awards, interpret the 2005 Plan, prescribe, rescind or amend therules and regulations of the 2005 Plan, make all other determinationsnecessary or advisable for the administration of the 2005 Plan, and alsodelegate to one or more executive officers of the Company the authority togrant an Award under the 2005 Plan to plan participants who are not insiders ofthe Company. The number of shares initially approved for issuance under the2005 Plan was 150,000 shares of our common stock and number of shares reservedand available for grant and issuance shall be increased on the first day of January ofeach year so that the total of all Common Stock available for Awards shall bethe maximum amount allowable under Regulation 260.140.45 of Title 10 of theCalifornia Code of Regulations. Unless earlier terminated as provided in theplan, the 2005 Plan will terminate on October 31, 2015.

**ITEM 6. MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**

**Overview**

We design, manufacture, and market RF and microwave,low noise, medium and high power amplifiers serving primarily the defensemicrowave market. Our business is comprised of two reportable segments, AML,which represented 76.5% of 2006 product revenue, and MPI, which represented23.5% of 2006 product revenue.

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 

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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, and$9.1 million in fiscal 2006.

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 ofOperations**

The following tablesummarizes our results of operations both in dollars and as a percentage of netsales for the fiscal years ended March 31, 2006 and 2005.

**For the fiscal year ended March 31, 2006:**

| ** **                              | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                                |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Defense Microwave  and other            |       | $                                    | 7,116      |       | 75.2       | %       | $          | 2,221      |       | 23.4      | %          | $          | 9,337      |   | 98.6 | % |
| PCS and wireless  messaging             |       | —                               |       | —     |       | —  |       | —     |       | —    |       | —     |       |
| Cellular,  wireless telephony and other |       | 129                                  |       | 1.4        |       | —  |       | —     |       | 129       |       | 1.4        |       |
| Total net sales                         |       | 7,245                                |       | 76.6       | %          | 2,221   |       | 23.4       | %          | 9,466     |       | 100.0      | %          |
| Cost of goods  sold                     |       | 4,610                                |       | 48.8       |       | 744     |       | 7.8        |       | 5,354     |       | 56.6       |       |
| Gross profit                            |       | $                                    | 2,635      |       | 27.8       | %       | $          | 1,477      |       | 15.6      | %          | $          | 4,112      |   | 43.4 | % |
| Operating  expenses:                    |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Selling, general and administrative     |       | 1,620                                |       | 17.1       |       | 641     |       | 6.8        |       | 2,261     |       | 23.9       |       |
| Research and development                |       | 1,106                                |       | 11.7       |       | 127     |       | 1.3        |       | 1,233     |       | 13.0       |       |
| Operating profit                        |       | (91                                  | )          | (.9        | )          | 709     |       | 7.6        |       | 618       |       | 6.5        |       |
| Other income  (expense), net            |       | (8                                   | )          | 0.0        |       | 5       |       | 0.0        |       | (3        | )          | 0.0        |       |
| Profit before income taxes              |       | (99                                  | )          | (.9        | )          | 714     |       | 0.0        |       | 615       |       | 6.5        |       |
| Income tax  expense (credit)            |       | (1,630                               | )          | 17.2       |       | —  |       | 0.0        |       | (1,630    | )          | 17.2       |       |
| Net profit                              |       | $                                    | 1,531      |       | 16.1       | %       | $          | 714        |       | 7.6       | %          | $          | 2,245      |   | 23.7 | % |

 

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**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 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 income  (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 | % |

 

**Fiscal Years Ended March 31,2006 and 2005**

*Netsales.**  *Netsales for fiscal 2006 were $9.5 million, compared to $8.7 million infiscal 2005. The increase in net sales is attributable to continued growth inthe defense sector and revenues generated from our MPI division. Sales ofcellular and other products were $129,000 or 1.4% of net sales in 2006, ascompared to $744,000, or 8.6% of net sales in fiscal 2005. MIC sales continuedto increase with sales of $9.3 million, or 98.6% of net sales in fiscal 2006,compared to $7.9 million, or 91.2% of net sales for fiscal 2005. Webelieve the increase in sales of MIC products is the result of our aggressivepenetration of the fractured MIC market and an increase in demand for defenserelated MIC products related to the procurement of upgrade, replacement, andspare parts for defense applications. If defense spending increases, weanticipate that MIC sales will continue to be a significant portion of ourrevenue. Sales to two customers, Raytheon and L 3 Communications, represented12.3% and 6.6% of net sales in 2006, respectively, as compared to sales to twocustomers, Raytheon and Government of Israel Ministry of Defense, whorepresented 12.8% and 8.2% of net sales in 2005, respectively.

Sales for the last quarter of fiscal 2006 were $1.9million. This was below our forecast, and was a result of our heavy new productdevelopment which caused inefficiencies and delays in delivery. The Company,however, views projects that are long term yet demand heavy initial developmentas an investment to benefit shareholders in the future.

The loss for the fourth quarter was $209,000 beforeadjustment for deferred tax valuation. This includes earnings from operationsof $1,300 before adjustments of: accrual to inventory reserve $150,000,additional bonus accrual  $30,000, andwarranty expense addition  $25,000.

Domestic and international net sales wereapproximately 82.1% and 17.9% of our net sales, respectively, for the yearended March 31, 2006. For the year ended March 31, 2005, domestic andinternational net sales were approximately 71.6% and 28.4% 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. However,certain OEM customers take possession of our products domestically and thendistribute these products to their international customers. Because we accountfor all of those net sales as domestic revenues, we 

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cannot be certain of theextent to which our domestic and international net sales is impacted by thepractices of our customers.

*Grossprofit.**  *Grossprofit for fiscal 2006 was $4.1 million, or 43.4% of net sales, compared to agross profit in fiscal 2005, of $3.9 million, or 44.9% of net sales. Thedecrease in margin was due to the lower volume of sales from the AML divisionand increase in the excess inventory reserve of $150,000.

*Selling,general, and administrative costs.**  *Selling,general and administrative costs for fiscal 2006 were $2.3 million, or 23.9% ofnet sales, compared to $2.1 million, or 23.9% of net sales, for fiscal 2005. Theincrease is attributable to commissions at $26,000 as a result of higher MPIsales.  AML had an increase of $43,000due to a new hire and general employee pay increases. Administrative expenseswere higher due to additional recruitment and consulting fees in the amount of$25,000 and $23,000 respectively.

*Researchand development costs.**  *Researchand development costs for fiscal 2006 were $1.2 million, or 13% of net sales,compared to $913,000, or 10.6% of net sales, for the corresponding period infiscal 2005. The increase is attributable to $224,000 relating to new hires,and general pay increases. An additional $57,000 increase was due to R&Dmaterial expense and $6,000 for travel related expenses.

*Otherexpense, net.**  *Otherexpense for fiscal 2006 was $3,000, as compared to $39,000 for fiscal 2005. Thedecrease is attributable to all capital leases being paid down during the year.For fiscal 2005, the $39,000 was interest expense of $96,000 which was offsetby interest income of $30,000 from short-term cash investments and by $27,000of reversals from over-accrued liabilities.

In 2007, we expect total operating expenses toincrease as we continue to invest in infrastructure and new product development.We expect operating expenses generally will increase more slowly than increasesin revenue.

*Provision for income taxes.**  *We recorded tax credits of $1,662,000 in fiscal 2006and identified tax credits on the balance sheet as a Deferred Tax Allowance. Thisrepresents both tax credits and net operating losses carried forward. Anadditional tax allowance over the next two fiscal years is estimated at $3.3million.

**Liquidity andCapital 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, 2006 was $0.

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. Warrantsto purchase a total of 240,000 shares of our common stock were issued in connectionwith the funding. The per share exercise price of the warrants is $0.24. Thewarrants expire five years from the date of issuance. We have valued thesewarrants at $35,000 and are expensing this value over the term of the notespayable. For the twelve months ended March 31, 2005, a total of $22,000was 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 July 27, 2005, we signed a Business FinancingModification Agreement with Bridge Bank to renew our line of credit, increasingthe credit facility from $1.5 million to $2.0 million. Of this, $1.0 millionmay be 

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used for cash advancesagainst accounts receivables and $1.0 million may be used for equipmentadvances. Our ability to borrow under this agreement varies based upon eligibleaccounts receivable and eligible equipment purchases. We are obligated to paythe bank a finance charge at a rate per year equal to the prime rate, which inno event shall be less than 5.50%, plus .25% with respect to cash advances anda rate of such prime rate plus 2.0% with respect to equipment advances. We areobligated to pay an annual facility fee of $5,000 (0.50% of the gross facilityamount). We must maintain certain financial requirements, including net profitafter tax, on a quarterly basis, of at least $0.01, and a debt service coverageratio with respect to equipment advances. We were in compliance with theserequirements at March 31, 2006; however, there is no assurance that wewill be in compliance at future dates. This agreement terminates on July 27,2006 or upon a date that the bank chooses to terminate the agreement. Anyunpaid balance is due and payable pursuant to the agreement on the terminationdate. If the agreement is terminated within the first 12 months following itsexecution on July 27, 2005, we will be required to pay an earlytermination fee of 1.0% of the credit facility amount under the terms of the agreement.At March 31, 2006, we had an outstanding balance of $ 0 under thisagreement and our remaining borrowing capacity was approximately $1,000,000available under the accounts receivable agreement. Under the equipmentfinancing agreement, we had an outstanding balance of $248,000 at March 31,2006 with a remaining borrowing capacity of approximately $752,000 available.

At March 31, 2006, we had $2,367,000 in cash andcash equivalents. Our operating activities provided cash of approximately $1.3million in fiscal 2006, primarily as a result of inventory and receivablereductions, compared to providing cash of $341,000 in 2005. Net cash used ininvesting activities amounted to $1.3 million in 2006, as compared to net cashprovided from investing activities of $726,000 in 2005, of which nearly $1.2million was received from the MPI acquisition, offset by net capital equipmentexpenditures of $464,000. Net cash provided by financing activities was$864,000 in 2006, as compared to net cash used in financing activities of$456,000 in 2005, $338,000 of which was the result of the paying off all notespayable and $136,000 used in paying down capital lease obligations.

We anticipate capital expenditures of approximately$600,000 in fiscal 2007. 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.

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, 2006 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 amounts and classifications of liabilities thatmight be necessary should we be unable to continue in existence.

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**Contractual Obligations**

Thefollowing table summarizes our contractual obligations, including purchasecommitments at March 31, 2006, 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                 |       | —                               |       |                                     | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating leases                           |       | 607                                  |       |                                     | 196        |   |   |   | 394 |   |   |   | 17 |   |   |   | — |   |   |
| Total contractual cash obligations         |       | $                                    | 607        |                                     |       | $ | 196 |   |   |   | $ | 394 |   |   |   | $ | 17 |   |   |   | $ | — |   |   |
|                                            |            |                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Critical Accounting Policies**

Our discussion andanalysis of our financial conditions and results of operations are based uponour financial statements, which have been prepared in accordance with generallyaccepted accounting principles in the United States. The preparation offinancial statements requires managers to make estimates and disclosures on thedate of the financial statements. On an on-going basis, we evaluate ourestimates, including, but not limited to, those related to revenue recognition.We use authoritative pronouncements, historical experience, and otherassumptions as the basis for making judgments. Actual results could differ fromthose estimates. We believe that the following critical accounting policiesaffect our more significant judgments and estimates in the preparation of ourfinancial statements.

*Revenue recognition.**  *We generate our revenue through the sale of products.Our policy is to recognize revenue when the applicable revenue recognitioncriteria have been met, which generally include the following:

·       *Persuasive evidence of an arrangement exists;*

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

·       *Price is fixed or determinable; and*

·       *Collectibility is reasonably assured*

Revenue from the sale ofproducts is generally recognized after both the goods are shipped to thecustomer and acceptance has been received, if required. Our products are custommade for our customers, who primarily consist of original engineermanufacturers (OEMs), and we do not accept returns. Our products are shippedcomplete and ready to be incorporated into higher level assemblies by ourcustomers. The terms of the customer arrangements generally pass title and riskof ownership to the customer at the time 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.

*Allowance for DoubtfulAccounts.*   We maintain an allowance for doubtfulaccounts receivable based on customer-specific allowances, as well as a generalallowance. Specific allowances are maintained for customers which aredetermined to have a high degree of collectibility risk based on such factors,among others, as: (i) the aging of the accounts receivable balance; (ii) thecustomer’s past payment experience; or (iii) a deterioration in thecustomer’s financial condition, evidenced by weak financial condition and/orcontinued poor operating results, reduced credit ratings, and/or a bankruptcyfiling. In addition to the specific allowance, we maintain a general allowancefor all its accounts receivables which are not covered 

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by a specificallowance. The general allowance is established based on such factors, amongothers, as: (i) the total balance of the outstanding accounts receivable,including considerations of the aging categories of those accounts receivable; (ii) pasthistory of uncollectible accounts receivable write-offs; and (iii) theoverall creditworthiness of the customer base. A considerable amount ofjudgment is required in assessing the realizability of accounts receivables. Shouldany of the factors considered in determining the adequacy of the overallallowance change, an adjustment to the provision for doubtful accountsreceivable may be necessary.

*Inventory.**  *Inventories are stated at the lower of cost ormarket, cost being determined on the first-in, first-out method. Inventoriesare written down if the estimated net realizable value is less than therecorded value. We review the carrying cost of our inventories by product eachquarter to determine the adequacy of our reserves for obsolescence. Inaccounting for inventories we must make estimates regarding the estimated netrealizable value of our inventory. This estimate is based, in part, on ourforecasts of future sales and age of the inventory.

*Intangible Assets.*   Wetest intangible assets with indefinite lives for impairment on an annual basisor more 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. Determiningthe life of the assets with finite lives is judgmental in nature and involvesthe use of estimates and assumptions. These estimates and assumptions involve avariety of factors, including future market growth and conditions, forecastedrevenues and costs and a strategic review of our business and operations. Webase our fair value estimates on assumptions we believe to be reasonable butthat are unpredictable and inherently uncertain. Actual future results maydiffer from those estimates. In the event we determine that an intangible assetis impaired in the future, an adjustment to the value of the asset would becharged to earnings in the period such determination is made.

*Existing Technology.****  ***Our existing technology isbased on a patent issued in 1990, which continues to be the main technology ofMPI. It is a substrate deposition technology that is mature and with noreplacement technology forecasted.

**Additional Factors That May Affect Future Results**

Futureoperating results may be impacted by a number of factors that could causeactual results to differ materially from those stated herein, which reflectmanagement’s current 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);

·       ourability to timely develop and produce commercially viable products atcompetitive prices;

·       ourability to produce products which meet the quality standards of both existingand potential new customers;

·       ourability to accurately anticipate customer demand;

·       ourability to manage expense levels, in light of varying revenue streams;

·       theavailability and cost of components;

·       theimpact of worldwide economic and political conditions on our business; and

·       theability to integrate potential future acquisitions into our existingoperations.

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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, and financialcondition.

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 orenhancements to existing products or introduce new products that will offersuperior price or performance features. We expect our competitors to offer newand existing products at prices necessary to gain or retain market share. Severalof our competitors have substantial financial resources, which may enable themto withstand 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.

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. Therecan be no assurance that we will not experience such fluctuations in the future.We establish our expenditure levels for product development and other operatingexpenses based on expected revenues, and expenses are relatively fixed in theshort term. As a result, variations in timing of revenues can cause significantvariations in quarterly results of operations. There can be no assurances thatwe will be profitable on a quarter-to-quarter basis in the future. We believethat period-to-period comparisons of our financial results are not necessarilymeaningful and should not be relied upon as an indication of future performance.Due to these factors, it is likely that in 

18

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somefuture quarter 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.

**Factors AffectingBusiness, 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 AssociatedWith Our Business**

***Most of our sales are made to the defense industry. Ourbusiness and financial results could be adversely affected if defense spendingis curtailed, which would cause the value of your investment to decline.***

As a percentage of totalrevenues, our net sales to our two largest customers; Raytheon and L3Communications, during the fiscal year ended March 31, 2006 totaled approximately18.9%, accounting for $1.8 million of our revenues in fiscal 2006. 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.

***Our marketis subject to rapid technological change, and to compete effectively, we mustcontinually introduce new products or enhancements that achieve marketacceptance.***

The marketfor our products is characterized by rapidly changing technology, frequent newproduct introductions, changes in customer requirements, and evolving industrystandards. We believe that we have been successful to date in investing inresearch and development to meet these needs and delivering products before ourcompetitors. We believe that our future success will depend upon continueddevelopment and timely introduction of products capable of collecting orprocessing new types of telecommunications signals. However, we expect that newtechnologies will continue to emerge. Our future performance will depend on thesuccessful development, introduction, and market acceptance of new and enhancedproducts that address these changes as well as current and potential customerrequirements. The introduction of new and enhanced products may cause ourcustomers to defer or cancel orders for existing products. There can be noassurance that we will be able to develop and market new products successfullyin the future or respond effectively to technological changes, or that newproducts introduced by others will not render our products or technologiesnoncompetitive 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.

19

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The development of new, technologically advanced productsis a complex and uncertain process requiring high levels of innovation andhighly skilled 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.

***Ourbusiness, operating results and financial condition could be negativelyimpacted if demand for our products is less than we anticipate or if we fail tohire qualified employees. As a result, the value of your securities maydecline.***

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****and Sofia Wireless. These competitorsare much larger than we are and have more in the way of financial and otherresources than we have. We have tried to create a niche market in themanufacturing of microwave integrated circuits for use by the defense industry.However, we have no contractual agreement with contractors that requires thempurchase minimum quantities with whom we do business and we cannot assure youthat these contractors will continue ordering parts from us or that they willorder at the same or greater levels than they have done in the past. If ourcustomers severely reduced their orders or ceased ordering from us altogether,our business, results of operations and financial condition, as well as thevalue of your securities, could be materially adversely affected.

***Unexpectedincreases in the cost to develop or manufacture our products under fixed-pricecontracts may cause us to experience unreimbursed cost overruns.***

Asignificant portion of our revenue is derived from fixed-price contracts. Underfixed-price contracts, unexpected increases in the cost to develop ormanufacture a product, whether due to inaccurate estimates in the biddingprocess, unanticipated increases in materials costs, inefficiencies, or otherfactors, are borne by us. We have experienced cost overruns in the past thathave resulted in losses on certain contracts, and may experience additionalcost overruns in the future. Such cost overruns would increase our operatingexpenses, reduce our net income and earnings per share, and have a materiallyadverse effect on our future results of operations and financial condition.

***Our futurerevenues are inherently unpredictable, our operating results are likely tofluctuate from period to period, and if we fail to meet the expectations ofsecurities analysts or investors, our stock price could 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, 

20

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we believe that period-to-periodcomparisons of our results of operations are not meaningful and should not berelied upon as indications of future performance. Some of the factors thatcould cause our quarterly or annual operating results to fluctuate includeconditions inherent in government contracting and our business such as thetiming of cost and expense recognition for contracts, the United StatesGovernment contracting and budget cycles, and contract closeouts. Because webase our operating expenses on anticipated revenue trends and a high percentageof our expenses are fixed in the short term, any delay in generating orrecognizing 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.

***We may engage in future acquisitions that dilute ourstockholders equity and cause us to use cash, incur debt, or assume contingentliabilities.***

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:

·       incursignificant unplanned expenses and personnel costs;

·       issuestock, or assume stock option plans that would dilute our current stockholders’percentage ownership;

·       usecash, which may result in a reduction of our liquidity;

·       incurdebt; or

·       assumeliabilities.

These purchasesalso involve numerous risks, including:

·       problemsintegrating the purchased operations, technologies, personnel or products;

·       unanticipatedcosts, litigation and other contingent liabilities;

·       diversionof management’s attention from our core business;

·       adverseeffects on existing business relationships with suppliers and customers;

·       risksassociated with entering into markets in which we have no, or limited, priorexperience;

·       unconsummatedtransactions; and

·       potentialloss of our key employees 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.

21

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**Risks Associated With Ownership of Our Securities**

***We have notpaid cash dividends and it is unlikely that we will pay cash dividends in theforeseeable 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 theability to issue additional shares of our common stock without asking forshareholder approval, which could cause your investment 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 mayraise additional capital through a securities offering that could dilute yourownership 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 noactive public market for our securities, so you may not be able to liquidateyour securities if you need 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 aresubject to the Penny Stock Rules and these rules may adversely affecttrading 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, investment experience and objectives. Broker-dealersmust also disclose these restrictions in writing to the customer, obtainspecific written consent from the customer, and provide monthly accountstatements to the customer. The effect of these restrictions probably decreasesthe willingness of broker-dealers to make a market in our common stock,decreases liquidity of our common stock and increases transaction costs forsales and purchases of our common stock as compared to other securities.

**Quantitative andQualitative Disclosures About Market Risk**

We have some risk exposure from interest rates beingunfavorable. At March 31, 2006, 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.

22

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**ITEM 7. FINANCIALSTATEMENTS**

**INDEXTO FINANCIAL STATEMENTS**

|                                                                                                                       | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm                                                              |       | F-24     |
| Consolidated  Balance Sheet as of March 31, 2006                                                                 |       | F-25     |
| Consolidated Statements of Statements of Income for  the years ended March 31, 2005 and March 31, 2006      |       | F-26     |
| Consolidated Statements of Stockholders’ Equity for  the years ended March 31, 2005 and March 31, 2006 |       | F-27     |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2005 and March 31, 2006                |       | F-28     |
| Notes to Consolidated Financial Statements                                                                            |       | F-29     |

 

F-23

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Boardof Directors and Shareholders

AMLCommunications, Inc.

Camarillo, CA

We have audited the accompanying consolidated balancesheet of AML Communications, Inc. and subsidiary as of March 31,2006, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the years in the two-year period ended March 31,2006. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of AML Communications, Inc.and subsidiary as of March 31, 2006, and the results of its operations andits cash flows for each of the years in the two-year period ended March 31,2006 in conformity with accounting principles generally accepted in the UnitedStates of America.
| /s/ KABANI &  COMPANY, INC. |
|--------------------------------------|
| KABANI & COMPANY, INC.      |
| Los Angeles, California              |
| June 16,  2006                  |

 

F-24

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**AMLCOMMUNICATIONS, INC. & SUBSIDIARYCONSOLIDATED BALANCE SHEETAS OF MARCH 31, 2006**

| **ASSETS**                                                                                            | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Current Assets:                                                                                       |       |       |       |
| Cash and cash equivalents                                                                             |       | $          | 2,367,000  |   |
| Accounts receivable, net of allowance for doubtful  accounts of $36,967                               |       | 1,066,000  |       |
| Inventories, net                                                                                      |       | 1,582,000  |       |
| Other current assets                                                                                  |       | 282,000    |       |
| Total current assets                                                                                  |       | 5,297,000  |       |
| Property and Equipment, at cost                                                                       |       | 5,106,000  |       |
| Less: Accumulated depreciation and amortization                                                       |       | (3,425,000 | )          |
| Property and Equipment, net                                                                           |       | 1,681,000  |       |
| Deferred Tax Asset                                                                                    |       | 1,662,000  |       |
| Intangible Assets:                                                                                    |       |       |       |
| Technologies, net                                                                                     |       | 811,000    |       |
| Patents, net                                                                                          |       | 146,000    |       |
| Customer lists, net                                                                                   |       | 132,000    |       |
| Trademarks                                                                                            |       | 180,000    |       |
| Other Assets                                                                                          |       | 15,000     |       |
|                                                                                                  |       | $          | 9,924,000  |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                        |       |       |       |
| Current  Liabilities:                                                                                 |       |       |       |
| Line of Credit                                                                                        |       | $          | 249,000    |   |
| Accounts payable                                                                                      |       | 153,000    |       |
| Current portion of long term debt                                                                     |       | 10,000     |       |
| Accrued expenses:                                                                                     |       |       |       |
| Accrued payroll and payroll related expenses                                                          |       | 477,000    |       |
| Accrued income taxes                                                                                  |       | 1,000      |       |
| Other accrued liabilities                                                                             |       | 111,000    |       |
| Total current liabilities                                                                             |       | 1,001,000  |       |
| Notes Payable                                                                                         |       | 629,000    |       |
| Stockholders’  Equity:                                                                           |       |       |       |
| Common stock, $0.01 par value:15,000,000 shares  authorized; shares issued and outstanding 10,234,166 |       | 102,000    |       |
| Capital in excess  of par value                                                                       |       | 13,494,000 |       |
| Accumulated  deficit                                                                                  |       | (5,302,000 | )          |
| Total stockholders’ equity                                                                       |       | 8,294,000  |       |
|                                                                                                  |       | $          | 9,924,000  |   |

 

The accompanying notes are an integral part to these consolidated financial statements

F-25

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**AML COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF INCOME**

| ** **                                                             | ** ** | **For the Years Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **March 31,  2006**               | ** ** | **March 31,  2005** | ** ** |
| Net sales                                                              |       | $                                      | 9,466,000  |   | $ | 8,650,000 |   |
| Cost of goods  sold                                                    |       | 5,354,000                              |       | 4, 766,000 |   |
| Gross profit                                                           |       | 4,112,000                              |       | 3,884,000 |   |
| Operating Expenses:                                                    |       |                                   |       |   |   |
| Selling, general and administrative                                    |       | 2,261,000                              |       | 2,069,000 |   |
| Research and development                                               |       | 1,233,000                              |       | 913,000 |   |
| Total operating expenses                                               |       | 3,483,000                              |       | 2,982,000 |   |
| Profit from operations                                                 |       | 618,000                                |       | 902,000 |   |
| Other income  (expense):                                               |       |                                   |       |   |   |
| Interest income                                                        |       | 37,000                                 |       | 30,000 |   |
| Interest expense                                                       |       | (40,000                                | )          | (96,000 | ) |
| Other                                                                  |       | 000                                    |       | 27,000 |   |
| Total other income (expense)                                           |       | (3,000                                 | )          | (39,000 | ) |
| Profit before provision for income taxes                               |       | 615,000                                |       | 863,000 |   |
| Provision for  income taxes                                            |       | (1,630,000                             | )          | (72,000 | ) |
| Net profit                                                             |       | $                                      | 2,245,000  |   | $ | 935,000 |   |
| Basic earnings per common share                                        |       | $                                      | 0.22       |   | $ | 0.10 |   |
| Basic weighted  average number of shares of common stock outstanding   |       | 10,098,000                             |       | 9,130,000 |   |
| Diluted earnings per common share                                      |       | $                                      | 0.21       |   | $ | 0.08 |   |
| Diluted weighted average  number of shares of common stock outstanding |       | 10,699,000                             |       | 11,028,000 |   |

 

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

F-26

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**AML COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED MARCH 31, 2005 AND 2006**

| ** **                                        | ** ** | **Common Stock** | ** ** | **Capital in  Excess of** | ** ** | **Retained  Earnings/  Accumulated** | ** ** | ** **  | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|--------------------------------------|------------|-------------|------------|
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**                          | ** ** | **Par Value**                   | ** ** | **Deficit** | ** ** | **Totals** | ** ** |
| 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 |   |
| Options Exercised                                 |       | 177,050               |       | 1,000                               |       | 108,000                              |       | —      |       | 109,000 |   |
| Net Income                                        |       | —                |       | —                              |       | —                               |       | 2,245,000   |       | 2,245,000 |   |
| Balance, March 31,  2006                     |       | 10,234,166            |       | $                                   | 102,000    |                                 | $          | 13,494,000  |       | $ | (5,302,000 | ) | $ | 8,294,000 |   |

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*                    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 consolidated financial statements.

F-27

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**AML COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **For the Years Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **March 31, 2006**           | ** ** | **March 31, 2005** | ** ** |
| **Cash Flows from Operating  Activities:**                                         | ** ** |                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net Income                                                                         |       |                                   | $          | 2,245,000 |   |   |   | $ | 935,000 |   |   |
| Adjustments to reconcile  net profit to net cash provided by operating activities: |       |                                   |       |   |   |   |   |   |   |
| Debt discount fees                                                                 |       |                                   | —     |   |   |   | 22,000 |   |   |
| Depreciation                                                                       |       |                                   | 322,000    |   |   |   | 254,000 |   |   |
| Bad debt expense                                                                   |       |                                   | (13,000    | ) |   |   | 16,000 |   |   |
| Inventory Reserves                                                                 |       |                                   | (36,000    | ) |   |   | 164,000 |   |   |
| Amortization                                                                       |       |                                   | 216,000    |   |   |   | 184,000 |   |   |
| Loss (gain) on sale of fixed assets                                                |       |                                   | —     |   |   |   | (2,000 | ) |   |
| Changes in assets and  liabilities:                                                |       |                                   |       |   |   |   |   |   |   |
| Decrease  (increase) in:                                                           |       |                                   |       |   |   |   |   |   |   |
| Accounts receivable                                                                |       |                                   | 238,000    |   |   |   | (518,000 | ) |   |
| Inventories                                                                        |       |                                   | 184,000    |   |   |   | (285,000 | ) |   |
| Other current assets                                                               |       |                                   | (129,000   | ) |   |   | 11,000 |   |   |
| Other assets—Deferred Tax Asset                                               |       |                                   | (1,662,000 | ) |   |   | — |   |   |
| Increase (decrease) in:                                                            |       |                                   |       |   |   |   |   |   |   |
| Accounts payable                                                                   |       |                                   | (94,000    | ) |   |   | (296,000 | ) |   |
| Accrued income taxes                                                               |       |                                   | (18,000    | ) |   |   | (274,000 | ) |   |
| Accrued expenses                                                                   |       |                                   | 19,000     |   |   |   | 130,000 |   |   |
| Net cash provided  by operating activities                                         |       |                                   | 1,272,000  |   |   |   | 341,000 |   |   |
| **Cash  Flows from Investing Activities:**                                         | ** ** |                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchases of property and equipment                                                |       |                                   | (1,357,000 | ) |   |   | (464,000 | ) |   |
| Proceeds from the sale of property and equipment                                   |       |                                   | —     |   |   |   | 40,000 |   |   |
| Long-term cash investments                                                         |       |                                   | —     |   |   |   | — |   |   |
| Cash received in the MPI acquisition                                               |       |                                   | —     |   |   |   | 1,150,000 |   |   |
| Net cash provided  by (used in) investing activities                               |       |                                   | (1,357,000 | ) |   |   | 726,000 |   |   |
| **Cash  Flows from Financing Activities:**                                         | ** ** |                                   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from exercise of stock options                                            |       |                                   | 109,000    |   |   |   | 5,000 |   |   |
| Proceeds from exercise of warrants                                                 |       |                                   | —     |   |   |   | 13,000 |   |   |
| Proceeds from line of credit, net                                                  |       |                                   | 169,000    |   |   |   | — |   |   |
| Proceeds (payments) notes payable                                                  |       |                                   | 639,000    |   |   |   | (295,000 | ) |   |
| Proceeds (payments) notes payable—investors                                   |       |                                   | —     |   |   |   | (43,000 | ) |   |
| Principal payments on capital lease obligations, net                               |       |                                   | (53,000    | ) |   |   | (136,000 | ) |   |
| Net cash provided  by (used in) financing activities                               |       |                                   | 864,000    |   |   |   | (456,000) |   |   |
| Net increase in Cash and Cash Equivalents                                          |       |                                   | 779,000    |   |   |   | 611,000 |   |   |
| Cash and Cash  Equivalents, beginning of period                                    |       |                                   | 1,588,000  |   |   |   | 977,000 |   |   |
| Cash and Cash  Equivalents, end of period                                          |       |                                   | $          | 2,367,000 |   |   |   | $ | 1,588,000 |   |   |

 

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

F-28

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2006**

**1. Line of Business**

AML Communications is adesigner, manufacturer, and marketer of amplifiers, subsystems, and relatedproducts 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 SignificantAccounting 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, 2006, the Company had cash and cashequivalent balances totaling $1,819,000 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 2006, the Company had sales to two customers that represented12.3% and 6.6% of net sales, respectively, as compared to fiscal 2005, in whichthe Company had sales to two customers, which represented 12.8% and 8.2% of netsales, respectively. As of March 31, 2006, these two customers comprised6.1% and 34.3%, 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, 2006, internationalsales were $1.7 million, or 17.9% of net sales, as compared to $2.5 million, or28.4% of net sales in fiscal year ended March 31, 2005.

*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-29

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

·       *Price isfixed 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*

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 material, and manufacturing overhead on work-in-process and finished goods, and are stated at thelower of cost (first-in, first-out) or market and consist of the following:

| ** **                     | ** ** | **March 31, 2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| Raw materials,  net of reserve |       |                         | $          | 963,000 |   |   |
| Work in process                |       |                         | 412,000    |   |   |
| Finished goods                 |       |                         | 207,000    |   |   |
|                           |       |                         | $          | 1,582,000 |   |   |

 

The reserve for inventoryat March 31, 2006 was $481,000.

*Depreciation andAmortization*

| Machinery and  equipment |   | 3 to 5 years  |   |
|--------------------------|--------|---------------|--------|
| Furniture and  fixtures  |   | 5 years       |   |
| Leasehold  improvements  |   | Life of lease |   |
| Building                 |   | 30 years      |   |

 

Depreciation expense for the years ended March 31,2006 and March 31, 2005 was $322,000 and $254,000 respectively.

F-30

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

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, 2006** | ** ** |
|--------------------------|------------|------------------------------|------------|
| Building                 |       |                         | $          | 800,000 |   |   |
| Machinery and  equipment |       |                         | 3,477,000  |   |   |
| Furniture and  fixtures  |       |                         | 146,000    |   |   |
| Leasehold  improvements  |       |                         | 683,000    |   |   |
|                     |       |                         | $          | 5,106,000 |   |   |

 

On February 3, 2006the company purchased the building that houses MPI located at 3350 Scott Blvd.25 Santa Clara, California for a purchase price of $800,000. The Company made adown payment of $160,000. The building is being financed by the bank promissorynote in the amount of $640,000 with 6.760% interest payable in 83 regularpayments of $4,425.88 each which includes principle and interest and oneirregular last payment of $556,594.48. The company’s final payment is due February 10,2013 and will be for all principle and interest not yet paid. The note payableis secured by the the deed of trust on the building.

*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 considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount exceeds thefair value of the assets. During the year ended March 31, 2006, theCompany recognized no impairment.

F-31

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

At March 31, 2006,intangibles consist of the following:

| **Intangibles**           | ** ** | ** ** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------|------------|-------------------------------|------------|---------|------------|
| Amortized  intangibles:   |       |       |       |                            |       |                          |       |    |       |   |   |
| Patents                   |       |       | $          | 189,000                         |       |                          |       | $       | (44,000    | ) |   | $ | 145,000 |   |
| Existing Technology       |       |       | 961,000    |                            |       |                          | (150,000   | )       |       | 811,000 |   |
| Customer List             |       |       | 339,000    |                            |       |                          | (207,000   | )       |       | 132,000 |   |
| Unamortized  intangibles: |       |       |       |                            |       |                          |       |    |       |   |   |
| Trademarks                |       |       | 181,000    |                            |       |                          | —     |    |       | 181,000 |   |
|                      |       |       | $          | 1,670,000                       |       |                          |       | $       | (401,000   | ) |   | $ | 1,269,000 |   |

 

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, 2006 was$216,000. The Company expects the amortization expenses for the next five yearsto be as follows:

| **Year Ending March 31,** | ** ** | ** ** | ** ** | **Annual Amount** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------|------------|
| 2007                                     |       |       | $          | 216,000                |       |   |
| 2008                                     |       |       | $          | 122,000                |       |   |
| 2009                                     |       |       | $          | 103,000                |       |   |
| 2010                                     |       |       | $          | 103,000                |       |   |
| 2011                                     |       |       | $          | 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 lossby the total of the weighted average number of shares outstanding, and thedilutive effect of outstanding stock options (applying the treasury stockmethod).

F-32

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

The Company had 1,760,000 of granted stock options andwarrants that were exercisable as of March 31, 2006 and 1,898,000 ofgranted stock options and warrants exercisable at March 31, 2005.

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations:

| **Year ended March  31, 2006** | ** ** | ** ** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                             |       |       |       |                |       |       |       |               |       |
| Net income available to common stockholders             |       | $          | 2,245,000  |                | 10,098,000 |       |       | $                  | 0.22       |   |   |
| Effect of dilutive  securities:                         |       |       |       |                |       |       |       |               |       |
| Stock options                                           |       |       |       | 449,000             |       |       |       |               |       |
| Warrants                                                |       |       |       | 152,000             |       |       |       |               |       |
| Diluted earnings per  share:                            |       | $          | 2,245,000  |                | 10,699,000 |       |       | $                  | 0.21       |   |   |

 

| **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 |   |   |

 

*Segments*

The Company has two reportable segments consisting of (1) AMLCommunications, Inc. (“AML”) and (2) the Microwave Power, Inc. (“MPI”).Our AML segment designs, manufactures, and markets amplifiers and relatedproducts that address the defense microwave and wireless communications markets.These products are manufactured and sold through operations in Camarillo,California. Our MPI segment designs, manufactures, and markets high powermicrowave amplifiers. These products are manufactured and sold throughoperations in Santa Clara, California. The Company evaluates performance basedon sales, gross profit margins and operating profit before income taxes.

F-33

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

The following is information for the Company’sreportable segments for the year ended March 31, 2006:

**For the year ended March 31, 2006:**

| ** **                                                   | ** ** | **AML**                              | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|---------|------------|-----------------|------------|-----------|------------|
| ** **                                                   | ** ** | **(Dollars in Thousands)** | ** ** |
| Revenue                                                      |       | $                                    | 7,245      |    | $          | 2,221           |       |      | —     |   |   | $ | 9,466 |   |
| Gross Profit                                                 |       | 2,635                                |       | 1,477   |       |            | —     |      |       | 4,112 |   |
| Depreciation & amortization (includes  intangibles) |       | 299                                  |       | 239     |       |            | —     |      |       | 538 |   |
| Interest expense                                             |       | 40                                   |       | —  |       |            | —     |      |       | 40 |   |
| Other, net                                                   |       | (32                                  | )          | (5      | )          |            | —     |      |       | (37 | ) |
| Profit from continuing operations before tax                 |       | (99                                  | )          | 714     |       |            | —     |      |       | 615 |   |
| Identifiable assets                                          |       | 5,421                                |       | 4,503   |       |            | —     |      |       | 9,924 |   |
| Capital  Expenditures                                        |       | $                                    | 1,314      |    | 43         |            |       | —    |       |   | $ | 1,357 |   |
|                                                              |            |                                      |            |         |            |                 |            |           |            |  |  |  |  |  |

 

 

F-34

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

**2. Summary of SignificantAccounting Policies(Continued)**

**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 |   |
|                                                              |            |                                      |            |         |            |                 |            |           |            |  |  |  |  |  |

 

*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 affect thereported amounts of assets and liabilities and disclosure of contingent assetsand 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 include telecommunications, radar, simulators, transmitters, andtest instrumentation. The revenues earned by each product line are as follows:

**For the Fiscal Year Ended March 31,2006:**

| ** **                   | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Revenues                     |       |                                 |       |       |       |    |       |       |       |      |       |       |       |
| Defense microwave  and other |       | $                                    | 6,938      |       | 73.2       | %       | $          | 2,180      |       | 23.1      | %          | $          | 9,118      |   | 96.3 | % |
| PCS and two-way  messaging   |       | 196                                  |       | 2.1        |       | 41      |       | .4         |       | 237       |       | 2.5        |       |
| Cellular and  other          |       | 111                                  |       | 1.2        |       | —  |       | —     |       | 111       |       | 1.2        |       |
| Total net sales              |       | $                                    | 7,245      |       | 76.5       | %       | $          | 2,221      |       | 23.5      | %          | $          | 9,466      |   | 100.0 | % |

 

F-35

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

**For the Fiscal Year EndedMarch 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 | % |

 

The following tablesummarizes the international sales by segment for the fiscal year ended March 31,2006:

| ** **           | ** ** | **AML**                              | ** ** | ** ** | ** ** | **MPI** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|---------|------------|------------|------------|-----------|------------|------------|------------|
| ** **           | ** ** | **(Dollars in thousands)** | ** ** |
| International  Sales |       | $                                    | 1,328      |       | 14.1       | %       | $          | 373        |       | 3.9       | %          | $          | 1,701      |   | 17.9 | % |
| Domestic sales       |       | 5,917                                |       | 62.5       |       | 1,848   |       | 19.5       |       | 7,765     |       | 82.1       |       |
| Total Sales          |       | $                                    | 7,245      |       | 76.6       | %       | $          | 2,221      |       | 23.4      | %          | $          | 9,466      |   | 100.0 | % |

 

**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 | % |

 

*Research andDevelopment Costs*

Research and developmentcosts for fiscal 2006 were $1,233,000, or 13% of net sales, compared to$913,000, or 10.6% of net sales, for the corresponding period in fiscal 2005. Ofthe increase of $283,000 is attributed to additional new hires and general wageincreases. Research and development costs are charged to expense as incurred.

*Fair Value ofFinancial 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.

F-36

----

**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

*Stock-BasedCompensation*

In December 2002, the FASB issued Statement ofFinancial Accounting Standards No. 148 (“SFAS 148”), “Accounting forStock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS123, “Accounting for Stock-Based Compensation”, to provide alternative methodsof 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 endedMarch 31, 2006. The compensation expense for these periods has beendetermined under the fair value method using the Black-Scholes pricing model,and assumes graded vesting.**

| **For the year ended ended:**                  | ** ** | ** ** | ** ** | **March 31,  2005** | ** ** | **March 31,  2006** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|
| Net income as reported                                             |       | $          | 935,000    |                     | $          | 2,245,000                |       |
| Less: stock-based compensation expense, net of related tax effects |       | (71,000    | )          | (63,000                  | )          |
| Pro forma net income                                               |       | $          | 864,000    |                     | $          | 2,182,000                |       |
| Basic earnings per share—as  reported                         |       | $          | 0.10       |                     | $          | 0.22                     |       |
| Diluted earnings per share—as reported                        |       | $          | 0.08       |                     | $          | 0.21                     |       |
| Basic earnings per share—pro forma                            |       | $          | 0.09       |                     | $          | 0.22                     |       |
| Diluted  earnings per share—pro forma                         |       | $          | 0.07       |                     | $          | 0.20                     |       |

 

The assumptions used in calculating the fair value of optionsgranted using the Black-Scholes option- pricing model are as follows:

| Risk-free interest rate      |   | 4.9        | %      |
|------------------------------|--------|------------|--------|
| Expected life of the options |   | 3.95 years |   |
| Expected volatility          |   | 121.2      | %      |
| 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 31,2006 and 2005 were $50,000 and $60,000, respectively.

F-37

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

*Recently IssuedAccounting Pronouncements*

In December 2004 the FASB issued FASB Statement No. 123R“Shared-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 first quarter of fiscal 2006. The Company is evaluating theimpact of the adoption of this standard on its financial statements.

In May 2005 the FASB issued SFAS No. 154 “AccountingChanges and Error Corrections.” This statement applies to all voluntary changesin accounting principle and requires retrospective application to prior periods’financial statements of changes in accounting principle, unless this would beimpracticable. This statement also makes a distinction between “retrospectiveapplication” of any accounting principle and the “restatement” of financialstatements to reflect the correction of an error. This statement is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. We are evaluating the effect the adoption of thisinterpretation will have on its financial position, cash flows, and results ofoperations.

In June, 2005 the EITF reached consensus on Issue No. 05-6.Determining the Amortization Period for Leasehold Improvements (“EITF 05-6provides guidance on determining the amortization period for leaseholdimprovements acquired in a business combination or acquired subsequent to leaseinception. The guidance in EITF 05-6 will be applied prospectively and iseffective for periods beginning after June 29, 2005. EITF 05-6 isnot expected to have a material effect on the Company’s consolidated financialposition or results of operations.

In February, 2006 FASB issued SFAS No. 155, “Accountingfor Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”. SFAS No. 155 permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation, clarifies which interest-only strips and principle-onlystrips are not subject to the requirements of SFAS No. 133, establishes arequirement to evaluate instruments that contain an embedded derivativerequiring bifurcation, clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives and amends SFAS No. 140 toeliminate the prohibition on qualifying special-purpose entity from holding aderivative statement is effective for all financial instruments acquired orissued after beginning of the Company’s first fiscal quarter that begins September 15,2006. Management believes that this statement will not have a significantimpact on the financial statements.

In March 2006FASB issued SFAS 156 “Accounting for Servicing of Financial Assets” thisStatement amends FASB Statement No. 140 Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities, with respectto accounting for separately recognized servicing assets and servicingliabilities. The Statement:

1.                Requires an entityto recognize a servicing asset or servicing liability each time it undertakesan obligation to service a financial asset by entering into a servicingcontract.

F-38

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

2.                Requires allseparately recognized servicing liabilities to be initially measured at fairvalue, if practicable

3.                Permits an entityto choose ‘Amortization Method’ or Fair value measurement method’ for eachclass of separately recognized servicing assets liabilities.

4.                At its initialadoption permits a one time reclassification of available-for-sale securitiesto trading securities by entities with recognized servicing rights, withoutcalling into question the treatment of other available-for-sale securitiesunder Statement 115, provided that the available-for-sale securities areidentified in some manner as offsetting the entity’s exposure to changes infair value of servicing liabilities that a servicer elects to subsequentlymeasure at fair value.

5.                Requires separatepresentation of servicing assets and servicing liabilities subsequentlymeasured at fair value in the statement of financial position and additionaldisclosures for all separately recognized servicing assets and servicingliabilities.

This Statement iseffective as of the beginning of the Company’s first fiscal year that beginsafter September 15, 2006. Management believes that this statement will nothave a significant impact on the financial statements.

**3. Debt and LeaseCommitments**

*Accounts ReceivableFinancing*

On July 27, 2005, wesigned a Business Financing Modification Agreement with Bridge Bank to renewour line of credit, increasing the credit facility from $1.5 million to $2.0million. Of this $2.0 million, $1.0 million may be used for cash advancesagainst accounts receivables and $1.0 million may be used for equipmentadvances. Our ability to borrow under this agreement varies based upon eligibleaccounts receivable and eligible equipment purchases. We are obligated to paythe bank a finance charge at a rate per year equal to the prime rate, which inno event shall be less than 5.50%, plus .25% with respect to cash advances anda rate of such prime rate plus 2.0% with respect to equipment advances. We areobligated to pay an annual facility fee of $5,000 (0.50% of the gross facilityamount). We must maintain certain financial requirements, including net profitafter tax, on a quarterly basis, of at least $0.01, and a debt service coverageratio with respect to equipment advances. We were in compliance with theserequirements at March 31, 2006; however, there is no assurance that wewill be in compliance at future dates. This agreement terminates on July 27,2006 or upon a date that the bank chooses to terminate the agreement. Anyunpaid balance is due and payable pursuant to the agreement on the terminationdate. If the agreement is terminated within the first 12 months following itsexecution on July 27, 2005, we will be required to pay an earlytermination fee of 1.0% of the credit facility amount under the terms of theagreement. At March 31, 2006 we had an outstanding balance of $ 0 underthis agreement and our remaining borrowing capacity was approximately$1,000,000 available under the accounts receivable agreement. Under theequipment financing agreement, we had an outstanding balance of $248,000 at March 31,2006 with a remaining borrowing capacity of approximately $752,000 available.

F-39

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

**3. Debt andLease Commitments (Continued)**

**Note Payable**

On February 3, 2006the company purchased the building that houses MPI located at 3350 Scott Blvd.25 Santa Clara, California for a purchase price of $800,000. The Company made adown payment of $160,000. The building is being financed by the bank promissorynote in the amount of $640,000 with 6.760% interest payable in 83 regularpayments of $4,425.88 each which includes principle and interest and oneirregular last payment of $556,594.48. The company’s final payment is due February 10,2013 and will be for all principle and interest not yet paid. The note payableis secured by the the deed of trust on the building.

**Capital and Operating LeaseObligations**

The Company leases its office space and manufacturingfacility under a long-term operating lease expiring April 2008. Total rentexpense under these operating leases was approximately $183,000 and $244,000during the years ended March 31, 2006 and 2005, respectively.

Total minimum leasepayments under the above leases are as follows: 

| ** **                  | ** ** | **Operating  Leases** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| Year ending  March 31, |       |                  |       |
| 2007                        |       | $                     | 196,000    |   |
| 2008                        |       | 198,000               |       |
| 2009                        |       | 17,000                |       |
| Thereafter                  |       | —                |       |
|                        |       | $                     | 411,000    |   |

 

**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.

Thecomponents of the income tax provision for the years ended March 31, 2005and 2006, were as follows:

| ** ** | ** ** | **March 31, 2005** | ** ** | **March 31, 2006** | ** ** |
|------------|------------|------------------------------|------------|------------------------------|------------|
| Current    |       |                         | $          | (72,000                      | )          |   |   | $ | 32,000 |   |   |
| Deferred   |       |                         | —     |                         |       |   | 1,662,000 |   |   |
|       |       |                         | $          | (72,000                      | )          |   |   | $ | 1,630,000 |   |   |

 

F-40

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

**4. IncomeTaxes (Continued)**

Differences between thebenefit from income taxes and income taxes at the statutory federal income taxrate for years ended March 31, 2005 and 2006 are as follows:

| ** **                                              | ** ** | **March 31, 2005** | ** ** | **March 31, 2006** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **Amount**                   | ** ** | **Percent**                  | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Income tax  expense (benefit) at statutory federal rate |       | $                            | 278,000    |                         |       | 34.0 | % |   | $ | 209,000 |   | 34.0 | % |
| State income  taxes, net of federal income tax          |       | (97,000                      | )          |                         | (11.8      | ) |   | (237,000 | ) | (38.5 | ) |
| Effect of permanent  differences                        |       | 64,000                       |       |                         | 7.8        |   |   | 61,000 |   | 9.9 |   |
| Change in  valuation allowance                          |       | (325,000                     | )          |                         | (39.7      | ) |   | (1,662,000 | ) | (270.2 | ) |
| Other                                                   |       | 8,000                        |       |                         | 0.9        |   |   | (1,000 | ) | 0.1 |   |
|                                                    |       | $                            | (72,000    | )                            |       | (8.8 | )% |   | $ | (1,630,000 | ) | (263.0 | )% |

 

Under SFAS 109, deferred tax assets may be recognizedfor temporary differences that will result in deductible amounts in futureperiods and for loss carry forwards. A valuation allowance is recognized if,based on the weight of available evidence, it is more likely than not that someportion 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, 2006 follows:

| **Deferred Tax Assets and liabilities** | ** ** | ** ** | ** ** | **Balance** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------|------------|
| Inventory  reserves                                         |       | $          | 206,000    |        |
| Allowance for  doubtful accounts                            |       | 16,000     |       |
| Accrued vacation                                            |       | 69,000     |       |
| Accrued warranty  and customer support                      |       | 11,000     |       |
| Other                                                       |       | (65,000    | )          |
| General tax  credit carry-forwards                          |       | 1,675,000  |       |
| Net operating  loss carry-forwards                          |       | 3,436,000  |       |
| Depreciation                                                |       | (42,000    | )          |
|                                                        |       | 5,306,000  |       |
| Valuation allowance                                         |       | (3,644,000 | )          |
| Total                                                       |       | $          | (1,662,000 | )           |

 

As of March 31, 2006, the Company had federal netoperating loss carry-forwards of approximately $8.7 million, expiring atvarious dates through 2024.

F-41

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

**5.****   Stockholders’Equity**

**Stock Option Plan**

The Company’s StockIncentive Plan provides for the granting of non-qualified and incentive stockoptions to purchase up to 3,500,000 shares of common stock for periods not toexceed 10 years. Options typically vest 20% after one year from the dateof grant with remaining options vesting at a rate of 20% per year thereafter.Options may be granted to employees, officers, directors and consultants.

*Plan Duration*

The original 1995 Stock Incentive Plan becameeffective on November 3, 1995 and has been amended and restated on June 24,1998, July 26, 2000, June 26, 2001 and on June 10, 2002, and July 12,2005.   After termination of the AmendedPlan, no additional Awards may be granted thereunder. Although Common Stock maybe issued on or after November 1, 2005 pursuant to the exercise of Awardsgranted prior to such date, no Common Stock shall be issued under the AmendedPlan on or after October 31, 2015.

Activityunder the amended plan is as follows (1):

| **Fifth Amended and Restated 1995 Stock Incentive Plan** | ** ** | ** ** | ** ** | **Number ofShares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------------------------|------------|
| 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                                           |       |   |
| Granted                                                                                     |       | 257,500    |       |                     | 1.10       |                                           |       |
| Exercised                                                                                   |       | (177,050   | )          |                     | .61        |                                           |       |
| Canceled                                                                                    |       | (131,438   | )          |                     | 1.51       |                                           |       |
| Outstanding at  March 31, 2006                                                         |       | 1,937,750  |       |                     | $          | 1.06                                           |       |   |
| Exercisable at  March 31, 2006                                                         |       | 1,536,850  |       |                     | $          | 1.06                                           |       |   |

 

The weighted average fair value for options grantedduring each year was $0.53 and $0.96 for fiscal 2006 and fiscal 2005,respectively.

The number of common stock options available for grantas of each year was 628,074 for fiscal 2006 and 254,136 for fiscal 2005.

F-42

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

Options outstanding at March 31,2006 and related weighted average price and life information 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  |                                    |       | 266,200    |                            |       |                                                | 6.87       |                                          |       |                     | $          | 0.15                                   |       |   | 244,700 |   |   | $ | 0.14 |   |   |
| $0.51 -  $1.00  |                                    |       | 1,238,250  |                            |       |                                                | 5.83       |                                          |       |                     | $          | 0.91                                   |       |   | 1,135,750 |   |   | $ | 0.92 |   |   |
| $1.01 -  $2.00  |                                    |       | 357,300    |                            |       |                                                | 7.71       |                                          |       |                     | $          | 1.31                                   |       |   | 80,400 |   |   | $ | 1.59 |   |   |
| $2.01 -  $5.00  |                                    |       | 47,250     |                            |       |                                                | 3.75       |                                          |       |                     | $          | 3.24                                   |       |   | 47,250 |   |   | $ | 3.24 |   |   |
| $5.01 -  $15.75 |                                    |       | 28,750     |                            |       |                                                | 1.00       |                                          |       |                     | $          | 9.47                                   |       |   | 28,750 |   |   | $ | 9.47 |   |   |
| $0.11 -  $15.75 |                                    |       | 1,937,750  |                            |       |                                                | 6.16       |                                          |       |                     | $          | 1.06                                   |       |   | 1,536,850 |   |   | $ | 1.06 |   |   |

 

**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, 2006 and 2005: dividend yields of 0% and 0%, respectively;expected volatility of 51% and 99%, respectively; risk-free interest rates of6.54% and 4.42%, respectively; and expected lives of 4.25 and 4.55, respectively.The weighted-average fair value of options granted during the year ended March 31,2006 for which the exercise price equals the market price on the grant date was$.53, and the weighted-average exercise price was $1.10.

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, 2006, 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 31,2006, none of the shares related to this warrant have been exercised.

F-43

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

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 31,2006, 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, 2006,52,500 shares related to these warrants have been exercised.

**7.**   EmployeeBenefit 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 employees may participate inthis plan. After meeting the three-month minimum of employment with theCompany, employees become eligible and may choose to enroll at the nextquarterly open enrollment. Contributions to the Plan for fiscal year 2005 and2006 were $46,000 and $95,000 respectively.

**8.**   LegalProceedings

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 a materialadverse effect on the business, financial condition or results of operations ofthe Company.

**9.**   RelatedParty Transactions

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. Warrantsto purchase a total of 240,000 shares of our common stock were issued inconnection 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 

F-44

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

**9.**   Related Party Transactions (Continued)

$35,000and are expensing this value over the term of the notes payable. For the yearended March 31, 2005, a total of $22,000 was charged to the consolidatedstatement of operations. On November 2,2004, the Board of Directors approved the early payoff of these notes payableand these notes were paid in full on November 9, 2004.

**10.**   Acquisitionof 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 $3,028,000. Pursuant to the acquisitionagreement, 2,117,108 shares as consideration for the acquisition and 21,174shares to be issued to the broker were committed, or authorized for issuance byour board of directors, as of June 18, 2004. The difference between theamount of “net assets acquired” and the purchase price consists ofapproximately $145,000 in transactional costs and approximately $30,000 (21,174shares at $1.43 per share) worth of shares of the common stock issued to thebroker. Transactional costs include legal, accounting, and appraisal fees. Therewas no change in MPI’s management and the Company entered into employmentagreements with two of MPI’s senior officers, its past President and Secretary.MPI will continue to operate as the Company’s division from its facility inSanta Clara, which is owned by MPI’s prior shareholders and leased to theCompany.

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

1.)           Technologically, MPI’ssemi-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.

Asummary of the condensed balance sheet of MPI as of June 18, 2004 is asfollows:

| ** **                   | ** ** | **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 ofacquired intangible assets, $189,000 was assigned to patents (8 year usefullife), $961,000 was assigned to Existing Technology (12 year useful life), and$339,000 was assigned to Customer 

F-45

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**AML COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 2006**

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

Lists (3year useful life). All are subject to amortization. The balance of $181,000 wasassigned to trademarks, which have an indefinite life and therefore should notbe amortized.

**11.**   SupplementalDisclosure of Cash Flows

The Company prepares its statements of cash flowsusing the indirect method as defined under the Financial Accounting Standard 95.

The Company paid $32,000 and $0 income tax and $40,000and $96,000 interest during the years ended March 31, 2006 and 2005respectively.

Cash flows from financing and investing activities forthe year ended March 31, 2005 excludes the effect of issuance of 2,117,108shares of common stock valued at $1.43 per share with total consideration of $3,028,000as purchase consideration for the acquisition of Microwave Power Inc.

F-46

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**ITEM 8.**   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

**ITEM 8A.**   CONTROLSAND PROCEDURE

(a)           *Evaluationof disclosure controls and procedures*.   As of the end ofthe period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Director of Finance, of the effectiveness of the designand operation of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer 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 in Securitiesand Exchange Commission rules and forms and (ii)  is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosures.

(b)          *Changes in internal controls over financial reporting*.   Therewas no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**ITEM 8B.**   OTHERINFORMATION

Not Applicable.

47

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**PART III**

**ITEM 9.   DIRECTORS,EXECUTIVE OFFICERS OF REGISTRANT**

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 2006 Annual Meeting of Stockholders to be held on September 7,2006.

**ITEM 10.   EXECUTIVECOMPENSATION**

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 2006 Annual Meeting of Stockholders to be held on September 7,2006.

**ITEM 11.   SECURITYOWNERSHIP 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 2006 AnnualMeeting of the Stockholders to be held on September 7, 2006.

**ITEM 12.   CERTAINRELATIONSHIPS 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 2006 Annual Meeting of Stockholders to be held on September 7,2006.

48

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**ITEM 13.   EXHIBITSAND 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)                                       |   |
| 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)*                                                                                                                                                                            |   |
| 10.19 |   | Business Financing Modification with Bridge Bank,  dated December 23, 2005(12)                                                                                                                                                          |   |
| 10.20 |   | Business Financing Modification with Bridge Bank  dated January 19, 2006(12)                                                                                                                                                            |   |
| 10.21 |   | Fifth Amended and Restated 1995 Stock Option  Agreement at July 12, 2005(13)                                                                                                                                                            |   |

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| 10.22 |   | Loan Agreement with Bank of America for purchase of  MPI building(12)     |   |
|-------|--------|---------------------------------------------------------------------------|--------|
| 10.23 |   | 2005 Equity Incentive Plan(15)                                            |   |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm(14)             |   |
| 31.1  |   | Certification by the Chief Executive Officer(14)                          |   |
| 31.2  |   | Certification by the Chief Financial Officer(14)                          |   |
| 32    |   | Certification  pursuant to Section 906 of the Sarbanes Oxley Act(14) |   |

 

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(1)          Previously filed withthe Securities and Exchange Commission as Exhibit 10.13 to the company’s Form 10-KSBfor 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)   Previously filed withSecurities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2005 and incorporated herein byreference.

(13)   Previously filed with theSecurities and Exchange Commission as an attachment to the Company’s ProxyStatement dated July 29, 2005 and incorporated herein by reference.

(14)   Filed herewith.

(15)   Previously filed withSecurities and Exchange Commission as an exhibit to the Company’s Form S-8Registration Statement (no. 333-131588) dated February 6, 2006 andincorporated herein by reference.

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

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**ITEM 14.   PRINCIPALACCOUNTANT FEES AND SERVICES**

Thefollowing table sets forth fees billed to us by our auditors during the fiscalyears ended March 31, 2005 and March 31, 2006 for: (i) servicesrendered for the audit of our annual financial statements and the review of ourquarterly financial statements, (ii) services by our auditor that arereasonably related to the performance of the audit or review of our financialstatements and that are not reported as Audit Fees, (iii) servicesrendered in connection with tax compliance, tax advice and tax planning, and (iv) allother fees for services rendered. “All other fees” include fees related to (orpaid for) in the fiscal year ended March 31, 2005 and fees related tofiscal year ended March 31, 2006. Included in the “Audit Related Fees” forthe fiscal year ended March 31, 2005, there was $70,000 in audit feesdirectly 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, 2006** | ** ** |
| (i)    Audit  fees    |       |                                     | $          | 73,000 |   |   |   | $ | 63,000 |   |   |
| (ii)   Audit  related fees |       |                                     | 34,000     |   |   |   | 25,000 |   |   |
| (iii)  Tax  fees                |       |                                     | —     |   |   |   | — |   |   |
| (iv)  All  other fees           |       |                                     | 2,000      |   |   |   | 2,000 |   |   |
|                                      |       |                                     | $          | 109,0000 |   |   |   | $ | 90,000 |   |   |

 

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**SIGNATURES**

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

|        |   | **AML Communications, Inc.**                                              |
|--------|--------|--------------------------------------------------------------------------------|
|   | By:    | /s/ JACOB INBAR                                                                |
|   |   | Jacob Inbar, President and  Chief Executive Officer  Dated: June 26, 2006 |

 

KNOW ALL THESE PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Jacob Inbar andJames M. Fornear, and each of them, jointly and severally, his attorneys infact, each with full power of substitution, for him in any and all capacities,to sign any and all amendments to this Report on Form 10-KSB, and tofile the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each said attorneys-in-fact or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant anJamesM. Forneard in the capacities and on the dates indicated.

|                        | ** **    | ** **                                     | ** ** | ** **          |
|------------------------|---------------|------------------------------------------------|------------|---------------------|
|                        | **Signature** | ** **                                     | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
| /s/ JACOB  INBAR       |          | President, Chief  Executive Officer and        |       | June 26,  2006 |
| Jacob  Inbar           |          |    Chairman of the  Board            |       |                |
| /s/ TIBERIU  MAZILU    |          | Vice President-Engineering  and Director       |       | June 26,  2006 |
| Tiberiu Mazilu         |          |                                           |       |                |
| /s/ EDWIN J.  MCAVOY   |          | Secretary, Vice  President-Sales, and Director |       | June 26,  2006 |
| Edwin J. McAvoy        |          |                                           |       |                |
| /s/ JAMES M.  FORNEAR  |          | Chief Financial  Officer                       |       | June 26,  2006 |
| James  M. Fornear      |          |                                           |       |                |
| /s/ RICHARD W.  FLATOW |          | Director                                       |       | June 26,  2006 |
| Richard  W. Flatow     |          |                                           |       |                |
| /s/ GERALD M.  STAREK  |          | Director                                       |       | June 26,  2006 |
| Gerald M. Starek       |          |                                           |       |                |
|                        |               |                                                |            |                     |  |  |  |  |  |  |

 

 

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