** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-QSB**
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

For the quarterly periodended:         **June 30,2006**

or
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 0R  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

For the transition period from                 to                    

Commission FileNumber:                   **0-27252**

**AMLCOMMUNICATIONS, INC.**

(Exact name ofsmall business issuer as specified in its charter)

| **Delaware**                              | ** ** | **77-0130894**       |
|-------------------------------------------|------------|----------------------|
| (State or Other  jurisdiction of          |       | (IRS Employer        |
| incorporation or  organization)           |       | Identification  No.) |
|                                      |       |                 |
| ** 1000 Avenida Acaso**              | ** ** | ** **           |
| **Camarillo,  California**                | ** ** | **93012**            |
| (Address of  principal executive offices) |       | (Zip Code)           |

 

**(805) 388-1345**

(Issuer’stelephone number including area code)

Check whether the issuer (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

                                                                                                                                                                            Yes o  Nox

State the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

CommonStock Outstanding as of August 11, 2006: 10,234,166 shares

Transitional Small Business Disclosure Format: Yes o  Nox

 

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**AMLCommunications, Inc.**

 
|            | **Index  to Form 10-QSB**                                                                                 | ** ** |
|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                                | ** ** |
| Item 1.    | Financial Statements  (Unaudited)                                                                         |       |
|       |                                                                                                      |       |
|       | Consolidated  Balance Sheet as of June 30, 2006                                                           |       |
|       |                                                                                                      |       |
|       | Consolidated  Statements of Operations for the three month periods ended June 30, 2006 and  June 30, 2005 |       |
|       |                                                                                                      |       |
|       | Consolidated  Statements of Cash flows for the three month periods ended June 30, 2006 and  June 30, 2005 |       |
|       |                                                                                                      |       |
|       | Notes to Consolidated Financial Statements                                                                |       |
|       |                                                                                                      |       |
| Item 2.    | Management’s Discussion and Analysis or Plan of  Operation.                                          |       |
|       |                                                                                                      |       |
| Item 3.    | Controls and Procedures                                                                                   |       |
|       |                                                                                                      |       |
| Part  II   | Other  Information                                                                                        |       |
|       |                                                                                                      |       |
| Item  1.   | Legal  Proceedings                                                                                        |       |
|       |                                                                                                      |       |
| Item 2.    | Unregistered Sales of Equity Securities and Use of  Proceeds                                              |       |
|       |                                                                                                      |       |
| Item 3.    | Defaults Upon Senior Securities                                                                           |       |
|       |                                                                                                      |       |
| Item 4.    | Submission of Matters to a Vote of Security Holders                                                       |       |
|       |                                                                                                      |       |
| Item  5.   | Other  Information                                                                                        |       |
|       |                                                                                                      |       |
| Item 6.    | Exhibits                                                                                                  |       |
|       |                                                                                                      |       |
| ** ** | SIGNATURES                                                                                                |       |

** **

2

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**PART I - FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCE SHEET**

**(unaudited)**
| ** **                                                                                                               | ** ** | **June 30,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                               | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                               | ** ** | ** **              | ** ** |
| Current Assets:                                                                                                          |       |                    |       |
| Cash and cash  equivalents                                                                                               |       | $                       | 1,804,000  |   |
| Accounts receivable,  net of allowance for doubtful accounts of $37,000                                                  |       | 1,330,000               |       |
| Inventories, net                                                                                                         |       | 1,601,000               |       |
| Other current assets                                                                                                     |       | 120,000                 |       |
| Total current assets                                                                                                     |       | 4,855,000               |       |
|                                                                                                                     |       |                    |       |
| Property and Equipment,  at cost                                                                                         |       | 5,467,000               |       |
| Less: Accumulated  depreciation                                                                                          |       | (3,512,000              | )          |
| Property and Equipment,  net                                                                                             |       | 1,955,000               |       |
|                                                                                                                     |       |                    |       |
| Deferred Tax Asset                                                                                                       |       | 1,662,000               |       |
| Intangible Assets:                                                                                                       |       |                    |       |
| Technologies, net                                                                                                        |       | 790,000                 |       |
| Patents, net                                                                                                             |       | 140,000                 |       |
| Customer lists, net                                                                                                      |       | 104,000                 |       |
| Trademarks                                                                                                               |       | 181,000                 |       |
| Other Assets                                                                                                             |       | 16,000                  |       |
|                                                                                                                     |       | $                       | 9,703,000  |   |
| ** **                                                                                                               | ** ** | ** **              | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                           |       |                    |       |
|                                                                                                                     |       |                    |       |
| Current Liabilities:                                                                                                     |       |                    |       |
| Line of Credit                                                                                                           |       | $                       | 207,000    |   |
| Accounts payable                                                                                                         |       | 173,000                 |       |
| Current portion of long  term debt                                                                                       |       | 10,000                  |       |
| Accrued expenses:                                                                                                        |       |                    |       |
| Accrued payroll and  payroll related expenses                                                                            |       | 202,000                 |       |
| Accrued income taxes                                                                                                     |       | 8,000                   |       |
| Other accrued  liabilities                                                                                               |       | 130,000                 |       |
| Total current  liabilities                                                                                               |       | 730,000                 |       |
|                                                                                                                     |       |                    |       |
| Notes Payable                                                                                                            |       | 626,000                 |       |
|                                                                                                                     |       |                    |       |
| Stockholders’ Equity:                                                                                               |       |                    |       |
| Common stock, $0.01 par  value:15,000,000 shares authorized; 10,234,166 shares issued and outstanding  at June 30, 2006. |       | 102,000                 |       |
|                                                                                                                     |       |                    |       |
| Capital in excess of  par value                                                                                          |       | 13,520,000              |       |
| Accumulated deficit                                                                                                      |       | (5,275,000              | )          |
| Total stockholders’  equity                                                                                         |       | 8,347,000               |       |
|                                                                                                                     |       | $                       | 9,703,000  |   |

The accompanying notes are an integral part of these financialstatements.

3

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**
| ** **                                                                       | ** ** | **Three Month Periods Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                       | ** ** | **June 30,**                            | ** ** | **June 30,** | ** ** |
| ** **                                                                       | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|                                                                             |       |                                         |       |   |   |
| Net sales                                                                        |       | $                                            | 2,302,000  |   | $ | 2,486,000 |   |
| Cost of goods  sold                                                              |       | 1,323,000                                    |       | 1,346,000 |   |
| Gross profit                                                                     |       | 979,000                                      |       | 1,140,000 |   |
|                                                                             |       |                                         |       |   |   |
| Operating  expenses:                                                             |       |                                         |       |   |   |
| Selling, general & administrative                                            |       | 618,000                                      |       | 603,000 |   |
| Research and development                                                         |       | 319,000                                      |       | 283,000 |   |
| Total operating expenses                                                         |       | 937,000                                      |       | 886,000 |   |
| Income from  operations                                                          |       | 42,000                                       |       | 254,000 |   |
|                                                                             |       |                                         |       |   |   |
| Other income (expense), net                                                      |       | (8,000                                       | )          | 3,000 |   |
| Income before  provision for income taxes                                        |       | 34,000                                       |       | 257,000 |   |
|                                                                             |       |                                         |       |   |   |
| Provision for  income taxes                                                      |       | 8,000                                        |       | 8,000 |   |
|                                                                             |       |                                         |       |   |   |
| Net income                                                                       |       | $                                            | 26,000     |   | $ | 249,000 |   |
|                                                                             |       |                                         |       |   |   |
| Basic and  diluted earnings per common share                                     |       | $                                            | 0.00       |   | $ | 0.02 |   |
|                                                                             |       |                                         |       |   |   |
| Basic and  diluted weighted average number of shares of common stock outstanding |       | 10,234,166                                   |       | 10,066,000 |   |
|                                                                             |       |                                         |       |   |   |
| Diluted earnings  per common share                                               |       | $                                            | 0.00       |   | $ | 0.02 |   |
|                                                                             |       |                                         |       |   |   |
| Diluted weighted  average number of shares of common stock outstanding           |       | 10,832,930                                   |       | 12,009,000 |   |

The accompanying notes are an integral part of these financialstatements.

4

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**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**
| ** **                                                                                   | ** ** | **Three Month Periods Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2006**                  | ** ** | **June 30, 2005** | ** ** |
| Cash Flows from  Operating Activities:                                                       |       |                                         |       |   |   |
| Net Income                                                                                   |       | $                                            | 26,000     |   | $ | 249,000 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |       |                                         |       |   |   |
| Debt discount fees                                                                           |       | —                                       |       | — |   |
| Depreciation                                                                                 |       | 89,000                                       |       | 74,000 |   |
| Bad debt expense                                                                             |       | —                                       |       | 5,000 |   |
| Inventory Reserves                                                                           |       | 3,000                                        |       | 23,000 |   |
| Stock Option Expenses                                                                        |       | 26,000                                       |       | — |   |
| Decrease (increase) in:                                                                      |       |                                         |       |   |   |
| Accounts receivable                                                                          |       | (264,000                                     | )          | 89,000 |   |
| Inventories                                                                                  |       | (22,000                                      | )          | (32,000 | ) |
| Other current assets                                                                         |       | 161,000                                      |       | 45,000 |   |
| Increase  (decrease) in:                                                                     |       |                                         |       |   |   |
| Accounts payable                                                                             |       | 20,000                                       |       | 308,000 |   |
| Accrued state income taxes                                                                   |       | 8,000                                        |       | (19,000 | ) |
| Accrued expenses                                                                             |       | (257,000                                     | )          | 48,000 |   |
| Net cash (used  in) provided by operating activities                                         |       | (156,000                                     | )          | 844,000 |   |
|                                                                                         |       |                                         |       |   |   |
| Cash Flows from  Investing Activities:                                                       |       |                                         |       |   |   |
| Purchases of property and equipment                                                          |       | (364,000                                     | )          | (394,000 | ) |
| Cash received in the MPI acquisition                                                         |       | —                                       |       | — |   |
| Net cash used in  investing activities                                                       |       | (364,000                                     | )          | (394,000 | ) |
|                                                                                         |       |                                         |       |   |   |
| Cash Flows from  Financing Activities:                                                       |       |                                         |       |   |   |
| Proceeds from exercise of stock options                                                      |       | —                                       |       | 3,000 |   |
| Proceeds from line of credit, net                                                            |       | (42,000                                      | )          | (5,000 | ) |
| Proceeds from notes payable                                                                  |       | (2,000                                       | )          | — |   |
| Principle payments capital lease obligations                                                 |       | —                                       |       | (29,000 | ) |
| Net cash used in  financing activities                                                       |       | (44,000                                      | )          | (31,000 | ) |
|                                                                                         |       |                                         |       |   |   |
| Net increase  (decrease) in Cash and Cash Equivalents                                        |       | (564,000                                     | )          | 419,000 |   |
| Cash and Cash  Equivalents, beginning of period                                              |       | 2,368,000                                    |       | 1,588,000 |   |
| Cash and Cash  Equivalents, end of period                                                    |       | $                                            | 1,804,000  |   | $ | 2,007,000 |   |
| Supplemental  disclosure of cash flow information:                                           |       |                                         |       |   |   |
| Cash paid during the period for:                                                             |       |                                         |       |   |   |
| Interest                                                                                     |       | $                                            | 19,000     |   | $ | 6,000 |   |
| Income Taxes                                                                                 |       | $                                            | 8,000      |   | $ | 8,000 |   |

The accompanying notes are an integral part of thesefinancial statements.

5

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**AMLCOMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2006**

**1.             Basis of Presentation**

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 oftwo reportable segments consisting of amplifiers and related products that aredesigned, manufactured and marketed by AML Communications, Inc. for the defensemicrowave (AML) and high power microwave amplifiers that are designed,manufactured and marketed by our division Microwave Power, Inc. (MPI) for thedefense market. Our defense industry products are used primarily in electronicsystems for tactical aircraft, ships, ground systems, and missile systems.These products are sold directly by us as well as through independent salesrepresentatives. We had two reportable segments (AML) and (MPI) for the quarterended June 30, 2005 and the same two reportable segments in the quarter endedJune 30, 2006.

We were incorporated in California in 1986 as AdvancedMilliwave Laboratories, Inc. Early in 1994, we changed our name to AMLCommunications, Inc. In December 1995, in conjunction with the initial publicoffering of our common stock, we changed our state of incorporation fromCalifornia to Delaware. In May 1996, we moved our principle office andmanufacturing facility to our current location, 1000 Avenida Acaso, Camarillo,California 93012.

The accompanying financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States. However, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been omitted orcondensed pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). In the opinion of management, all adjustments (consistingof normal recurring adjustments) necessary for a fair presentation have beenincluded. The results of operations and cash flows for the three-month periodpresented are not necessarily indicative of the results of operations for afull year. These financial statements should be read in conjunction with theCompany’s March 31, 2006 audited financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-KSB.**

**2.             Earnings Per Share**

Statement of Financial Accounting Standards No. 128, “Earningsper share” requires the presentation of basic earnings per share and dilutedearnings per share. Basic and diluted earnings per share computations arepresented by the Company conform to the standard and are based on the weightedaverage 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).

The Company had approximately 1,822,000 of grantedstock options and warrants that were exercisable as of June 30, 2006 andapproximately 1,943,000 of granted stock options and warrants exercisable atJune 30, 2005.

6

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The following is a reconciliation of the numerators and denominators ofthe basic and diluted earnings per share computations:

 
| **Three months ended June 30, 2006** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                                   |       |                |       |       |       |               |       |
| Net income available to common stockholders                   |       | 26,000              |       | 10,234,166 |       | $                  | 0.00       |   |
| Effect of  dilutive securities:                               |       |                |       |       |       |               |       |
| Stock options                                                 |       |                |       | 598,764    |       |               |       |
| Diluted earnings per  share:                                  |       | 26,000              |       | 10,832,930 |       | $                  | 0.00       |   |

 
| **Three months ended June 30, 2005** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                                   |       |                |       |       |       |               |       |
| Net income available to common stockholders                   |       | 249,000             |       | 10,066,000 |       | $                  | 0.02       |   |
| Effect of  dilutive securities:                               |       |                |       |       |       |               |       |
| Stock options                                                 |       |                |       | 1,943,000  |       |               |       |
| Diluted earnings  per share:                                  |       | 249,000             |       | 12,009,000 |       | $                  | 0.02       |   |

3.             **Accounts Receivable**

**Accountsreceivable as of June 30, 2006 are as follows:**
| Accounts receivable      |   | $      | 1,367,000 |   |
|--------------------------|--------|--------|-----------|--------|
| Allowance for  bad debts |   | 37,000 |      |
|                     |   | $      | 1,330,000 |   |

**4.**             **Inventories**

Inventories include costs of material, labor andmanufacturing overhead and are stated at the lower of cost (first-in,first-out) or market and consist of the following:
|                               | ** ** | **June 30, 2006** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
|                          | ** ** | ** **                  | ** ** |
| Raw material,  net of reserve |       | $                           | 1,533,000  |   |
| Work-in-process               |       | 364,000                     |       |
| Finished goods                |       | 188,000                     |       |
|                          |       | $                           | 2,085,000  |   |

The reserve for inventory at June 30, 2006 was $484,000.

**5.             Depreciation and Amortization**

Property and equipment are being depreciated andamortized on the straight-line basis over the following estimated useful lives:
| Machinery and equipment |   | 3 to 5 years  |   |
|-------------------------|--------|---------------|--------|
| Furniture and  fixtures |   | 5 years       |   |
| Leasehold  improvements |   | Life of lease |   |
| Building                |   | 30 years      |   |

Depreciationexpense for the three months ended June 30, 2006 and June 30, 2005was $87,000 and $74,000 respectively.

TheCompany capitalizes expenditures that materially increase asset lives andcharges ordinary repairs and maintenance to operations as incurred. When assetsare sold or otherwise disposed of, the cost and related depreciation or amortizationis removed from the accounts and any resulting gain or loss is included inother income (expense) in the accompanying statements of operations.

Propertyand equipment consist of the following:
|                          | ** ** | **June 30, 2006** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| Building                 |       | $                           | 800,000    |   |
| Machinery and  equipment |       | 3,831,000                   |       |
| Furniture and  fixtures  |       | 146,000                     |       |
| Leasehold  improvements  |       | 690,000                     |       |
|                     |       | $                           | 5,467,000  |   |

7

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**6.             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”. Whereintangible assets have finite lives, they are amortized over their useful lifeunless factors exist to indicate that the asset has been impaired. The Companyevaluates if the assets are impaired annually or on an interim basis if anevent occurs or circumstances change to suggest that the assets value hasdiminished. 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. Recoverability of assets is measured by a comparison of thecarrying amount of the assets to future net cash flows expected to be generatedby the assets. If the assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount exceedsthe fair value of the assets. During the three months ended June 30 2006, theCompany recognized no impairment.

At June 30, 2006, intangibles consist of thefollowing:
| **Intangibles**           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net**  | ** ** |
|---------------------------|------------|---------------------------------|------------|-------------------------------|------------|----------|------------|
|                      |       |                            |       |                          |       |     |       |
| Amortized  intangibles:   |       |                            |       |                          |       |     |       |
| Patents                   |       | $                               | 189,000    |                          | $          | (49,000  | )          | $ | 140,000 |   |
| Existing Technology       |       | 961,000                         |       | (171,000                      | )          | 790,000  |       |
| Customer List             |       | 339,000                         |       | (235,000                      | )          | 104,000  |       |
|                      |       |                            |       |                          |       |     |       |
| Unamortized  intangibles: |       |                            |       |                          |       |     |       |
| Trademarks                |       | 181,000                         |       | —                        |       | 181,000  |       |
|                      |       | $                               | 1,670,000  |                          | $          | (455,000 | )          | $ | 1,215,000 |   |

Due to the acquisition ofMPI in the quarter ended June 30, 2004, we recorded the intangible assets above.We assigned an 8 year life to patents, a 12 year life to Existing Technology,and a 3 year life to Customer Lists. All are subject to amortization. The valueassigned to trademarks, which have an indefinite life, should not be amortized.

Amortization expense from continuing operation forquarter ended June 30, 2006 was $54,000. We expect amortization expense for thenext five years to be as follows:
| Year Ending March 31: | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2007                                 |       | $          | 216,000    |   |
| 2008                                 |       | $          | 122,000    |   |
| 2009                                 |       | $          | 122,000    |   |
| 2010                                 |       | $          | 103,000    |   |
| 2011                                 |       | $          | 103,000    |   |

**7.             Debt and lease commitments**

Line of credit

At June 30, 2006, we had a line of credit agreement with Bridge Bank.On July 17, 2006, we signed a Business Financing Agreement with Bridge Bank torenew our line of credit, with a credit facility of $2.0 million. Of this $2.0million, $1.0 million may be used for cash advances against accountsreceivables and $1.0 million may be used for equipment advances. Our ability toborrow under this agreement varies based upon eligible accounts receivable andeligible equipment purchases. We are obligated to pay the bank a finance chargeat a rate per year equal to the prime rate, which in no event shall be lessthan 5.50%, plus .25% with respect to cash advances and a rate of such primerate plus 2.0% with respect to equipment advances. We are obligated to pay anannual facility fee of $5,000 (0.50% of the gross facility amount) and $2,500the second year. We must maintain certain financial requirements, including aQuick Ratio of 1.50 to 1.00, and to stay within 80% of planned quarterlyrevenue. We were in compliance with these requirements at June 30, 2006;however, there is no assurance that we will be in compliance at future dates.This agreement terminates on July 17, 2007 or upon a date that the bank choosesto terminate the agreement. Any unpaid balance is due and payable pursuant tothe agreement on the termination date. If the agreement is terminated withinthe first 12 months following its execution on July 17, 2006, we will berequired to pay an early termination fee of 1.0% of the credit facility amountunder the terms of the agreement. At June 30, 2006, we had an outstandingbalance of $0 under this agreement and our remaining borrowing capacity wasapproximately $1,000,000 available under the accounts receivable agreement and$793,000 available under the equipment financing agreement.

8

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Note Payable

OnFebruary 3, 2006 the Company purchased the building that houses MPI located at3350 Scott Blvd. 25 Santa Clara, California for a purchase price of $800,000. TheCompany made a down payment of $160,000. The building is being financed by thebank promissory note in the amount of $640,000 with 6.760% interest payable in83 regular payments of $4,425.88 each which includes principle and interest andone irregular last payment of $556,594.48. The Company’s final payment is dueFebruary 10, 2013 and will be for all principle and interest not yet paid. Thenote payable is secured by the deed of trust on the building. As of June 30,2006, the outstanding note was amounting to $636,000 with $10,000 in currentportion.

OperatingLease Obligations

The Company leases its office space and manufacturingfacility under an operating lease expiring April 2008. Total rent expense underthis operating lease was approximately $47,000 and $45,000 during the threemonths ended June 30, 2006 and 2005, respectively.

Totalminimum lease payments under the above leases are as follows:
| ** **                  | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------|------------|
| Year ending  March 31, |       |                  |       |      |       |
| 2007                        |       | $                     | 196,000    |      | $          | 196,000 |   |
| 2008                        |       | 198,000               |       | 198,000   |       |
| 2009                        |       | 17,000                |       | 17,000    |       |
| Thereafter                  |       | —                |       | —    |       |
|                        |       | $                     | 411,000    |      | $          | 411,000 |   |

 
| Less—Amount representing  interest  |   |   |   |
|------------------------------------------|--------|--------|--------|
| Present value of  minimum lease payments |   |   |   |
| Less—Current  portion               |   |   |   |
|                                     |   |   |   |

**8.             Equity Transactions**

Stock Options

TheCompany adopted SFAS No. 123 (Revised 2004), *Share Based Payment*(“SFAS No. 123R”), under themodified-prospective transition method on April 1, 2006. SFAS No. 123Rrequires companies to measure and recognize the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value. Share-based compensation recognized under the modified-prospectivetransition method of SFAS No. 123R includes share-based compensation basedon the grant-date fair value determined in accordance with the originalprovisions of SFAS No. 123, *Accountingfor Stock-Based Compensation,*for all share-based payments grantedprior to and not yet vested as of April 1, 2006 and share-based compensationbased on the grant-date fair-value determined in accordance with SFASNo. 123R for all share-based payments granted after April 1, 2006. SFASNo. 123R eliminates the ability to account for the award of theseinstruments under the intrinsic value method proscribed by AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and allowed under the originalprovisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R,the Company accounted for our stock option plans using the intrinsic valuemethod in accordance with the provisions of APB Opinion No. 25 and relatedinterpretations.

9

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Primarilyas a result of adopting SFAS No. 123R, the Company recognized $26,316 inshare-based compensation expense for the three months ended June 30, 2006. Theimpact of this share-based compensation expense on the Company’s basic anddiluted earnings per share was $0.00 per share. The fair value of our stockoptions was estimated using the Black-Scholes option pricing model.

Forperiods presented prior to the adoption of SFAS No. 123R, pro formainformation regarding net income and earnings per share as required by SFASNo. 123R has been determined as if we had accounted for our employee stockoptions under the original provisions of SFAS No. 123. The fair value ofthese options was estimated using the Black-Scholes option pricing model. Forpurposes of pro forma disclosure, the estimated fair value of the options isamortized to expense over the option’s vesting period. There is no pro formaexpense to recognize during the three months ended June 30, 2006.

In1995, the board of directors approved the creation of the 1995 Stock OptionPlan. In November 2005, the board established the 2005 Equity Incentive Plan (“2005Plan”) with 150,000 shares initially approved. The total aggregate number ofshares initially reserved and available for grant and issuance pursuant to thisPlan will be 500,000 shares. Incentive stock option awards may be granted underthe 2005 Plan only to employees (including officers and directors who are alsoemployees) of the Company or of a Parent or subsidiary of the Company. All other awards (including nonqualified stock options, restricted stock orstock awards) under the 2005 Plan may be granted to employees, officers,directors, consultants, independent contractors and advisors of the Company orany Parent or Subsidiary of the Company, provided such consultants, contractorsand advisors render bona fide services not in connection with the offer andsale of securities in a capital-raising transaction.

Pursuantto the 2005 Plan, during the three months ended June 30, 2006, the Companygranted 59,000 stock options as employee compensation.

All ofthe 59,000 stock options granted on June 8, 2006 have a term of ten (10) yearsmeasured from the Grant Date and shall accordingly expire at the close ofbusiness on the Expiration Date, unless sooner terminated in accordance withthe plan. The options will become vested Twenty (20) percent per year over afive year period.

Theoption exercise price was $1.20 for 59,000 stock options which was the same asfair value of the shares at the time of granting of the options.

Following is asummary of the stock option activity:
|                              | ** ** | **Options  outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------|------------|--------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                          | ** ** |
| Outstanding,  March 31, 2006 |       | 1,937,750                |       | $                                      | 1.06       |                                | $          | 118,000 |   |
| Granted                      |       | 59,000                   |       | —                                 |       |                                |       |
| Forfeited                    |       | 5,250                    |       | —                                 |       |                                |       |
| Exercised                    |       | —                   |       | —                                 |       |                                |       |
| Outstanding, June 30,  2006  |       | 1,991,500                |       | $                                      | 1.07       |                                | $          | 20,000 |   |

Following is a summary of the status of optionsoutstanding at June 30, 2006:
| 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                         |       | 6.62                                            |       | $                                             | 0.15       |                     | 245,950    |                                       | $          | 0.14 |   |
| $0.51 - $1.00                       |       | 1,238,250                       |       | 5.83                                            |       | $                                             | 0.91       |                     | 1,150,750  |                                       | $          | 0.92 |   |
| $1.01 - $2.00                       |       | 411,050                         |       | 7.56                                            |       | $                                             | 1.30       |                     | 126,400    |                                       | $          | 1.46 |   |
| $2.01 - $5.00                       |       | 47,250                          |       | 3.50                                            |       | $                                             | 3.24       |                     | 47,250     |                                       | $          | 3.24 |   |
| $5.01 - $15.75                      |       | 28,750                          |       | 0.76                                            |       | $                                             | 9.47       |                     | 28,750     |                                       | $          | 9.47 |   |
| $0.11 - $15.75                      |       | 1,991,500                       |       | 5.95                                            |       | $                                             | 1.07       |                     | 1,599,100  |                                       | $          | 1.07 |   |

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Foroptions vested during the three months ended June 30, 2006, theweighted-average fair value of such options was $0.80.

Theassumptions used in calculating the fair value of options granted using theBlack-Scholes option- pricing model are as follows:
| Risk-free interest rate       |   | 5.0         | %      |
|-------------------------------|--------|-------------|--------|
| Expected life of  the options |   | 10.00 years |   |
| Expected  volatility          |   | 88.4        | %      |
| Expected dividend yield       |   | 0           |   |

For options grantedduring the three months ended June 30, 2006, the weighted-average fair value ofsuch options was $0.72.

Theassumptions used in calculating the fair value of options granted using theBlack-Scholes option- pricing model are as follows:
| Risk-free interest rate       |   | 5.04        | %      |
|-------------------------------|--------|-------------|--------|
| Expected life of  the options |   | 10.00 years |   |
| Expected  volatility          |   | 40.37       | %      |
| Expected dividend yield       |   | 0           |   |

Warrants

Following is asummary of the warrant activity:
| Outstanding, March 31, 2006 |   | 222,928 |   |
|-----------------------------|--------|---------|--------|
| Granted                     |   | —  |   |
| Forfeited                   |   | —  |   |
| Exercised                   |   | —  |   |
| Outstanding, June 30,  2006 |   | 222,928 |   |

Following is a summary of the status of warrantsoutstanding at June 30, 2006:
| Range of  Exercise Prices | ** ** | **Total  Warrants  Outstanding** | ** ** | **Weighted  Average  Remaining  Life  (Years)** | ** ** | **Total  Weighted  Average  Exercise  Price** | ** ** | **Warrants  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|--------------------------------------------|------------|
|                                |       |                             |       |                                            |       |                                          |       |                      |       |                                       |       |
| $0.24 - $1.00                       |       | 195,499                          |       | 1.59                                            |       | $                                             | 0.26       |                      | 195,499    |                                       | $          | 0.26 |   |
| $1.01 - $5.00                       |       | 27,429                           |       | 1.42                                            |       | $                                             | 2.19       |                      | 27,429     |                                       | $          | 2.19 |   |
| $0.24 - $5.00                       |       | 222,928                          |       | 1.56                                            |       | $                                             | 0.50       |                      | 222,928    |                                       | $          | 0.50 |   |

**9.             Segments**

The Company has two reportable segments consisting of(1) AML Communications, Inc. and (2) Microwave Power, Inc. Our AMLCommunications segment includes low noise and high power amplifiers withfrequencies that range from 50kHz to 26GHz. These products are manufactured andsold through operations in Camarillo, California. Microwave Power, Inc. is adesigner, manufacturer and marketer of high power microwave amplifiers. Our MPIsegment includes solid state microwave amplifiers operating in the frequencyrange from 1 to 40 GHz with output power from 10mW to 500W. These products aremanufactured and sold through operations in Santa Clara, California. TheCompany evaluates performance based on sales, gross profit margins, andoperating profit before income taxes.

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The following is information for the Company’sreportable segments for the three month periods ended June 30, 2006 and June30, 2005:

**For the three months ended June 30, 2006**
| (In thousands)                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 1,820      |    | $          | 482             |       | —    |       | $ | 2,302 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 686     |       | 293     |       | —          |       | 979       |       |
| Depreciation  & amortization (includes intangibles) |       | 76      |       | 67      |       | —          |       | 143       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 19      |       | —  |       | —          |       | 19        |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 672     |       | 111     |       | —          |       | 783       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Profit from  continuing Operations before tax           |       | $       | (78        | )       | $          | 112             |       | —    |       | $ | 34 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable  assets                                    |       | $       | 5,131      |    | $          | 4,572           |       | —    |       | $ | 9,703 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | $       | 235        |    | 129        |            | —     |      | $          | 364 |   |

**For the three months ended June 30, 2005**
| (In thousands)                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 1,893      |    | $          | 593             |       | —    |       | $ | 2,486 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 774     |       | 366     |       | —          |       | 1,140     |       |
| Depreciation  & amortization (includes intangibles) |       | 66      |       | 62      |       | —          |       | 128       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 6       |       | —  |       | —          |       | 6         |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 628     |       | 121     |       | —          |       | 749       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Profit from  continuing Operations before tax           |       | $       | 74         |    | $          | 183             |       | —    |       | $ | 257 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable  assets                                    |       | $       | 3,505      |    | $          | 3,958           |       | —    |       | $ | 7,463 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | $       | 394        |    | $          | —          |       | —    |       | $ | 394 |   |

**10.          Major customers and vendors**

Two customers provided 32% and 30% of net revenue forthe three months ended June 30, 2006 and 2005, respectively. Total accountsreceivable due from these customers was approximately $453,000 and $274,000 asof June 30, 2006 and 2005, respectively.

The Company extends credit to its customers based uponits assessment of their credit worthiness and generally does not requirecollateral. Credit losses have not been significant.

Two vendors accounted for 26% and 27% of the Company’snet purchases for the three months ended June 30, 2006 and 2005, respectively. Totalaccounts payable due to these vendors was $14,000 and $19,000 as of ended June30, 2006 and 2005, respectively.

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**11.          SubsequentEvent**

On July 17, 2006, we signed a Business FinancingAgreement with Bridge Bank to renew our line of credit to $2.0 million. Of this$2.0 million, $1.0 million may be used for cash advances against receivablesand $1.0 million may be used for equipment advances. We are required tomaintain certain financial covenants, including a Quick Ratio of 1.5 to 1.0 andto stay within 80% of planned quarterly revenue. We believe the company is andwill be able to fulfill these requirements. Our ability to borrow under thisagreement varies based upon eligible accounts receivable and eligible equipmentpurchases. We are obligated to pay the bank a finance charge at a rate per yearequal to the prime rate, which in no event shall be less than 5.50%, plus .25%with respect to cash advances and a rate of such prime rate plus .50% withrespect to equipment advances. We are obligated to pay an annual facility feeof $5,000 (0.50% of the gross facility amount) and $2,500 the second year. Thisagreement terminates on July 17, 2007 or upon a date that the bank chooses toterminate the agreement. Any unpaid balance is due and payable pursuant to theagreement on the termination date. If the agreement is terminated within thefirst 12 months following its execution on July 17, 2006, we will be requiredto pay and early termination fee of 1.0% of the Credit Facility amount.

**12.          Reclassifications**

Certain comparative amounts have been reclassified toconform with the current year’s presentation.

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**Item 2. Management’sDiscussion and Analysis or Plan of Operation**

Some of the statements made by us in this QuarterlyReport on Form 10-QSB are forward-looking in nature, including but notlimited to, statements relating to our future revenue, product development,demand, acceptance and market share, gross margins, levels of research anddevelopment, our management’s plans and objectives for our current and futureoperations, and other statements that are not historical facts. Forward-lookingstatements include, but are not limited to, statements that are not historicalfacts, and statements including forms of the words “intend”, “believe”, “will”,“may”, “could”, “expect”, “anticipate”, “plan”, “possible”, and similar terms.Actual results could differ materially from the results implied by the forwardlooking statements due to a variety of factors, many of which are discussedthroughout this Quarterly Report and particularly in the section titled “AdditionalFactors That May Affect Future Results” which is included in the section titled“Management’s Discussion and Analysis or 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 may reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events. Factors that could cause actual results to differmaterially from those expressed in any forward-looking statement made by usinclude, but are not limited to:
|   | · | our ability to  finance our activities and maintain our financial liquidity;           |
|--------|--------|----------------------------------------------------------------------------------------|
|   | · | our ability to attract and retain qualified,  knowledgeable employees;                 |
|   | · | the impact of general economic conditions on our  business;                            |
|   | · | postponements, reductions, or cancellations in  orders from new or existing customers; |
|   | · | the limited number of potential customers for our  products;                           |
|   | · | the variability in gross margins on our products;                                      |
|   | · | our ability to design and market new products  successfully;                           |
|   | · | our failure to acquire new customers in the future;                                    |
|   | · | deterioration of business and economic conditions in  our markets;                     |
|   | · | intensely competitive industry conditions with  increasing price competition; and      |
|   | · | the rate of growth in the defense markets.                                             |

 

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

**Overview**

We design, manufacture, and market RFand microwave, low noise, medium and high power amplifiers serving primarilythe defense microwave market. Our business is comprised of two reportablesegments, AML, which represented 79.1% of our 2006 product revenue, and MPI,which represented 20.9% of our 2006 product revenue.

Our AML segment includes low noiseand power amplifiers with frequencies that range from 50 kHz to 26 GHz. InFebruary 2001, we made a strategic decision to focus our resources on thedefense markets. As such, we moved rapidly to utilize our knowledge base inDefense Microwave related design and manufacturing to offer new products, aswell as variations of existing products. The results of this strategy have beenan increase in revenues for Defense related products from $3.7 million infiscal 2003 to $6.3 million in fiscal 2004, and an increase to $6.6 million infiscal 2005, and $9.1 million in fiscal 2006.

We consider the AML segment to be ourcore business and devote most of our management time and other resources toimproving the prospects for this segment. Most of our sales and marketingexpenses are in the AML segment. The majority of our research and developmentspending is dedicated to this segment as well.

Our MPI segment includes solid statemicrowave amplifiers operating in the frequency range from 1 to 40 GHz withoutput power from 10mW to 500 W. In June 2004, we acquired Microwave Power,Inc. and operate it as a division of AML. The MPI division operatesindependently, with its own marketing, production, and general management team.We intend to expand MPI’s managerial and technical capabilities to addresspotential for growth of the division as well as knowledge dissemination inexpectations of key personnel retiring.

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**Results of Operations**

**Three Months Ended June 30, 2006 Compared toThree Months Ended June 30, 2005**

*Net sales.*Net sales for thethree months ended June 30, 2006 were $2.3 million, as compared to net sales of$2.5 million for the three months ended June 30, 2005, a decrease of $184,000or 7.4%. Defense related MIC products accounted for $2.28 million, or 99.5% ofnet sales for the three months ended June 30, 2006, compared to $2.4 million or98.3% of net sales for the three months ended June 30, 2005. Sales for MPI werelower than the prior year same period by $112,000 primarily due to a slowdownin orders during fourth quarter of 2006. The reduction of orders during fourthquarter of 2006 is not considered a trend. The reduction in sales for thisquarter in comparison to the first quarter last year indicates lower bookingsduring fourth quarter of 2006.

*Grossprofit.*Gross profit for the three months ended June 30, 2006was $979,000, or 42.5% of net sales, compared to a gross profit of $1.1million, or 45.9% of net sales for the three months ended June 30, 2005. Thereduction in sales volume accounted for $78,000 of the margin decline. Grossprofit, as a percentage of net sales, also decreased due to higher directmaterial costs due to the shift in product shipments. Direct material costsvary from month to month, due to the product mix. Our products are customerspecific and therefore, the material content for these units will vary.

*Selling, general and administrative costs.*Selling,general, and administrative costs were $618,000, or 26.5% of net sales, for thethree months ended June 30, 2006, compared to $603,000, or 24.2% of net sales,for the three months ended June 30, 2005. During the first quarter of fiscal2007, we began recording the employee stock based compensation expense whichamounted to $26,000. Selling expenses also increased as a result of newcatalogs and trade show expenses amounting to $18,000 and $11,000,respectively.

*Research and development costs.*Researchand development costs were $319,000, or 13.9% of net sales, for the three monthsended June 30, 2006, as compared to $283,000, or 11.4% of net sales, for thethree months ended June 30, 2005. The increase reflects the hiring ofadditional R&D employees and continued investment in R&D projects.

*Other expense net.*Other expensewas $8,000 for the three months ended June 30, 2006, as compared to otherincome of $3,000 for the three months ended June 30, 2005. The increase ininterest expense is attributed to the note payable related to the financing ofthe MPI building in Santa Clara, California.

*Provision for income taxes.* Forthe three months ended June 30, 2006, we recorded a provision of $8,000 forfederal and state AMT taxes as compared to the three months ended June 30,2005, where we recorded $8,000.

*Net profit.*Net profit was $26,000,or $0.00 per share, for the three months ended June 30, 2006, compared to a netprofit of $249,000, or $0.02 per share, for the three months ended June 30,2005.

**Liquidityand Capital Resources**

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

BetweenJuly 1, 2000 and December 31, 2001, we entered into capital leases for thepurpose of acquiring production and test equipment valued in aggregate at$740,000. The terms of the leases range from 36 months to 60 months and theinterest charges range from 8.6% to 15.6%. The total amount remaining on theleases at June 30, 2006 was $0.

InDecember 2002, the Company entered into a non-cancelable capital lease toacquire test equipment valued in aggregate at approximately $50,000. The termsof the lease call for 36 equal monthly payments of $1,699 commencing inDecember 2002 and at an annual interest rate of 13.7%. The total amountremaining on the lease at June 30, 2006 was $0.

In July 2003, we raised $245,000 ($100,000 of which was a conversion froman advance received in June 2003) from current officers and directors and$43,000 from other investors in the form of notes payable with warrantsattached. The funds were used for working capital. The promissory notes bearinterest at the rate of 8% and have a two-year maturity. Warrants to purchase atotal of 240,000 shares of our common stock were issued in connection with the funding.The per share exercise price of the warrants is $0.24. The warrants expire fiveyears from the date of issuance. We have valued these warrants at $35,000 andare expensing this value over the term of the notes payable. 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.

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At June 30, 2005, we had a line of credit agreement with Bridge Bank. OnJuly 17, 2006, we signed a Business Financing Agreement with Bridge Bank torenew our line of credit, to $2.0 million. Of this $2.0 million, $1.0 millionmay be used for cash advances against accounts receivables and $1.0 million maybe used for equipment advances. Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipment purchases.We are obligated to pay the bank a finance charge at a rate per year equal tothe prime rate, which in no event shall be less than 5.50%, plus .25% withrespect to cash advances and a rate of such prime rate plus 2.0% with respectto equipment advances. We are obligated to pay an annual facility fee of $5,000(0.50% of the gross facility amount). We must maintain certain financialrequirements, including a Quick Ratio of 1.50 to 1.0, and stay within 80% ofplanned quarterly revenue. We were in compliance with these requirements atJune 30, 2006; however, there is no assurance that we will be in compliance atfuture dates. This agreement terminates on July 17, 2007 or upon a date thatthe bank chooses to terminate the agreement. Any unpaid balance is due andpayable pursuant to the agreement on the termination date. If the agreement isterminated within the first 12 months following its execution on July 17, 2006,we will be required to pay an early termination fee of 1.0% of the creditfacility amount under the terms of the agreement. At June 30, 2006, we had anoutstanding balance of $0 under this agreement and our remaining borrowingcapacity was approximately $1,000,000 available under the accounts receivableagreement and $793,000 available under the equipment financing agreement. Acopy of the Business Financing Agreement is filed as Exhibit 10.21 hereto andincorporated herein in its entirely.

At June30, 2006, we had $1.8 million in cash and cash equivalents. For the threemonths ended June 30, 2006, our operating activities used cash of approximately$156,000, compared to providing cash of 844,000 for the three months ended June30, 2005. Net cash used in investing activities, for the acquisition ofproduction equipment, amounted to $364,000 for the three months ended June 30,2006, as compared to $394,000 net cash used in investing activities during thethree months ended June 30, 2005. Net cash used in financing activities was$44,000 for the three months ended June 30, 2006, and $31,000 used in financingfor the three months ended June 20, 2005.

We anticipate capital expenditures of approximately$600,000 in fiscal 2007. We believe that funds for these expenditures will beprovided by our operating activities. However, we may choose to finance some ofthese expenditures through our financing agreement with Bridge Bank. At June30, 2006, we had a line of credit agreement with Bridge Bank, of which$1,000,000 may be used for equipment advances at a rate of such prime rate plus2.0%. At June 30, 2006, our remaining borrowing capacity was $793,000 availableunder the equipment financing agreement.

In addition to the funds raised in July 2005, we mayattempt to procure additional sources of financing in the event that thecapital available as of June 30, 2006 is insufficient for our operating needsand capital expenditures. These sources may include, but are not limited to,additional sales of our securities. There are, however, no assurances that wewill be able to successfully obtain additional financing at terms acceptable tous. Failure to obtain such financing could have a material adverse effect onour ability to operate as a going concern.

Successfulcompletion of our development program and attaining profitable operations aredependent upon our maintaining a level of sales adequate to support our coststructure. In addition, realization of a major portion of the assets in theaccompanying balance sheet is dependent upon our ability to meet our financingrequirements and the success of our plans to sell our products. The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or amounts and classifications ofliabilities that might be necessary should we be unable to continue inexistence.

**CriticalAccounting Policies**

Our discussion and analysis of our financial conditionsand results of operations are based upon our financial statements, which havebeen prepared in accordance with generally accepted accounting principles inthe United States. The preparation of financial statements requires managers tomake estimates and disclosures on the date of the financial statements. On anon-going basis, we evaluate our estimates, including, but not limited to, thoserelated to revenue recognition. We use authoritative pronouncements, historicalexperience, and other assumptions as the basis for making judgments. Actualresults could differ from those estimates. We believe that the followingcritical accounting policies affect our more significant judgments andestimates in the preparation of our financial statements.

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*Revenue recognition.*We generateour revenue through the sale of products. Our policy is to recognize revenuewhen the 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;*

·                                          *Price is fixed or determinable; and*

·                                          *Collectibility is reasonably assured*

Revenue from the sale of products is generally recognized after boththe goods are shipped to the customer and acceptance has been received, ifrequired. Our products are custom made for our customers, who primarily consistof original engineer manufacturers (OEMs), and we do not accept returns. Ourproducts are shipped complete and ready to be incorporated into higher levelassemblies by our customers. The terms of the customer arrangements generallypass title and risk of ownership to the customer at the time of shipment.

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

*Allowance for Doubtful Accounts*. Wemaintain an allowance for doubtful accounts receivable based on customer-specificallowances, as well as a general allowance. Specific allowances are maintainedfor customers which are determined to have a high degree of collectibility riskbased on such factors, among others, as: (i) the aging of the accountsreceivable balance; (ii) the customer’s past payment experience; or (iii) adeterioration in the customer’s financial condition, evidenced by weakfinancial condition and/or continued poor operating results, reduced creditratings, and/or a bankruptcy filing. In addition to the specific allowance, wemaintain a general allowance for all its accounts receivables which are notcovered by a specific allowance. The general allowance is established based onsuch factors, among others, as: (i) the total balance of the outstanding accountsreceivable, including considerations of the aging categories of those accountsreceivable; (ii) past history of uncollectible accounts receivable write-offs;and (iii) the overall creditworthiness of the customer base. A considerableamount of judgment is required in assessing the realizability of accountsreceivables. Should any of the factors considered in determining the adequacyof the overall allowance change, an adjustment to the provision for doubtfulaccounts receivable may be necessary.

*Inventory.*Inventories are statedat the lower of cost or market, cost being determined on the first-in,first-out method. Inventories are written down if the estimated net realizablevalue is less than the recorded value. We review the carrying cost of our inventoriesby product each quarter to determine the adequacy of our reserves forobsolescence. In accounting for inventories, we must make estimates regardingthe estimated net realizable value of our inventory. This estimate is based, inpart, on our forecasts of future sales and age of the inventory.

*Intangible Assets*. We testintangible assets with indefinite lives for impairment on an annual basis ormore frequently if certain events occur. If the assets are considered to beimpaired, the impairment to be recognized will be measured by the amount inwhich the carrying amount exceeds the fair value of the assets. For ourintangible assets with finite lives, including our customer lists, existingtechnology, and patents, we amortize the costs of the assets over their usefullives and assess impairment at least annually or whenever events andcircumstances suggest the carrying value of an asset may not be recoverable. Determiningthe life of the assets with finite lives is judgmental in nature and involves theuse 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.

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*ExistingTechnology.*Our existing technology is based on a patentissued in 1990, which continues to be the main technology of MPI. It is asubstrate deposition technology that is mature and with no replacementtechnology forecasted.

**AdditionalFactors That May Affect Future Results**

Future operating results may be impacted by a numberof factors that could cause actual results to differ materially from thosestated herein, which reflect management’s current expectations. These factorsinclude:

·                                          industry-specificfactors (including the reliance upon growth of the defense microwave market,significant competition characterized by rapid technological change, new productdevelopment, product obsolescence, and significant price erosion over the lifeof 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;

·                                         the impact ofworldwide economic and political conditions on our business; and

·                                         the ability tointegrate potential future acquisitions into our existing operations.

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

We have evaluated the credit exposure associated withconducting business with foreign customers and have concluded that such risk isacceptable. Nevertheless, any significant change in the economy or adeterioration in United States trade relations or the economic or politicalstability of foreign markets could have a material adverse effect on our business,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 may experiencegreater risk associated with general business, political and economicconditions in those markets. At such time, we may seek to lessen our exposurethrough currency hedging transactions. We cannot assure you that a currencyhedging strategy would be successful in avoiding currency exchange relatedlosses. In addition, should the relative value of the U.S. dollar in comparisonto foreign currencies increase, the resulting increase in the price of ourproducts to foreign customers could result in decreased sales which could havea material adverse impact on our business, results of operations, and financialcondition.

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.

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The markets in which wecompete are characterized by rapidly changing technology and continuousimprovements in products and services. Our future success depends on ourability to enhance our current products and to develop and introduce, in atimely manner, new products that keep pace with technological developments,that meet or exceed industry standards, that compete effectively on the basisof price, performance and quality, that adequately address OEM customer andend-user customer requirements, and that achieve market acceptance. We believethat to remain competitive in the future we will need to continue to developnew products, which will require the investment of significant financialresources in new product development. In the event our newly developed productsare not timely developed or do not gain market acceptance, our business,results of operations and financial condition could be materially adverselyaffected.

Ourquarterly and annual results have in the past been, and will continue to be, subjectto significant fluctuations due to a number of factors, any of which could havea material adverse effect on our business, financial condition and results ofoperations. There can be no assurance that we will not experience suchfluctuations in the future. We establish our expenditure levels for productdevelopment and other operating expenses based on expected revenues, andexpenses are relatively fixed in the short term. As a result, variations intiming of revenues can cause significant variations in quarterly results ofoperations. There can be no assurances that we will be profitable on aquarter-to-quarter basis in the future. We believe that period-to-periodcomparisons of our financial results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance. Due to thesefactors, it is likely that in some future quarter or quarters our revenues oroperating results will not meet the expectations of public stock marketanalysts or investors. In such event, the market price of our common stockwould be materially adversely affected.

**Item 3. Controls and Procedures**

(a)          *Evaluationof disclosure controls and procedures*. As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Director of Finance, of the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended. Based uponthat evaluation, our Chief Executive Officer and Director of Finance concludedthat our disclosure controls and procedures were effective as of the end of theapplicable period to ensure that the information required to be disclosed bythe Company in reports that it files or submits under the Exchange Act (i) isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms and (ii) is accumulatedand communicated to our management, including our Chief Executive Officer andDirector of Finance, as appropriate to allow timely decisions regardingrequired disclosures.

(b)         *Changes ininternal controls over financial reporting*. There was no change inour internal control over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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#### **PART II – OTHER INFORMATION**

**Item 1. LegalProceedings**

**Not Applicable**

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

NotApplicable

**Item 3. Defaults UponSenior Securities**

**Not Applicable**

**Item 4. Submission ofMatters to a Vote of Security Holders**

**Not Applicable**

**Item 5. OtherInformation**

**Not applicable**

**Item 6.    Exhibits**

Theexhibits listed in the Exhibit Index are filed as part of this report.

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#### **SIGNATURES**

In accordance with Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|        | AML Communications Inc. |                       |
|--------|-------------------------|----------------------------|
|   |                    |                       |
|   | /s/: Jacob Inbar        |                       |   |   |
|   | By:                     | Jacob Inbar, President and |   |
|   |                    | Chief Executive Officer    | Dated: August 14, 2006 |
|        |                         |                            |  |  |  |

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**EXHIBIT INDEX**
| 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 (11)                    |
| 10.13  |                                                                  | Parr-Bohn Properties First Amendment to lease of  1000 Avenida Acaso, Camarillo, CA. (11)         |
| 10.14  |                                                                  | Interim Lease and Proposed Lease Terms (8)                                                        |
| 10.15  |                                                                  | Financing Agreement dated July 8, 2004 with Bridge  Bank (9)                                      |
| 10.16  |                                                                  | Enterprise Agreement Number 4627 dated August 26,  2004 (10)*                                     |
| 10.17  |                                                                  | Business Financing Modification Agreement with  Bridge Bank, dated July 27, 2005(12)              |
| 10.18  |                                                                  | Business Financing Modification Agreement with  Bridge Bank dated January 19, 2006 (13)           |
| 10.19  |                                                                  | Fifth Amended and Restated 1995 Stock Option  Agreement at July 12, 2005(14)                      |
| 10.20  |                                                                  | 2005 Equity Incentive Plan (15)                                                                   |
| 10.21  |                                                                  | Business Financing Agreement with Bridge Bank dated  July 17, 2006 (16)                           |
| 31.1   | Certification by the Chief Executive Officer (16)                     |
| 31.2   | Certification by the Director of Finance (16)                         |
| 32.1   | Certification pursuant to Section 906 of the  Sarbanes Oxley Act (16) |
| 32.2   | Certification pursuant to Section 906 of the  Sarbanes Oxley Act (16) |

 

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(1)           Previouslyfiled with the Securities and Exchange Commission as Exhibit 10.13 to theCompany’s Form 10KSB for the fiscal year ended March 31, 2004.

(2)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to theRegistration Statement on Form SB-2 No. 33-99102-LA and incorporated herein byreference.

(3)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-KSB for fiscal year ended March 31, 1996 and incorporated herein byreference

(4)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended December 31, 1999 and incorporated herein byreference.

(5)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended September 30, 2000 and incorporated herein byreference.

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(6)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended December 31, 2001 and incorporated herein byreference.

(7)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended September 30, 2003 and incorporated herein byreference.

(8)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 8-K dated July 6, 2004 and incorporated herein by reference.

(9)           Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended June 30, 2004 and incorporated herein byreference.

(10)         Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 8-K dated September 1, 2004 and incorporated herein by reference.

(11)         Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-KSB for the fiscal year ended March 31, 2004 and incorporated herein byreference.

(12)         Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-KSB for the fiscal year ended March 31, 2005 and incorporated herein byreference.

(13)         Previouslyfiled with Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended December 31, 2005 and incorporated herein byreference.

(14)         Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sProxy Statement dated July 29, 2005 and incorporated herein by reference.

(15)         Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sProxy Statement dated July 28, 2006 and incorporated herein by reference.

(16)         Filedherewith.

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

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