** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, 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 period ended:  ****December 31, 2007** |
|                                                                      |       |                                                                                                     |
| **or**                                                                    |
|                                                                      |       |                                                                                                     |
| **o**                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from             to            **

 

**Commission FileNumber:          0-27250**

 

**AMLCOMMUNICATIONS, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

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

 

**(805) 388-1345**

(Issuer’s telephone number including area code)

 

Checkwhether the issuer (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the small business issuer was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the small business issuer is a shell company (as definedin Rule 12b-2 of the Exchange Act).

 

Yes o  No x

 

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

 

Common Stock Outstanding as of February 4, 2008: 10,256,666 shares

 

Transitional Small BusinessDisclosure Format: Yes o  No x

 

 

----

 

**AML Communications, Inc.**

 
|             | **Index  to Form 10-QSB**                                                                                                                      |       |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                                                                |       |
| Item 1.          | Financial Statements (Unaudited)                                                                                                                    |       |
|             |                                                                                                                                                |       |
|             | Unaudited Consolidated Balance Sheet  as of December 31, 2007                                                                                  |       |
|             |                                                                                                                                                |       |
|             | Unaudited Consolidated  Statements of Operations for the three month and nine month periods ended December 31, 2007 and December 31, 2006 |       |
|             |                                                                                                                                                |       |
|             | Unaudited  Consolidated Statements of Cash Flows for the nine month periods ended December 31,  2007 and December 31, 2006                |       |
|             |                                                                                                                                                |       |
|             | Notes to Unaudited  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

----

** **

**PART I - FINANCIAL INFORMATION**

** **

**Item 1.****           Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED BALANCE SHEET**

**(Unaudited)**

 
| ** **                                                                                                                             | ** ** | **December 31****,   200****7** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | ** **                                | ** ** |
| **ASSETS**                                                                                                                             | ** ** | ** **                                | ** ** |
| Current Assets:                                                                                                                        |       |                                      |       |
| Cash and cash  equivalents                                                                                                             |       | $                                         | 1,192,000  |   |
| Accounts  receivable, net                                                                                                              |       | 1,872,000                                 |       |
| Inventories, net                                                                                                                       |       | 2,868,000                                 |       |
| Note receivable                                                                                                                        |       | 7,000                                     |       |
| Prepaid expenses                                                                                                                       |       | 145,000                                   |       |
| Deferred tax  asset - current                                                                                                          |       | 709,000                                   |       |
| Total current  assets                                                                                                                  |       | 6,793,000                                 |       |
|                                                                                                                                   |       |                                      |       |
| Property and  equipment, at cost                                                                                                       |       | 6,899,000                                 |       |
| Less:  Accumulated depreciation                                                                                                        |       | (4,402,000                                | )          |
| Property and  equipment, net                                                                                                           |       | 2,497,000                                 |       |
|                                                                                                                                   |       |                                      |       |
| Deferred tax  asset                                                                                                                    |       | 2,615,000                                 |       |
| Intangible  Assets:                                                                                                                    |       |                                      |       |
| Technologies,  net                                                                                                                     |       | 2,274,000                                 |       |
| Patents, net                                                                                                                           |       | 104,000                                   |       |
| Customer  relationship, net                                                                                                            |       | 289,000                                   |       |
| Backlog                                                                                                                                |       | 114,000                                   |       |
| Trademarks and  brand names                                                                                                            |       | 238,000                                   |       |
|                                                                                                                                   |       | 3,019,000                                 |       |
| Deposits                                                                                                                               |       | 31,000                                    |       |
|                                                                                                                                   |       | $                                         | 14,955,000 |   |
|                                                                                                                                   |       |                                      |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                         |       |                                      |       |
|                                                                                                                                   |       |                                      |       |
| Current  Liabilities:                                                                                                                  |       |                                      |       |
| Line of credit                                                                                                                         |       | $                                         | 969,000    |   |
| Accounts payable                                                                                                                       |       | 927,000                                   |       |
| Current portion  of long term debt                                                                                                     |       | 11,000                                    |       |
| Short term note  payable                                                                                                               |       | 48,000                                    |       |
| Accrued  expenses:                                                                                                                     |       |                                      |       |
| Accrued payroll  and payroll related expenses                                                                                          |       | 591,000                                   |       |
| Accrued income  taxes                                                                                                                  |       | 23,000                                    |       |
| Other accrued  liabilities                                                                                                             |       | 243,000                                   |       |
| Total current  liabilities                                                                                                             |       | 2,812,000                                 |       |
|                                                                                                                                   |       |                                      |       |
| Long term notes  payable                                                                                                               |       | 609,000                                   |       |
| Due to related party                                                                                                                   |       | 529,000                                   |       |
|                                                                                                                                   |       |                                      |       |
| Minority  interest                                                                                                                     |       | 553,000                                   |       |
|                                                                                                                                   |       |                                      |       |
| Commitments                                                                                                                            |       | ––                              |       |
|                                                                                                                                   |       |                                      |       |
| Stockholders’  Equity:                                                                                                            |       |                                      |       |
| Common stock,  $0.01 par value:15,000,000 shares authorized; 10,256,666 shares issued and  outstanding at December 31, 2007. |       | 103,000                                   |       |
| Capital in  excess of par value                                                                                                        |       | 13,731,000                                |       |
| Accumulated  deficit                                                                                                                   |       | (3,382,000                                | )          |
| Total  stockholders’ equity                                                                                                       |       | 10,452,000                                |       |
|                                                                                                                                   |       | $                                         | 14,955,000 |   |

 

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

 

3

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Nine Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **December 31,**                        | ** ** | **December 31,**                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                             | ** ** | **2007**                                     | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Net sales                                                              |       | $                                            | 3,477,000  |                                        | $          | 2,177,000 |   | $ | 9,384,000 |   | $ | 6,629,000 |   |
| Cost of goods  sold                                                    |       | 1,880,000                                    |       | 1,204,000                                   |       | 5,247,000 |   | 3,767,000 |   |
| Gross profit                                                           |       | 1,597,000                                    |       | 973,000                                     |       | 4,137,000 |   | 2,862,000 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Operating  expenses:                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Selling, general &  administrative                            |       | 784,000                                      |       | 560,000                                     |       | 2,305,000 |   | 1,782,000 |   |
| Research and  development                                              |       | 582,000                                      |       | 341,000                                     |       | 1,729,000 |   | 985,000 |   |
|  Total  operating expenses                                        |       | 1,366,000                                    |       | 901,000                                     |       | 4,034,000 |   | 2,767,000 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Income from  operations                                                |       | 231,000                                      |       | 72,000                                      |       | 103,000 |   | 95,000 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Other  income/(Interest & other expense), net                 |       | (53,000                                      | )          | (5,000                                      | )          | (140,000 | ) | (18,000 | ) |
| Income before  provision for income taxes and minority interest        |       | 178,000                                      |       | 67,000                                      |       | (37,000 | ) | 77,000 |   |
| Provision for  income taxes                                            |       | 8,000                                        |       | 7,000                                       |       | 23,000 |   | 23,000 |   |
| Minority  interest                                                     |       | 133,000                                      |       | ––                                |       | 421,000 |   | — |   |
| Net income                                                             |       | $                                            | 303,000    |                                        | $          | 60,000 |   | $ | 361,000 |   | $ | 54,000 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Basic earnings  per common share                                       |       | $                                            | 0.03       |                                        | $          | 0.01 |   | $ | 0.04 |   | $ | 0.01 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Basic weighted  average number of shares of common stock outstanding   |       | 10,257,000                                   |       | 10,249,000                                  |       | 10,257,000 |   | 10,239,000 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Diluted earnings  per common share                                     |       | $                                            | 0.03       |                                        | $          | 0.01 |   | $ | 0.03 |   | $ | 0.01 |   |
|                                                                   |       |                                         |       |                                        |       |   |   |   |   |
| Diluted weighted  average number of shares of common stock outstanding |       | 10,835,000                                   |       | 10,610,000                                  |       | 10,937,000 |   | 10,634,000 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

4

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Nine Month Periods Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31****,  200****7**         | ** ** | **December 31****,  2006** | ** ** |
| Cash Flows from  Operating Activities:                                                       |       |                                        |       |   |   |
| Net income                                                                                   |       | $                                           | 361,000    |   | $ | 54,000 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                        |       |   |   |
| Depreciation                                                                                 |       | 479,000                                     |       | 304,000 |   |
| Bad debt expense                                                                             |       | (4,000                                      | )          | (5,000 | ) |
| Inventory  reserves                                                                          |       | 21,000                                      |       | 10,000 |   |
| Stock options  granted for compensation                                                      |       | 115,000                                     |       | 86,000 |   |
| Amortization                                                                                 |       | 238,000                                     |       | 164,000 |   |
| Minority  interest                                                                           |       | (421,000                                    | )          | — |   |
| Changes in  assets and liabilities:                                                          |       |                                        |       |   |   |
| Decrease  (increase) in:                                                                     |       |                                        |       |   |   |
| Accounts  receivable                                                                         |       | (514,000                                    | )          | (88,000 | ) |
| Inventories                                                                                  |       | (860,000                                    | )          | (270,000 | ) |
| Other current  assets                                                                        |       | (46,000                                     | )          | 168,000 |   |
| Increase  (decrease) in:                                                                     |       |                                        |       |   |   |
| Accounts payable                                                                             |       | (64,000                                     | )          | 308,000 |   |
| Accrued income  taxes                                                                        |       | 23,000                                      |       | 23,000 |   |
| Accrued expenses                                                                             |       | 42,000                                      |       | (166,000 | ) |
| Net cash  provided by (used in) operating activities                                         |       | (630,000                                    | )          | 588,000 |   |
|                                                                                         |       |                                        |       |   |   |
| Cash Flows from  Investing Activities:                                                       |       |                                        |       |   |   |
| Purchases of  property and equipment                                                         |       | (152,000                                    | )          | (809,000 | ) |
| Cash used in  Mica-Tech acquisition                                                          |       | (13,000                                     | )          | — |   |
| Net cash used in  investing activities                                                       |       | (165,000                                    | )          | (809,000 | ) |
|                                                                                         |       |                                        |       |   |   |
| Cash Flows from  Financing Activities:                                                       |       |                                        |       |   |   |
| Proceeds from  line of credit                                                                |       | 39,000                                      |       | 41,000 |   |
| Proceeds from  exercise of stock options                                                     |       | —                                      |       | 3,000 |   |
| Payments on  notes payable                                                                   |       | (117,000                                    | )          | (8,000 | ) |
| Principle  payments capital lease obligations                                                |       | (13,000                                     | )          | — |   |
| Net cash  provided by (used in) financing activities                                         |       | (91,000                                     | )          | 36,000 |   |
|                                                                                         |       |                                        |       |   |   |
| Net decrease in  Cash and Cash Equivalents                                                   |       | (886,000                                    | )          | (185,000 | ) |
| Cash and Cash  Equivalents, beginning of period                                              |       | 2,078,000                                   |       | 2,368,000 |   |
| Cash and Cash  Equivalents, end of period                                                    |       | $                                           | 1,192,000  |   | $ | 2,183,000 |   |
| Supplemental  disclosure of cash flow information:                                           |       |                                        |       |   |   |
| Cash paid during  the period for:                                                            |       |                                        |       |   |   |
| Interest                                                                                     |       | $                                           | 151,000    |   | $ | 54,000 |   |
| Income Taxes                                                                                 |       | $                                           | —     |   | $ | 23,000 |   |
| Supplemental  disclosure of non-cash flow investing and financing activity:                  |       |                                        |       |   |   |
| Debt incurred to  purchase property and equipment                                            |       | $                                           | 398,000    |   | $ | 127,000 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**AML COMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2007**

** **

**1.             Basis of Presentation**

 

          AML Communications (the “Company” or “we”)currently designs, manufactures, and markets radio frequency (RF) and microwaveamplifiers and subsystems serving primarily the Defense Electronic Warfare Market.  Our business is comprised of three reportablesegments.   AML Communications, Inc.(AML) designs, manufactures, and markets amplifiers and related products forthe defense microwave.  Our divisionMicrowave Power, Inc. (MPI) designs, manufactures, and markets high powermicrowave amplifiers for the defense market. Our defense industry products are used primarily in electronic systemsfor tactical aircraft, ships, ground systems, and missile systems.  These products are sold directly by us aswell as through independent sales representatives.  On April 11, 2007, we acquired acontrolling interest of Mica-Tech, Inc. (Mica-Tech).  Our fifty-one (51) percent subsidiaryMica-Tech designs, manufactures, and markets an intelligent communicationsystem to provide Supervisory Control And Data Acquisition (SCADA) of theelectric power grid.  We had tworeportable segments (AML) and (MPI) for the nine month period ended December 31,2006 and threereportable segments (AML), (MPI), and (Mica-Tech) for the nine month periodended December 31, 2007.

 

          We were incorporated in California in1986 as Advanced Milliwave Laboratories, Inc.  Early in 1994, we changed our name to AMLCommunications, Inc.  In December 1995,in conjunction with the initial public offering of our common stock, we changedour state of incorporation from California to Delaware.  In May 1996, we moved our principleoffice and manufacturing facility to our current location, 1000 Avenida Acaso,Camarillo, California 93012.

 

          The accompanying financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States.  However, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationhave been included.  The results ofoperations and cash flows for the nine-month period presented are notnecessarily indicative of the results of operations for a full year.  These financial statements should be read inconjunction with the Company’s audited financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-KSB for the fiscal yearended March 31, 2007.

 

**Principles of Consolidation**

 

                The accompanying consolidatedfinancial statements include the accounts of AML, its wholly owned division,MPI, and its fifty-one (51) percent owned subsidiary, Mica-Tech from theacquisition date, April 11, 2007. While the historical financial statements includes the accounts of AMLCommunications, Inc., and its wholly owned division, Microwave Power, Inc.All significant inter-company accounts and transactions have been eliminated inconsolidation.  The nine month periodended December 31, 2007 includes 265 days of Mica-Tech, Inc.’sresults of operations prospectively from the date of the acquisition, or April 11,2007 through December 31, 2007.

 

**2.             Earnings Per Share**

 

**           Statement of Financial AccountingStandards No. 128, “Earnings per share” requires the presentation of basicearnings per share and diluted earnings per share.  Basic and diluted earnings per sharecomputations presented by the Company conform to the standard and are based onthe weighted average number of shares of Common Stock outstanding during theyear.**

 

          Basic earnings per share are computedby dividing net income or loss by the weighted average number of sharesoutstanding for the year.  “Diluted”earnings per share is computed by dividing net income or loss by the total ofthe weighted average number of shares outstanding, and the dilutive effect ofoutstanding stock options and warrants (applying the treasury stock method).

 

6

----

 

**          The Company had approximately1,978,000 of granted stock options and warrants that were exercisable as of December 31**, 2007 and approximately 1,849,000 of granted stockoptions and warrants exercisable at December 31, 2006.

 

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

** **
| **Nine months ended December 31****, 2007** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|----------------------------------------------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                                          |       |                |       |       |       |               |       |
| Net income  available to common stockholders                         |       | $                   | 361,000    |       | 10,257,000 |               | $          | 0.04 |   |
| Effect of  dilutive securities:                                      |       |                |       |       |       |               |       |
| Stock  options & warrants                                   |       |                |       | 680,000    |       |               |       |
| Diluted earnings  per share:                                         |       | $                   | 361,000    |       | 10,937,000 |               | $          | 0.03 |   |

 
| **Nine months ended December 31****, 2006** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|----------------------------------------------------------------------|------------|---------------------|------------|------------|------------|--------------------|------------|
| Basic earnings  per shares:                                          |       |                |       |       |       |               |       |
| Net income  available to common stockholders                         |       | $                   | 54,000     |       | 10,239,000 |               | $          | 0.01 |   |
| Effect of  dilutive securities:                                      |       |                |       |       |       |               |       |
| Stock  options & warrants                                   |       |                |       | 395,000    |       |               |       |
| Diluted earnings  per share:                                         |       | $                   | 54,000     |       | 10,634,000 |               | $          | 0.01 |   |

 

**3.**             **AccountsReceivable**

 

**Accountsreceivable as of**December 31,2007 are as follows:

** **
| Accounts  receivable     |       | $       | 1,981,000 |       |
|--------------------------|------------|---------|-----------|------------|
| Allowance for  bad debts |       | 109,000 |      |
|                     | ** ** | $       | 1,872,000 | ** ** |

** **

**4.**             **Inventories**

 

          Inventories include costs ofmaterial, labor and manufacturing overhead and are stated at the lower of cost(first-in, first-out) or market and consist of the following:

 
| ** **                    | ** ** | **December 31, 2007** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
|                          |       |                            |       |
| Raw material, net of  reserve |       | $                               | 2,322,000  |   |
| Work-in-process               |       | 674,000                         |       |
| Finished goods                |       | 286,000                         |       |
| Inventory  reserve            |       | (414,000                        | )          |
|                          |       | $                               | 2,868,000  |   |

 

**5.             Property &equipment**

 

                Propertyand equipment are being depreciated and amortized on the straight-line basisover the following estimated useful lives:

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

 

                Depreciationexpense was $479,000 and $304,000 forthe nine months ended December 31, 2007 and December 31, 2006 respectively.

 

7

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             The Company capitalizesexpenditures that materially increase asset lives and charges ordinary repairsand maintenance to operations as incurred. When assets are sold or otherwise disposed of, the cost and relateddepreciation or amortization is removed from the accounts and any resultinggain or loss is included in other income (expense) in the accompanyingstatements of operations.

 

                  Propertyand equipment consist of the following:

 
| ** **                | ** ** | **December 31****,   200****7** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| Building                  |       | $                                         | 800,000    |   |
| Machinery and  equipment  |       | 5,233,000                                 |       |
| Furniture and  fixtures   |       | 176,000                                   |       |
| Leasehold improvements    |       | 690,000                                   |       |
| Accumulated  depreciation |       | (4,402,000                                | )          |
|                      |       | $                                         | 2,497,000  |   |

 

**6.      Intangible Assets**

 

          The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 “goodwill and other intangible assets” and SFAS 144 “accounting for the impairment or disposal of long lived assets”.  Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired.  The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished.  Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets.  If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the nine months ended December 31, 2007, the Company recognized no impairment.

 

          At December 31, 2007, intangibles consist of the following:

 
| **Intangibles**             | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Net**    | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|------------|------------|
|                        |       |                                  |       |                                |       |       |       |
| Amortized  intangibles:     |       |                                  |       |                                |       |       |       |
| Patents                     |       | $                                     | 464,000    |                                | $          | (360,000   | )          | $ | 104,000 |   |
| Existing  Technology        |       | 2,641,000                             |       | (367,000                            | )          | 2,274,000  |       |
| Customer Lists              |       | 339,000                               |       | (339,000                            | )          | —     |       |
| Customer  Relationship      |       | 328,000                               |       | (39,000                             | )          | 289,000    |       |
| Trademarks and  Brand Names |       | 60,000                                |       | (3,000                              | )          | 57,000     |       |
| Backlog                     |       | 132,000                               |       | (18,000                             | )          | 114,000    |       |
|                        |       |                                  |       |                                |       |       |       |
| Unamortized  intangibles:   |       |                                  |       |                                |       |       |       |
| Trademarks                  |       | 181,000                               |       | —                              |       | 181,000    |       |
|                        |       | $                                     | 4,145,000  |                                | $          | (1,126,000 | )          | $ | 3,019,000 |   |

 

           Due to the acquisition of MPI in thequarter ended June 30, 2004 and the acquisition of Mica-Tech on April 11,2007, we recorded the intangible assetsabove.  For the intangible assets weacquired from MPI acquisition, we assigned an 8-year life to Patents, a 12-yearlife to Existing Technology, and a 3-year life to Customer Lists. All items aresubject to amortization. The value assigned to Trademarks, which have anindefinite life, should not be amortized.For the intangible assets we acquired from the Mica-Tech acquisition, weinitially assigned a 12-year life to Existing Technology, a 3-year life toCustomer Relationship, a 1-year life to Backlog and an indefinite life toTrademarks and Brand Names.  During thequarter ended September 30, 2007, Mica-Tech’s management thoroughlyreevaluated the life span of Mica-Tech’s intangible asset and assigned a newlife span to these intangible assets: a 15-year life to Existing Technology, a6-year life to Customer Relationship, and a 15-year life to Trademarks andBrand Names. All items stated are subject to amortization. The value of Backlog will be amortized as sales order shipped.  Every quarter, our management will review theshipments and the dollar amount shipped will be deducted from the originalcapitalized amount in percent value.

 

8

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          Amortization expense from continuing operation for the nine months ended December 31, 2007 was $238,000.  We expect amortization expense for the next five years to be as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2008                                     |       | $          | 97,000     |   |
| 2009                                     |       | $          | 388,000    |   |
| 2010                                     |       | $          | 274,000    |   |
| 2011                                     |       | $          | 274,000    |   |
| 2012                                     |       | $          | 274,000    |   |

 

**7.             Debt and lease commitments**

 

Line of credit

 

At December 31,2007, AML had a line of credit agreement with Bridge Bank. On August 15,2006, we signed a Business Financing Modification 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. On April 5,2007, we modified this agreement to add a new $600,000 equipment term loan toour existing line of credit and then increased this term loan by an additional$300,000 for a total of $900,000 on June 22, 2007.  Our ability to borrow under this agreementvaries 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 0.25%with respect to cash advances and a rate of such prime rate plus 3.0% withrespect to equipment advances and the additional equipment term loans.  We are obligated to pay a facility fee of$5,000 (0.50% of the facility amount) for the first year of the agreement and$2,500 the second year.  We must maintaincertain financial requirements, including a minimum Asset Coverage Ratio of1.50 to 1.00 beginning with the month ending October 31, 2007 and monthlythereafter.  We are also required to staywithin 80% of our planned quarterly revenue. We were in compliance with these requirements at December 31, 2007;however, there is no assurance that we will be in compliance at futuredates.  This agreement to provide cashadvances against accounts receivables terminates on August 15, 2008 orupon a date that the bank or AML chooses to terminate the agreement.  Any unpaid balance is due and payablepursuant to the agreement on the termination date.  If the agreement is terminated within thefirst 12 months following its execution on July 17, 2006, we would havebeen required to pay an early termination fee of 1.0% of the credit facilityamount under the terms of the agreement. At December 31, 2007, we had anoutstanding balance of $0 under the accounts receivable agreement and $906,000under the equipment financing agreement. The three equipment term loans mature on November 30, 2008, July 31,2009, and March 31, 2010.  Ourremaining borrowing capacity is approximately $1,000,000 under the accountsreceivable agreement and $0 under the equipment financing agreement as theavailability period for the equipment term loans has expired as of October 7,2007.

 

Notes Payable

 

On February 3,2006, the Company purchased the building that houses MPI located at 3350 ScottBlvd. Bldg #25, Santa Clara, California for a purchase price of $800,000.  The Company made a down payment of$160,000.  The building is being financedby a bank promissory note in the amount of $640,000 with 6.760% interest,payable in 83 regular payments of $4,425.88 each which includes principal andinterest and one final payment of $556,594.48. The Company’s final payment is due February 10, 2013 and will befor all principal and interest not yet paid. The note payable is secured by the deed of trust on the building.  As of December 31, 2007,the outstanding note amounted to $620,000 with $11,000 in current portion.

 

On December 20,2006, Mica-Tech raised $200,000 from an outside investor in the form of shortterm note payable.  The funds were usedfor working capital.  The promissory notebears interest at the rate of 10%. Mica-Tech makes equal monthly payments of $25,000, which includes aprincipal and an accrued interest on the remaining principal balance.  Mica-Tech defaulted on its November and December paymentdue to a cash deficiency.  The defaultwas waived by the lender at no cost. The total amount remaining on the note at December 31,2007 was $48,000.  The Company was notable to make January payment as well. Currently the note is due on demand.

 

Mica-Techwas advanced working capital from its president and a major shareholder, over aperiod of time which totaled to $685,000 as of April 10, 2007.  On April 10, 2007, Mica-Tech convertedthese advancements in the form of a single note for the amount of $685,000,with an annual interest rate of 10%.  Ofthe $685,000, $200,000 

 

9

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was converted into 200,000 shares ofMica-Tech’s common stock at the closing of the acquisition on April 11,2007.  Under the terms of the note, nopayment is required until April 2, 2009. As of December 31, 2007, the outstanding note amounted to $529,000including $44,000 in accrued interest.

 

Operating Lease Obligations

 

          AML leases its office space and manufacturingfacility under an operating lease expiring April 2008.  Total rent expense under this operating leasewas approximately $147,000 and $141,000during the nine months ended December 31, 2007 and 2006,respectively. Mica-Tech leases its office spaceand manufacturing facility under an operating lease expiring October 2008.  Total rent expense under this operating leasewas approximately $45,000 and $42,000during the nine months ended December 31, 2007 and 2006, respectively.

 

          Total minimum lease payments underthe above leases are as follows:

 
| ** **                  | ** ** | **Operating   Leases** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| Year ending  March 31, |       |                        |       |
| 2008                        |       | $                           | 257,000    |   |
| 2009                        |       | 53,000                      |       |
| Thereafter                  |       | —                      |       |
|                        |       | $                           | 310,000    |   |

 

**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. 123R requires companies tomeasure and recognize the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value.  Share-based compensation recognized under themodified-prospective transition method of SFAS No. 123R includesshare-based compensation based on the grant-date fair value determined inaccordance with the original provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*forall share-based payments granted prior to and not yet vested as of April 1,2006 and share-based compensation based on the grant-date fair-value determinedin accordance with SFAS No. 123R for all share-based payments grantedafter April 1, 2006. SFAS No. 123R eliminates the ability to accountfor the award of these instruments under the intrinsic value method proscribedby Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and allowed under the original provisions 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.

 

Primarilyas a result of adopting SFAS No. 123R, the Company recognized $115,000 or$0.01 per basic and diluted earnings per share in share-based compensationexpense for the ninemonths ended December 31, 2007and $86,000 or $0.01 per basic anddiluted earnings per share in share-based compensation expense for the ninemonths ended December 31, 2006.The fair value of our stock options was estimated using the Black-Scholesoption pricing model.

 

Forperiods presented prior to the adoption of SFAS No. 123R, pro formainformation regarding net income and earnings per share as required by SFAS No. 123Rhas been determined as if we had accounted for our employee stock options underthe original provisions of SFAS No. 123. The fair value of these options was estimated using the Black-Scholesoption pricing model. For purposes of pro forma disclosure, the estimated fairvalue of the options is amortized to expense over the option’s vestingperiod.  There is no pro forma expense torecognize during the ninemonths ended December 31, 2007.

 

In1995, the board of directors approved the creation of the 1995 Stock OptionPlan.  In November 2005, the boardestablished the 2005 Equity Incentive Plan (“2005 Plan”).  The total aggregate number of sharesinitially reserved and available for grant and issuance pursuant to the 2005Plan is 150,000 shares.  Incentive stockoption awards may be granted under the 2005 Plan only to employees (includingofficers and directors who are also 

 

10

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employees) of the Companyor of a parent or subsidiary of the Company.  All other awards (includingnonqualified stock options, restricted stock or stock awards) under the 2005Plan may be granted to employees, officers, directors, consultants, independentcontractors and advisors of the Company or any parent or subsidiary of theCompany, provided such consultants, contractors and advisors render bona fideservices not in connection with the offer and sale of securities in acapital-raising transaction.

 

Pursuantto the 2005 Plan, during the nine months ended December 31,2007, the Company granted 168,000 stock options to the Company’semployees, two external directors of AML, and an external director ofMica-Tech, as follows:

 

On April 5,2007, the Company granted 28,000 stock options to three employees as employeecompensation. All of the 28,000 stock options 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 2005 Plan.  These options are vestedat the rate of twenty (20) percent per year over a five year period.  The option exercise price is $1.42, which is the fair market value ofour common stock at the time these options were granted.

 

On May 1, 2007, the Company granted5,000 non qualified stock options to Mica-Tech’s external director.  All of the 5,000 stock options have a term often (10) years measured from the grant date and shall accordingly expireat the close of business on the expiration date, unless sooner terminated inaccordance with the 2005 Plan.  Theoptions are vested at the rate of twenty-five (25) percent per year over a fouryear period.  The option exercise priceis $1.45, which is the fair market value of our common stock at the time theseoptions were granted.

 

On June 8,2007, the Company granted 7,000 stock options to two employees as employeecompensation. All of the 7,000 stock options have a term of ten (10) yearsmeasured from the grant date and shall accordingly expire at the close of businesson the expiration date, unless sooner terminated in accordance with the 2005Plan.  The options are vested at the rateof twenty (20) percent per year over a five year period.  The option exercise price is $1.43, which is the fair market value ofour common stock at the time these options were granted.

 

On June 27,2007, the Company granted 28,000 stock options to fifty employees as employeecompensation. All of the 28,000 stock options 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 2005 Plan.  Of the 28,000 sharesgranted, 4,000 shares are vested at the rate of twenty (20) percent per yearover a five year period.  The remaining24,000 shares are vested as follows: fifty (50) percent after one month fromthe grant date and the remaining fifty (50) percent after one year from thegrant date. The option exercise price is $1.36 for all of the 28,000 stockoptions granted, which is the fair market value of our common stock at the timethese options were granted.

 

On August 6,2007, the Company granted 5,000 stock options to an employee as employeecompensation. All of the 5,000 stock options 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 2005 Plan.  The options are vested atthe rate of twenty (20) percent per year over a five year period.  The option exercise price is $1.25, which is the fair market value ofour common stock at the time these options were granted.

 

On September 13,2007, the Company granted a total of 95,000 stock options to three employeesand two external directors as follows: 80,000 stock options to three AML’sofficers as employee compensations and 15,000 non qualified stock options totwo external directors.

 

Of thefirst 80,000 stock options granted, 55,000 stock options have a term of five (5) yearsand 25,000 stock options have a term of ten (10) years, measured from thegrant date and shall accordingly expire at the close of business on theexpiration date, unless sooner terminated in accordance with the 2005Plan.  All of the 80,000 stock optionsare vested at the rate of thirty three (33) percent per year over a three yearperiod.

 

Thesecond 15,000 non qualified stock options granted 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 2005 Plan.  The options are vested atthe rate of twenty-five (25) percent per year over a four year period.

 

11

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Theoption exercise price is $1.02 for all of the 95,000 stock options granted on September 13,2007, which is the fair market value of our common stock at the time theseoptions were granted.

 

Followingis a summary of the stock option activity:

 
| ** **                           | ** ** | **Options   outstanding** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
|                                 |       |                           |       |                                                     |       |                                      |       |   |   |
| Outstanding,  March 31, 2007    |       | 2,232,750                      |       | $                                                        | 0.97       |                                      | $          | 341,982 |   |
| Granted                              |       | 168,000                        |       | $                                                        | 1.18       |                                      |       |   |
| Forfeited                            |       | 28,050                         |       | $                                                        | 3.56       |                                      |       |   |
| Exercised                            |       | —                         |       |                                                     |       |                                      |       |
| Outstanding,  December 31, 2007 |       | 2,372,700                      |       | $                                                        | 0.95       |                                      | $          | 85,870 |   |

 

Followingis a summary of the status of options outstanding at December 31, 2007:

 
| **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                                 |       |                                        | 243,700    |                                                        | 5.96       |                                                                  | $          | 0.15                           |       | 243,700                                                |       | $ | 0.15 |   |
| $0.51 - $1.00                                 |       |                                        | 1,588,250  |                                                        | 5.24       |                                                                  | $          | 0.92                           |       | 1,293,332                                              |       | $ | 0.91 |   |
| $1.01 - $2.00                                 |       |                                        | 497,250    |                                                        | 6.64       |                                                                  | $          | 1.26                           |       | 210,300                                                |       | $ | 1.37 |   |
| $2.01 - $5.00                                 |       |                                        | 43,500     |                                                        | 2.19       |                                                                  | $          | 3.19                           |       | 43,500                                                 |       | $ | 3.19 |   |
| $0.11 - $15.75                                |       |                                        | 2,372,700  |                                                        | 5.59       |                                                                  | $          | 0.95                           |       | 1,790,832                                              |       | $ | 0.92 |   |

 

Foroptions granted during the nine months ended December 31,2007, the weighted-average fair value of such options was $0.52.

 

Theassumptions used in calculating the fair value of options granted using theBlack-Scholes option- pricing model are as follows:

 

                                                StockOptions Granted on April 5, 2007:

 
| Risk-free  interest rate      |   | 4.68       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.50 years |   |
| Expected  volatility          |   | 38.52      | %      |
| Expected  dividend yield      |   | 0          |   |

 

StockOptions Granted on May 1, 2007:

 
| Risk-free  interest rate      |   | 4.62       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.25 years |   |
| Expected  volatility          |   | 38.28      | %      |
| Expected  dividend yield      |   | 0          |   |

 

12

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StockOptions Granted on June 8, 2007:

 
| Risk-free  interest rate      |   | 4.95       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.50 years |   |
| Expected  volatility          |   | 39.08      | %      |
| Expected  dividend yield      |   | 0          |   |

 

StockOptions Granted on June 27, 2007:

 

*24,000 stock options with one year vesting periods:*

 
| Risk-free  interest rate      |   | 5.07       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 5.50 years |   |
| Expected  volatility          |   | 39.13      | %      |
| Expected  dividend yield      |   | 0          |   |

 

*4,000 stock options with five year vesting periods:*

 
| Risk-free  interest rate      |   | 5.07       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.50 years |   |
| Expected  volatility          |   | 39.13      | %      |
| Expected  dividend yield      |   | 0          |   |

 

StockOptions Granted on August 6, 2007:

 
| Risk-free  interest rate      |   | 4.79       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.50 years |   |
| Expected  volatility          |   | 33.29      | %      |
| Expected  dividend yield      |   | 0          |   |

 

StockOptions Granted on September 13, 2007:

 

*55,000stock options with a term of 5 years and three year vesting periods:*

 
| Risk-free  interest rate      |   | 4.47       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 3.50 years |   |
| Expected  volatility          |   | 42.58      | %      |
| Expected  dividend yield      |   | 0          |   |

 

*25,000 stock options with a term of 10 years andthree year vesting periods:*

 
| Risk-free  interest rate      |   | 4.47       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.00 years |   |
| Expected  volatility          |   | 42.58      | %      |
| Expected  dividend yield      |   | 0          |   |

 

*15,000 stock options with a term of 10 years andfour year vesting periods:*

 
| Risk-free  interest rate      |   | 4.47       | %      |
|-------------------------------|--------|------------|--------|
| Expected  life of the options |   | 6.25 years |   |
| Expected  volatility          |   | 42.58      | %      |
| Expected  dividend yield      |   | 0          |   |

 

13

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Details of the Company’snon-vested options are as follows:

 
| ** **                                | ** ** | **Non-Vested   Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Vesting Period** | ** ** | **Grant Date Fair   Value** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|
| Non-vested  - March 31, 2007         |       | 582,700                       |       | $                                              | 1.01       |                                           | 1.55 Years |                                       |       |   |
| Granted                                   |       | 168,000                       |       | 1.18                                           |       |                                           |       | 86,780                                     |       |
| Forfeited                                 |       | (7,450                        | )          | 1.32                                           |       |                                           |       |                                       |       |
| Vested                                    |       | (161,382                      | )          | 1.01                                           |       |                                           |       |                                       |       |
| Exercised                                 |       | —                        |       | —                                         |       |                                           |       |                                       |       |
| Non-vested  – December 31, 2007 |       | 581,868                       |       | 1.06                                           |       | 1.63 Years                                     |       |                                       |       |
|                                           |            |                               |            |                                                |            |                                                |            |                                            |            |  |

 

The total compensationcost relating to non-vested stock options that is not yet recognized is$261,000, which is expected to be recognized over a period of 2.33 years.

 

Warrants

 

Following is a summary ofthe warrant activity:

 
| ** **                           | ** ** | **Warrants   outstanding** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
| Outstanding,  March 31, 2007    |       | 214,928                         |       | $                                                        | 0.49       |                                      | $          | 187,000 |   |
| Granted                              |       | —                          |       |                                                     |       |                                      |       |
| Forfeited                            |       | 27,429                          |       |                                                     |       |                                      |       |
| Exercised                            |       | —                          |       |                                                     |       |                                      |       |
| Outstanding,  December 31, 2007 |       | 187,499                         |       | 0.24                                                     |       | $                                         | 157,000    |   |
|                                      |            |                                 |            |                                                          |            |                                           |            |  |  |

 

Following is a summary ofthe status of warrants outstanding at December 31, 2007:

 
| **Exercise Prices** | ** ** | **Total   Warrants   Outstanding** | ** ** | **Weighted   Average   Remaining   Life   (Years)** | ** ** | **Total   Weighted   Average   Exercise   Price** | ** ** | **Warrants   Exercisable** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|
|                     |       |                                         |       |                                                                    |       |                                                                  |       |                            |       |                                                   |       |
| $                        | 0.24       |                                         | 187,499    |                                                                    | 0.54       |                                                                  | $          | 0.24                            |       | 187,499                                                |       | $ | 0.24 |   |
|                          |            |                                              |            |                                                                         |            |                                                                       |            |                                 |            |                                                        |            |  |  |  |

 

**9.****                                      Segments**

 

          The Company has three reportable segments consisting of (1) AML, (2) MPI and (3) Mica-Tech.  Our AML segment includes low noise and high power amplifiers with frequencies that range from 50KHz to 26GHz.  These products are manufactured and sold through operations in Camarillo, California.  MPI is a designer, manufacturer and marketer of high power microwave amplifiers.  Our MPI segment includes solid state microwave amplifiers operating in the frequency range from 1 to 40 GHz with output power from 10mW to 500W.  These products are manufactured and sold through operations in Santa Clara, California.  Our Mica-Tech segment designs, manufactures and markets an intelligent satellite communication system that provides a highly reliable and secure communications link between remote sites and control centers, utilizing Supervisory Control And Data Acquisition (SCADA)  technology.  The Company evaluates performance based on sales, gross profit margins, and operating profit before income taxes.

 

14

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          The following is information for the Company’s 3 reportable segments for the three month period ended December 31, 2007 and the nine month period ended December 31, 2007.

 

**For the three months ended December 31****, 2007**

** **
| **(In thousands)**                                                    | ** ** | **AML** | ** ** | **MPI** | ** ** | **Mica-  Tech** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------------|------------|-----------|------------|
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Revenue                                                                    |       | $       | 2,733      |    | $          | 516             |       | $               | 228        |      | —     |   | $ | 3,477 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Gross  Profit                                                              |       | 1,204   |       | 322     |       | 71              |       | —          |       | $         | 1,597      |   |
| Depreciation &  amortization (includes intangibles)               |       | 135     |       | 44      |       | 50              |       | —          |       | $         | 229        |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Interest  expense                                                          |       | 37      |       | —  |       | 18              |       | —          |       | $         | 55         |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Income/(Loss)  from continuing Operations before tax and minority interest |       | $       | 293        |    | $          | 156             |       | $               | (271       | )         | —     |   | $ | 178 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Net  Income                                                                |       | $       | 286        |    | $          | 156             |       | $               | (139       | )         | —     |   | $ | 303 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Identifiable  assets                                                       |       | $       | 7,440      |    | $          | 4,924           |       | $               | 2,591      |      | —     |   | $ | 14,955 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Capital  Expenditures                                                      |       | $       | 16         |    | $          | 2               |       | $               | 0          |      | —     |   | $ | 18 |   |

 

**For the****nine****months ended December 31****, 2007**

 
| **(In thousands)**                                                    | ** ** | **AML** | ** ** | **MPI** | ** ** | **Mica-  Tech** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------------|------------|-----------|------------|
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Revenue                                                                    |       | $       | 7,296      |    | $          | 1,371           |       | 717             |       | —    |       | $ | 9,384 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Gross  Profit                                                              |       | 3,088   |       | 810     |       | 239             |       | —          |       | $         | 4,137      |   |
| Depreciation &  amortization (includes intangibles)               |       | 398     |       | 150     |       | 169             |       | —          |       | $         | 717        |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Interest  expense                                                          |       | 99      |       | —  |       | 52              |       | —          |       | $         | 151        |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Income/(Loss)  from continuing Operations before tax and minority interest |       | $       | 562        |    | $          | 260             |       | $               | (859       | )         | —     |   | $ | (37 | ) |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Net  Income                                                                |       | $       | 540        |    | $          | 260             |       | $               | (439       | )         | —     |   | $ | 361 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Identifiable  assets                                                       |       | $       | 7,440      |    | $          | 4,924           |       | $               | 2,591      |      | —     |   | $ | 14,955 |   |
|                                                                       |       |    |       |    |       |            |       |            |       |      |       |
| Capital  Expenditures*                                                     |       | $       | 139        |    | $          | 11              |       | $               | 2          |      | —     |   | $ | 152 |   |

 

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* The amounts are notincluding the capital equipment purchased through our line of credit, amountingto $397,000 for the nine months ended December 31, 2007.

 

**10.****                              ****RelatedParty Transaction**

 

Mica-Techreceived advance from its president and a major shareholder for working capitalpurpose, over a period of time which totaled to $685,000 as of April 10,2007.  On April 10, 2007, Mica-Techconverted these advancements in the form of a single note for the amount of$685,000, with an annual interest rate of 10%. Of the $685,000, $200,000 was converted into 200,000 shares of Mica-Tech’scommon stock at the closing of the acquisition on April 11, 2007.  The total amount due to its president and amajor shareholder,, as of December 31, 2007, was $529,000, which includedan accumulated interest of $44,000.  Boththe principal and accrued interest was classified as a long term debt on ourbalance sheet for the quarter ending December 31, 2007. Under the terms ofthe note, no payment is required until April 2, 2009.

 

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**11.****                              ****Acquisitionof Mica-Tech, Inc.**

 

On April 11,2007, the Company completed the acquisition of a controlling position in Mica-Techin a cash-for-stock transaction. Under the terms of the agreement, AMLpurchased 51% or 4,146,400 shares of Mica-Tech’s outstanding common stock foran aggregate price of $800,000. Mica-Tech, Inc., designs, manufactures,and markets an intelligent satellite communication system to provideSupervisory Control and Data Acquisition (SCADA) of the electric power grid.The satellite system is marketed to power utility companies and enables remotecontrol of substations for reducing black-outs and enhancing power/loadregulation during peak demand hours.

 

The Company paid$210,000 of the purchase price through the cancellation of Mica-Tech’s twopromissory notes to the Company in the aggregate principal amount of $210,000,and $590,000 of the purchase price in cash. The cash portion of the purchaseconsideration was paid from working capital of the Company.

 

A summary of theassets acquired and liabilities assumed in the acquisition follows:

 
| ** **                  | ** ** | **April 11, 2007** | ** ** |
|-----------------------------|------------|------------------------------|------------|
|                        |       |                         |       |
| Cash                        |       | $                            | 604,000    |   |
| Receivables, net            |       | 46,000                       |       |
| Inventory                   |       | 315,000                      |       |
| Property and equipment, net |       | 76,000                       |       |
| Prepaid assets              |       | 12,000                       |       |
| Intangible assets           |       | 2,205,000                    |       |
| Total assets acquired       |       | $                            | 3,258,000  |   |
| Current liabilities         |       | (757,000                     | )          |
| Notes payable               |       | (685,000                     | )          |
| Net assets acquired         |       | $                            | 1,816,000  |   |

 

Of the $2,205,000 inacquired intangible assets from the Mica-Tech acquisition, $328,000 wasassigned to Customer Relationship (6-year useful life), $1,685,000 to ExistingTechnology (15-year useful life), and $60,000 to Trademarks and Brand Name (15-yearuseful life).  All items stated aresubject to amortization.  The balance of $132,000 was assigned to Backlog,which will be amortized as sales order shipped. We will review the backlog every quarter and the dollar amount shippedwill be deducted from the original amount in percent value.

 

****UNAUDITED PROFORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE****

****FOR THE NINE MONTHPERIODS ENDED DECEMBER 31, 2007 AND 2006****

 

Thefollowing un-audited pro forma consolidated financial information for the ninemonth periods ended December 31, 2007 and 2006, as presented below,reflects the results of operations of the Company assuming the Mica-Techacquisition occurred on April 1, 2007 and 2006 respectively. These proforma results have been prepared for information purposes only and do notpurport to be indicative of what operating results would have been had theacquisition actually taken place on April 1, 2007 and 2006 respectively,and may not be indicative of future operating results.

 
| ** **                         | ** ** | **Nine month periods ended December 31**       | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                                | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(UN-AUDITED AND IN THOUSANDS OF   DOLLARS)** | ** ** |
|                               |       |                                                                    |       |   |   |
| Revenues                           |       | $                                                                       | 9,384      |   | $ | 6,969 |   |
| Operating Income/(loss)            |       | $                                                                       | (49        | ) | $ | 1,008 | ) |
| Net Income/(loss)                  |       | $                                                                       | 282        |   | $ | (524 | ) |
| Earnings/(loss) per share - basic  |       | $                                                                       | 0.03       |   | $ | (0.05 | ) |
| Earnings/(loss per share - diluted |       | $                                                                       | 0.03       |   | $ | (0.05 | ) |

 

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**12.****                              ****Major customers and vendors**

 

Threecustomers collectively provided 39% and 31% of net revenue for the ninemonths ended December 31, 2007 and 2006, respectively.  Total accounts receivable due from thesecustomers was approximately $967,000 as of December 31, 2007.

 

TheCompany extends credit to its customers based upon its assessment of theircredit worthiness and generally does not require collateral.  Credit losses have not been significant.

 

Threevendors collectively accounted for 35% and 33% of the Company’s net purchasesfor the nine months ended December 31, 2007and 2006, respectively.  Totalaccounts payable due to these vendors was $82,000 as of December 31, 2007.

 

**13.****                              ****Reclassifications**

 

**Certain comparative amountshave been reclassified to conform to the current period’s presentation.**

 

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** **

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

** **

Someof the statements made by us in this Quarterly Report on Form 10-QSB areforward-looking in nature, including but not limited to, statements relating toour future revenue, product development, demand, acceptance and market share,gross margins, levels of research and development, our management’s plans andobjectives for our current and future operations, and other statements that arenot 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 sectiontitled “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 publicly release any revisions to theseforward-looking statements that may reflect events or circumstances after thedate hereof or to reflect the occurrence of unanticipated events.  Factors that could cause actualresults to differ materially from those expressed in any forward-lookingstatement made by us include, 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.                                             |

 

**Inthis document, the words “we,” “our,” “ours,” and “us” refer to AMLCommunications, Inc. and our sub divisions, Microwave Power, Inc. andMica-Tech, Inc.**

** **

**Overview**

 

Ourbusiness is comprised of three reportable segments, AML Communications, Inc.(“AML”), Microwave Power, Inc. (“MPI”), and Mica-Tech, Inc (“Mica-Tech”).  AML and MPI design, manufacture, and marketRF and microwave amplifiers and subsystems serving, primarily, the DefenseElectronic Warfare Market.  AMLrepresented 76.6% of our 2007 product revenue and MPI represented 23.4% of our2007 product revenue.  Mica-Tech, ourfifty-one (51%) percent subsidiary acquired on April 11, 2007, designs,manufactures, and markets an intelligent communication system to provideSupervisory Control and Data Acquisition (SCADA) of the electric power grid.

 

Our AMLsegment includes low noise, power amplifiers and integrated sub assemblies withfrequencies that range from 50 kHz to 26 GHz.  In February 2001, we made a strategicdecision to focus our resources on the defense markets.  As such, we moved rapidly to utilize our knowledgebase in defense microwave related design and manufacturing to offer newproducts, as well as variations of existing products.  The results of this strategy have been anincrease in revenues for defense related products, from $3.7 million in fiscal2003 to $6.3 million in fiscal 2004 to $6.6 million in fiscal 2005 and to $9.1million in fiscal 2006.

 

Weconsider the AML segment to be our core business since it has a larger revenuebase, and investments have been made in this segment that address long termgrowth.  We devote most of our managementtime and other resources to improving the prospects for this segment.  Most of our sales and marketing expenses arefrom the AML segment.  The majority ofour research and development spending is dedicated to this segment as well.

 

Our MPIsegment includes solid state microwave amplifiers operating in the frequencyrange from 1 to 40 GHz with output power from 10mW to 500 W.  In June 2004, we acquired MPI and havesince operated it as a 

 

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division of AML.  The MPI division operates independently, withits own marketing, production, and general management team. We continue to expandMPI’smanagerial and technical capabilities to address the potential for growth ofthis division.

 

Our Mica-Techsegment designs and manufactures the UltraSatNet, an Intelligent SatelliteUtility Communication Solution for the monitoring and control of power griddistribution.  The operating software andhardware are designed in-house with support from outside consultants.  Mica-Tech is located in Camarillo, Californiaand operates independently with its own management team.

 

**Resultsof Operations**

** **

**ThreeMonths Ended**December 31,2007Compared to Three Months Ended December 31,2006

** **

*           Net sales. *Net sales for the threemonths ended December 31, 2007 were approximately $3.5 million, ascompared to net sales of approximately $2.2 million for the three months ended December 31,2006, an increase of approximately $1.3 million or 59.7%. Sales for the AMLsegment for the three months ended December 31, 2007 were higher thansales during the same period of the prior year by $1.0 million or 60.1%primarily due to large program orders received during the second part of fiscalyear 2007.  We commenced production onthese orders during the first quarter of fiscal year 2008 and continued todeliver the bulk of the finished products to our customers this quarter.  Mica-Tech contributed $228,000 to our totalsales during this quarter.  AML and, to alesser extent, MPI have devoted significant resources during the last threefiscal years towards the development of products that address long termcontracts to reduce our reliance on spot-market and incidental orders.  These investments and associated strategyhave, in management’s opinion, reached maturity.  Starting with the first quarter of fiscalyear 2008, we believe that the Company stands to benefit from the investmentsmade as these programs enter their production phases.

 

*          Gross profit. *Gross profit for the threemonths ended December 31, 2007 was approximately $1.6 million, or 45.9% ofnet sales, compared to a gross profit of $973,000, or 44.7% of net sales forthe three months ended December 31, 2006. Change in gross profit, as a percentage of net sales, is insignificant.

 

*         Selling, general and administrative costs. *Selling, general, andadministrative costs were $784,000, or 22.5% of net sales, for the three monthsended December 31, 2007, as compared to $560,000, or 25.7% of net sales,for the three months ended December 31, 2006.  The increase is mainly attributed toadministrative cost in connection with maintaining our Mica-Tech segment, whichwe acquired on April 11, 2007.  Mica-Techincurred $216,000 for 92 days during the three months ended December 31,2007.  Selling, general andadministrative costs for both AML and MPI remained same, compared to the sameperiod of the prior year.

 

*         Research and development costs. *Researchand development costs were $582,000, or 16.7% of net sales, for the threemonths ended December 31, 2007, as compared to $341,000, or 15.7% of netsales, for the three months ended December 31, 2006.  The increase reflects the hiring ofadditional R&D employees for developmental programs and continuedinvestment in R&D projects. Additionally, $108,000 is attributable to Mica-Tech’s research anddevelopment expenses for 92 days during the quarter.

 

          *Other expense net. *Otherexpense was $53,000 for the three months ended December 31, 2007 and$5,000 for the three months ended December 31, 2006. Interest expense of$55,000 is attributed to the outstanding notes payable and line of credit.Interest income on short tem and long term cash investments was $2,000.  Transfer of matured CDs to operating cashresulted in a lower interest income compared to the same period last year.

 

*         Provision for income taxes.* We recorded a provision of$8,000 for federal and state AMT taxes for the three months ended December 31,2007 and $7,000 for the three months ended December 31, 2006.

 

          *Net income(loss). *Netincome was $303,000, or $0.03 per share, for the three months ended December 31,2007, compared to a net profit of $60,000, or $0.01 per share, for the threemonths ended December 31, 2006.

 

**NineMonths Ended**December 31, 2007Compared to Nine Months Ended December 31, 2006

 

*          Net sales. *Netsales for the nine months ended December 31, 2007 were approximately $9.4million, as compared to net sales of approximately $6.6 million for the ninemonths ended December 31, 2006, an increase of 

 

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approximately $2.8 million or 41.6%.  Sales for the AML segment for the nine monthsended December 31, 2007 increased by $2.0 million, or 38.1%, compared tothe same period last year, primarily due to the start of production for largeprogram orders received.  Mica-Techcontributed $717,000 to the total sales for 265 days during the nine monthsended December 31, 2007.

 

*          Gross profit. *Gross profit for the ninemonths ended December 31, 2007 was approximately $4.1 million, or 44.1% ofnet sales, as compared to a gross profit of approximately $2.9 million, or43.2% of net sales for the nine months ended December 31, 2006. Change ingross profit, as a percentage of net sales, is insignificant.

 

*          Selling, general and administrativecosts. *Selling,general, and administrative costs were approximately $2.3 million, or 24.5% ofnet sales, for the nine months ended December 31, 2007, as compared toapproximately $1.8 million, or 26.9% of net sales, for the nine months ended December 31,2006. The dollar amount increase is mainly attributed to administrative cost inconnection with maintaining our Mica-Tech segment, which we acquired on April 11,2007.  Mica-Tech incurred $652,000 for265 days during the nine months ended December 31, 2007.  Selling, general and administrative costs forboth AML and MPI decreased, compared to the same period of the prior year, dueto decreased spending in salary and related benefits, advertising, andcommission expenses, and a reduction in amortization expense as certainintangibles were fully amortized.

 

*         Research and development costs. *Researchand development costs were approximately $1.7 million or 18.4% of net sales,for the nine months ended December 31, 2007, as compared to $985,000, or14.9% of net sales, for the nine months ended December 31, 2006. Weincurred a $198,000 increase in salaries and related benefits due to hiring newengineers for developmental programs and $91,000 increase in R&D suppliesand small equipment, a result of continuing investment in R&D projects. Theincrease reflects our commitment to invest in long term, large size projects.Additionally, $395,000 is attributable to Mica-Tech’s research and developmentexpenses for 265 days during the nine months ended December 31, 2007.

 

          *Other expense, net. *Otherexpense was $140,000 for the nine months ended December 31, 2007 and$18,000 for the nine months ended December 31, 2006.  Interest expense of $151,000 is attributed tothe note payable related to the financing of the MPI building in Santa Clara,California and the existing equipment line of credit. Of the total interestexpense of $151,000, $52,000 is attributed to Mica-Tech’s two notespayable.  Interest income on short temand long term cash investments was $12,000.

 

*         Provision for income taxes.* We recorded a provision of$23,000 for federal and state AMT taxes for the nine months ended December 31,2007 and for the nine months ended December 31, 2006.

 

          *Net income. *Netincome was $361,000 or $0.04 per share, for the nine months ended December 31,2007, compared to net profit of $54,000, or $0.01 per share, for the nine monthsended December 31, 2006.

 

**Liquidity and 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.

 

At December 31,2007, AML had a line of credit agreement with Bridge Bank. On August 15,2006, we signed a Business Financing Modification 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. On April 5,2007, we modified this agreement to add a new $600,000 equipment term loan toour existing line of credit and then increased this term loan by an additional$300,000 for a total of $900,000 on June 22, 2007.  Our ability to borrow under this agreementvaries 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 0.25%with respect to cash advances and a rate of such prime rate plus 3.0% withrespect to equipment advances and the additional equipment term loans.  We are obligated to pay a facility fee of$5,000 (0.50% of the facility amount) for the first year of the agreement and$2,500 the second year.  We must maintaincertain financial requirements, including a minimum Asset Coverage Ratio of1.50 to 1.00 beginning with the month ending October 31, 2007 and monthlythereafter.  We are also required to staywithin 80% of our planned quarterly revenue. We were in compliance with these requirements at December 31, 2007;however, there is no assurance that we will be in compliance at futuredates.  This agreement to provide cashadvances against accounts receivables terminates on August 15, 2008 orupon a date 

 

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that the bank or AML chooses toterminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months following its execution on July 17, 2006, wewould have been required to pay an early termination fee of 1.0% of the creditfacility amount under the terms of the agreement. At December 31, 2007, wehad an outstanding balance of $0 under the accounts receivable agreement and$906,000 under the equipment financing agreement.  The three equipment term loans mature on November 30,2008, July 31, 2009, and March 31, 2010.  Our remaining borrowing capacity isapproximately $1,000,000 under the accounts receivable agreement and $0 underthe equipment financing agreement as the availability period for the equipmentterm loans has expired as of October 7, 2007.

 

          AtDecember 31, 2007, we had $1,192,000 in cash and cash equivalents.  For the nine months ended December 31,2007, our operating activities used cash ofapproximately $630,000, as compared to $588,000 cash provided by our operatingactivities for the nine months ended December 31, 2006.  Net cashused in investing activities, primarily for the acquisition of productionequipment, amounted to $165,000 for the nine months ended December 31,2007 and $809,000 for the nine months ended December 31,2006. Net cash used in financing activities was $91,000 for the nine monthsended December 31, 2007, compared to $36,000 provided by our financing activities for the nine months ended December 31,2006. The proceeds from our line of credit was $39,000 and we paid down$117,000 toward outstanding notes payable.

 

                                                Weanticipate capital expenditures of approximately $800,000 in fiscal year2008.  We believe that funds for theseexpenditures will be provided by our operating activities.  However, we may choose to finance some ofthese expenditures through our financing agreement with Bridge Bank.  At December 31,2007, our remaining borrowing capacity under this agreement was $1,000,000.

 

                                                Inaddition to the funds we raised in July 2003, we may attempt to procureadditional sources of financing in the event that the capital available as of December 31, 2007 is insufficientfor our operating needs and 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 financingcould have a material adverse effect on our ability to operate as a goingconcern.

 

                                                Successful completion of ourdevelopment program and attaining profitable operations are dependent upon ourmaintaining a level of sales adequate to support our cost structure.  In addition, realization of a major portionof the assets in the accompanying balance sheet is dependent upon our abilityto meet our financing requirements and the success of our plans to sell ourproducts.  The financial statements donot include any adjustments relating to the recoverability and classification ofrecorded asset amounts or amounts and classifications of liabilities that mightbe necessary should we be unable to continue in existence.

 

**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 an on-going basis, we evaluate ourestimates, including, but not limited to, those related to revenuerecognition.  We use authoritativepronouncements, historical experience, and other assumptions as the basis formaking judgments.  Actual results coulddiffer from those estimates.  We believethat the following critical accounting policies affect our more significantjudgments and estimates in the preparation of our financial statements.

 

*Revenue recognition.*  Wegenerate our revenue through the sale of products.  Our policy is to recognize revenue when theapplicable revenue recognition criteria have been met, which generally includethe following:

 
| · | * * | *Persuasive  evidence of an arrangement exists;*         |
|--------|----------|----------------------------------------------------------|
| · | * * | *Delivery  has occurred or services have been rendered;* |
| · | * * | *Price  is fixed or determinable; and*                   |
| · | * * | *Collectibility is reasonably assured.*                  |

 

Revenue from the sale ofproducts is generally recognized after both the goods are shipped to thecustomer and acceptance has been received, if required.  Our products are custom made for ourcustomers, who primarily consist of original engineer manufacturers (OEMs), andwe do not accept returns.  Our productsare shipped 

 

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complete and ready to be incorporated into higherlevel assemblies by our customers.  Theterms of the customer arrangements generally pass title and risk of ownershipto the customer at the time of shipment.

 

Recordingrevenue from the sale of products involves the use of estimates and managementjudgment.  We must make a determinationat the time of sale whether the customer has the ability to make payments inaccordance with arrangements.  While wedo utilize past payment history, and, to the extent available for newcustomers, public credit information in making our assessment, thedetermination of whether collectibility is reasonably assured is ultimately ajudgment decision that must be made by management.

 

*          Allowance for Doubtful Accounts*.  We maintain an allowance for doubtfulaccounts receivable based on customer-specific allowances, as well as a generalallowance.  Specific allowances aremaintained for customers that are determined to have a high degree ofcollectibility risk based on such factors, among others, as: (i) the agingof the accounts receivable balance; (ii) the customer’s past paymentexperience; and (iii) a deterioration in the customer’s financialcondition, evidenced by weak financial condition and/or continued pooroperating results, reduced credit ratings, and/or a bankruptcy filing.  In addition to the specific allowance, wemaintain a general allowance for all our accounts receivables which are notcovered by a specific allowance.  Thegeneral allowance is established based on such factors, among others, as: (i) thetotal balance of the outstanding accounts receivable, including considerationsof the aging categories of those accounts receivable; (ii) past history ofuncollectible accounts receivable write-offs; and (iii) the overallcreditworthiness of the customer base.  Aconsiderable amount of judgment is required in assessing the realizability ofaccounts receivables.  Should any of thefactors considered in determining the adequacy of the overall allowance change,an adjustment to the provision for doubtful accounts receivable may benecessary.

 

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

 

          *Intangible Assets*.  We test intangible assets with indefinitelives for impairment on an annual basis or more frequently if certain eventsoccur.  If the assets are considered tobe impaired, the impairment to be recognized will be measured by the amount in whichthe carrying amount exceeds the fair value of the assets.  For our intangible assets with finite lives,including our customer lists, existing technology, and patents, we amortize thecosts of the assets over their useful lives and assess impairment at leastannually or whenever events and circumstances suggest the carrying value of anasset may not be recoverable. Determining the life of the assets with finite lives is judgmental innature and involves the use of estimates and assumptions.  These estimates and assumptions involve avariety of factors, including future market growth and conditions, forecastedrevenues and costs and a strategic review of our business and operations.  We base our fair value estimates onassumptions we believe to be reasonable but that are unpredictable and inherentlyuncertain.  Actual future results maydiffer from those estimates.  In theevent we determine that an intangible asset is impaired in the future, anadjustment to the value of the asset would be charged to earnings in the periodsuch determination is made.

 

*          Existing Technology. *Our existing technology isbased on a patent issued in 1990, which continues to be the main technology ofMPI.  It is a substrate depositiontechnology that is mature and with no replacement technology forecasted.

 

**Additional FactorsThat May Affect Future Results**

 

           Futureoperating results may be impacted by a number of factors that could causeactual results to differ materially from those stated herein, which reflectmanagement’s current expectations. These factors include:

 

·                  industry-specific factors (including the relianceupon growth of the defense microwave market, significant competitioncharacterized by rapid technological change, new product development, productobsolescence, and significant price erosion over the life of a product);

 

·                  our ability to timely develop and producecommercially viable products at competitive prices;

 

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·                  our ability to produce products which meet thequality standards of both existing and potential new customers;

 

·                  our ability to accurately anticipate customerdemand;

 

·                  our ability to manage expense levels, in light ofvarying revenue streams;

 

·                  the availability and cost of components;

 

·                  the impact of worldwide economic and politicalconditions on our business; and

 

·                  the ability tointegrate potential future acquisitions intoour existing operations.

 

We believe that, to the extentthat foreign sales are recognized, we may face increased risk associated withpolitical and economic instability, compliance with foreign regulatory rules governingexport requirements, tariffs and other trade barriers, differences inintellectual property protections, longer accounts receivable cycles, currencyfluctuations and general trade restrictions. If any of these risks materialize, they could have a material adverseeffect on our business, results of operations, and financial condition.

 

Wehave evaluated the credit exposure associated with conducting business withforeign customers and have concluded that such risk is acceptable.  Nevertheless, any significant change in theeconomy or deterioration in the United States’ trade relations or the economicor political stability of foreign markets could have a material adverse effecton our business, results of operations, and financial condition.

 

Sales to foreigncustomers are invoiced in U.S. dollars. Accordingly, we currently do not engage in foreign currency hedgingtransactions.  However, as we expandfurther into foreign markets, we may experience greater risk associated withgeneral business, political and economic conditions in those markets.  At such time, we may seek to lessen ourexposure through currency hedging transactions. We cannot assure you that a currency hedging strategy would be successfulin avoiding currency exchange related losses. 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 significantprice competition and expect price competition in the sale of our products toremain intense.  We cannot assure you thatour competitors will not develop new technologies or enhancements to existingproducts or introduce new products that will offer superior price orperformance features.  We expect ourcompetitors to offer new and existing products at prices necessary to gain orretain market share.  Several of ourcompetitors have substantial financial resources, which may enable them towithstand sustained price competition or a downturn in the pricing of theirproducts in the future.  Substantiallyall of our competitors have, and potential future competitors could have,substantially greater technical, marketing, distribution and other resourcesthan we do and have, or could have, greater name recognition and marketacceptance of their products and technologies.

 

The markets in which we compete are characterized byrapidly changing technology and continuous improvements in products andservices.  Our future success depends onour ability to enhance our current products and to develop and introduce, in atimely manner, new products that keep pace with technological developments andthat meet or exceed industry standards that compete effectively on the basis ofprice, performance and quality, that adequately address OEM customer and end-usercustomer requirements, and that achieve market acceptance.  We believe that to remain competitive in thefuture, we will need to continue to develop new products, which will requirethe investment of significant financial resources in new productdevelopment.  In the event our newly developedproducts are not timely developed or do not gain market acceptance, ourbusiness, results of operations and financial condition could be materiallyadversely affected.

 

Our quarterly and annual results have in the past been,and will continue to be, subject to significant fluctuations due to a number offactors, any of which could have a material adverse effect on our business,financial condition and results of operations. There can be no assurance that we will not experience such fluctuationsin the future.  We establish ourexpenditure levels for product development and other operating expenses basedon expected revenues, and expenses are relatively fixed in the short term.  As a result, variations in timing of revenuescan cause significant

 

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variations in quarterly results of operations.  There can be no assurances that we will beprofitable on a quarter-to-quarter basis in the future.  We believe that period-to-period comparisonsof our financial results are not necessarily meaningful and should not berelied upon as an indication of future performance.  Due to these factors, it is likely that insome future quarter or quarters, our revenues or operating results will notmeet the expectations of public stock market analysts or investors.  In such event, the market price of our commonstock would be materially adversely affected.

 

**Item 3.****          Controls and Procedures**

 

(a)                                  *Evaluation of disclosure controlsand procedures*.  As of the end of the period covered by thisreport, we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andDirector of Finance, of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our ChiefExecutive Officer and Director of Finance concluded that our disclosurecontrols and procedures were effective as of the end of the applicable periodto ensure that the information required to be disclosed by the Company inreports that it files or submits under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Director of Finance, as appropriate to allow timely decisionsregarding required disclosures.

 

(b)                                 *Changes in internal controls overfinancial reporting*. There was nochange in our internal control over financial reporting during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II –OTHER INFORMATION**

 
| ** **  | ** ** | ** **                                                                       |
|-------------|------------|----------------------------------------------------------------------------------|
| **Item 1.** | ** ** | **Legal Proceedings**                                                            |
| ** **  | ** ** | ** **                                                                       |
| ** **  | ** ** | **Not  Applicable.**                                                             |
| ** **  | ** ** | ** **                                                                       |
| **Item 2.** | ** ** | **Unregistered Sales of Equity Securities and  Use of Proceeds**                 |
| ** **  | ** ** | ** **                                                                       |
|        |       | Not Applicable.                                                                  |
|        |       |                                                                             |
| **Item 3.** | ** ** | **Defaults  Upon Senior Securities**                                             |
| ** **  | ** ** | ** **                                                                       |
| ** **  | ** ** | **Not Applicable.**                                                              |
| ** **  | ** ** | ** **                                                                       |
| **Item 4.** | ** ** | **Submission  of Matters to a Vote of Security Holders**                         |
| ** **  | ** ** | ** **                                                                       |
| ** **  | ** ** | **Not Applicable.**                                                              |
| ** **  | ** ** | ** **                                                                       |
| **Item 5.** | ** ** | **Other  Information**                                                           |
| ** **  | ** ** | ** **                                                                       |
| ** **  | ** ** | **Not Applicable.**                                                              |
| ** **  | ** ** | ** **                                                                       |
| **Item 6.** | ** ** | **Exhibits**                                                                     |
| ** **  | ** ** | ** **                                                                       |
|        |       | The exhibits listed in  the Exhibit Index are filed as part of this report. |

 

25

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#### **SIGNATURES**

#### ** **

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | AML  Communications Inc.      |                                                                              |
|--------|-------------------------------|-----------------------------------------------------------------------------------|
|   |                          |                                                                              |
|   |   /s/:  Jacob Inbar |                                                                              |   |
|   |   By:               | Jacob  Inbar, President and  Chief Executive Officer(Principal Executive Officer) | Dated:  February 13, 2008 |
|   |                          |                                                                              |
|   |                          |                                                                              |
|   |   /s/:  Heera Lee   |                                                                              |   |
|   |   By:               | Heera  Lee, Director of Finance  (Principal Financial Officer)                    | Dated:  February 13, 2008 |
|        |                               |                                                                                   |  |  |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                                                                                |
| 10.4                |       | Loan and Security Agreement dated November 10, 2000  between the Company and Silicon Valley Bank(4)                                                                                                                                     |
| 10.5                |       | Intellectual Property Security Agreement dated  November 10, 2000 between the Company and Silicon Valley Bank(4)                                                                                                                        |
| 10.6                |       | Warrant to purchase stock dated November 9, 2000  between the Company and Silicon Valley Bank(4)                                                                                                                                        |
| 10.7                |       | Accounts Receivable Purchase Agreement dated  November 20, 2001 between AML Communications, Inc. and Silicon  Valley Bank(5)                                                                                                       |
| 10.8                |       | Promissory Note dated December 30, 2001 between  Tiberiu, Mazilu, and AML Communications Inc.(5)                                                                                                                                        |
| 10.9                |       | Accounts Receivable Purchase Modifications Agreement dated  September 24, 2003 between Silicon Valley Bank and AML Communications(6)                                                                                                    |
| 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(6)                                       |
| 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(6)                                              |
| 10.12               |       | Fourth Amended and Restated 1995 Stock Option Agreement at  June 10, 2002(7)                                                                                                                                                            |
| 10.13               |       | Parr-Bohn Properties First Amendment to lease of 1000  Avenida Acaso, Camarillo, CA.(7)                                                                                                                                                      |
| 10.14               |       | Employment Agreement with Dr. Marina Bujatti, of MPI,  dated June 18, 2004(7)                                                                                                                                                      |
| 10.15               |       | Employment Agreement with Dr. Franco Sechi, of MPI,  dated June 18, 2004(7)                                                                                                                                                        |
| 10.16               |       | Interim Lease and Proposed Lease Terms(8)                                                                                                                                                                                                    |
| 10.17               |       | Financing Agreement dated July 8, 2004 with Bridge  Bank(9)                                                                                                                                                                             |
| 10.18               |       | Enterprise Agreement Number 4627 dated August 26,  2004(10)                                                                                                                                                                             |
| 10.19               |       | Business Financing Modification with Bridge Bank, dated  December 23, 2005(11)                                                                                                                                                          |
| 10.20               |       | Business Financing Modification with Bridge Bank dated  January 19,2006(11)                                                                                                                                                             |
| 10.21               |       | Fifth Amended and Restated 1995 Stock Option Agreement at  July 12, 2005(12)                                                                                                                                                            |
| 10.22               |       | Loan Agreement with Bank of America for purchase of MPI  building(11)                                                                                                                                                                        |
| 10.23               |       | 2005 Equity Incentive Plan(13)                                                                                                                                                                                                               |
| 10.24               |       | Business Financing Agreement with Bridge Bank dated  July 17, 2006(14)                                                                                                                                                                  |
| 10.25               |       | Stock Purchase Agreement with Mica-Tech, dated  April 11, 2007(15)                                                                                                                                                                      |
| 10.26               |       | Option Agreement with shareholders and optionholders of Mica-Tech,  dated April 11, 2007(15)                                                                                                                                            |
| 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 10-KSB 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) andincorporated herein by reference.

 

(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 incorporatedherein by reference

 

 

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(4)            Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended September 30, 2000 and incorporatedherein by reference.

 

(5)            Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended December 31, 2001 and incorporatedherein by reference.

 

(6)            Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended September 30, 2003 and incorporatedherein by reference.

 

(7)            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 incorporatedherein by reference.

 

(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 incorporatedherein by reference.

 

(10)      Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 8-K/A dated May 4, 2007 (unredacted version) and incorporatedherein by reference.

 

(11)      Previouslyfiled with Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2005 and incorporated herein byreference.

 

(12)      Previouslyfiled with the Securities and Exchange Commission as an attachment to theCompany’s Proxy Statement dated July 29, 2005.

 

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

 

(14)      Previouslyfiled with Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended June 30, 2006 and incorporated herein by reference.

 

(15)      Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 8-K dated April 20, 2007 and incorporated herein by reference.

 

(16)      Filedherewith.

 

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