** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                    |
| ** ** | ** ** | **For the quarterly period ended:   June 30,  2005**                                |
|       |       |                                                                                                    |
| ** ** | ** ** | **or**                                                                                                  |
|       |       |                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 0R  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from     to**

 

**Commission File Number:   0-27252**

 

**AML COMMUNICATIONS, INC.**

(Exact name of small business issuer as specified in its charter)

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

 

**(805) 388-1345**

(Issuer’s telephone number including area code)

 

Check whether the issuer (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý  No  o

 

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

 

Common Stock Outstandingas of August 8, 2005: **10,077,866 shares**

 

Transitional SmallBusiness Disclosure Format: Yes o  No ý

 

 

----

 

**AML Communications, Inc.**

 
| ** **       | ** ** | **Index to Form 10-QSB**                                                                          | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                                   |       |
| Item 1.          |       | Financial Statements (Unaudited)                                                                       |       |
|             |       |                                                                                                   |       |
|             |       | Balance  Sheet as of June 30, 2005                                                                |       |
|             |       |                                                                                                   |       |
|             |       | Statements of  Operations for the three month periods ended June 30, 2005 and  June 30, 2004 |       |
|             |       |                                                                                                   |       |
|             |       | Statements of  Cash flows for the three month periods ended June 30, 2005 and June 30,  2004 |       |
|             |       |                                                                                                   |       |
|             |       | Notes  to 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**

 

**Item1.  FinancialStatements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCESHEET**

**(unaudited)**

** **
| ** **                                                                                                                    | ** ** | **June 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                    | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                    | ** ** | ** **              | ** ** |
| Current Assets:                                                                                                               |       |                    |       |
| Cash and cash  equivalents                                                                                                    |       | $                       | 2,007,000  |   |
| Accounts  receivable, net of allowance for doubtful accounts of $55,000                                                       |       | 1,197,000               |       |
| Inventories, net                                                                                                              |       | 1,739,000               |       |
| Other current  assets                                                                                                         |       | 101,000                 |       |
| Total current  assets                                                                                                         |       | 5,044,000               |       |
|                                                                                                                          |       |                    |       |
| Property and  Equipment, at cost                                                                                              |       | 4,174,000               |       |
| Less:  Accumulated depreciation and amortization                                                                              |       | (3,207,000              | )          |
| Property and  Equipment, net                                                                                                  |       | 967,000                 |       |
| Intangible  Assets:                                                                                                           |       |                    |       |
| Technologies,  net                                                                                                            |       | 871,000                 |       |
| Patents                                                                                                                       |       | 163,000                 |       |
| Customer lists,  net                                                                                                          |       | 216,000                 |       |
| Trademarks                                                                                                                    |       | 181,000                 |       |
| Other Assets                                                                                                                  |       | 21,000                  |       |
| Total Assets                                                                                                                  |       | $                       | 7,463,000  |   |
|                                                                                                                          |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                |       |                    |       |
|                                                                                                                          |       |                    |       |
| Current  Liabilities:                                                                                                         |       |                    |       |
| Line of Credit                                                                                                                |       | $                       | 75,000     |   |
| Accounts payable                                                                                                              |       | 555,000                 |       |
| Current portion  of capital lease obligations                                                                                 |       | 25,000                  |       |
| Accrued  expenses:                                                                                                            |       |                    |       |
| Accrued payroll  and payroll related expenses                                                                                 |       | 338,000                 |       |
| Accrued income  taxes                                                                                                         |       | (1,000                  | )          |
| Other accrued  liabilities                                                                                                    |       | 280,000                 |       |
| Total current  liabilities                                                                                                    |       | 1,272,000               |       |
|                                                                                                                          |       |                    |       |
| Stockholders’  Equity:                                                                                                   |       |                    |       |
| Common stock,  $0.01 par value:15,000,000 shares authorized; 10,067,116 shares issued and  outstanding at June 30, 2005. |       | 101,000                 |       |
|                                                                                                                          |       |                    |       |
| Capital in  excess of par value                                                                                               |       | 13,389,000              |       |
| Accumulated  deficit                                                                                                          |       | (7,299,000              | )          |
| Total  stockholders’ equity                                                                                              |       | 6,090,000               |       |
| Total  liabilities and stockholder’s equity                                                                              |       | $                       | 7,463,000  |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**             | ** ** | **June 30,** | ** ** |
| ** **                                                             | ** ** | **2005**                      | ** ** | **2004** | ** ** |
|                                                                   |       |                          |       |   |   |
| Net sales                                                              |       | $                             | 2,486,000  |   | $ | 2,174,000 |   |
| Cost of goods  sold                                                    |       | 1,346,000                     |       | 1,240,000 |   |
| Gross profit                                                           |       | 1,140,000                     |       | 934 ,000 |   |
|                                                                   |       |                          |       |   |   |
| Operating  expenses:                                                   |       |                          |       |   |   |
| Selling,  general & administrative                            |       | 603,000                       |       | 409,000 |   |
| Research and  development                                              |       | 283,000                       |       | 183,000 |   |
|                                                                   |       | 886,000                       |       | 592,000 |   |
| Income from  operations                                                |       | 254,000                       |       | 342,000 |   |
|                                                                   |       |                          |       |   |   |
| Other income  (expense), net                                           |       | 3,000                         |       | (16,000 | ) |
| Income before  provision for income taxes                              |       | 257,000                       |       | 326,000 |   |
|                                                                   |       |                          |       |   |   |
| Provision for  income taxes                                            |       | 8,000                         |       | — |   |
|                                                                   |       |                          |       |   |   |
| Net income                                                             |       | $                             | 249,000    |   | $ | 326,000 |   |
|                                                                   |       |                          |       |   |   |
| Basic earnings  per common share                                       |       | $                             | 0.02       |   | $ | 0.04 |   |
| Basic weighted  average number of shares of common stock outstanding   |       | 10,066,000                    |       | 8,143,000 |   |
| Diluted earning  per common share                                      |       | $                             | 0.02       |   | $ | 0.03 |   |
| Diluted weighted  average number of shares of common stock outstanding |       | 12,009,000                    |       | 9,709,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Three Month Periods Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **June 30, 2005**        | ** ** | **June 30, 2004** | ** ** |
| Cash Flows from  Operating Activities:                                             |       |                          |       |   |   |
| Net Income                                                                         |       | $                             | 249,000    |   | $ | 326,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                          |       |   |   |
| Debt discount  fees                                                                |       | —                        |       | 4,000 |   |
| Depreciation and  amortization                                                     |       | 74,000                        |       | 64,000 |   |
| Bad debt expense                                                                   |       | 5,000                         |       | 5,000 |   |
| Inventory  Reserves                                                                |       | 23,000                        |       | 122,000 |   |
| Other assets -  Intangibles                                                        |       | 54,000                        |       | 23,000 |   |
| Changes in  assets and liabilities:                                                |       |                          |       |   |   |
| Decrease  (increase) in:                                                           |       |                          |       |   |   |
| Accounts  receivable                                                               |       | 89,000                        |       | (141,000 | ) |
| Inventories                                                                        |       | (32,000                       | )          | (97,000 | ) |
| Other current  assets                                                              |       | 45,000                        |       | (24,000 | ) |
| Increase  (decrease) in:                                                           |       |                          |       |   |   |
| Accounts payable                                                                   |       | 308,000                       |       | (303,000 | ) |
| Accrued state  income taxes                                                        |       | (19,000                       | )          |   |   |
| Accrued expenses                                                                   |       | 48,000                        |       | 52,000 |   |
| Net cash  provided by operating activities                                         |       | 844,000                       |       | 31,000 |   |
|                                                                               |       |                          |       |   |   |
| Cash Flows from  Investing Activities:                                             |       |                          |       |   |   |
| Purchases of  property and equipment                                               |       | (394,000                      | )          | (84,000 | ) |
| Cash received in  the MPI acquisition                                              |       | —                        |       | 1,150,000 |   |
| Net cash (used  in) provided by investing activities                               |       | (394,000                      | )          | 1,066,000 |   |
|                                                                               |       |                          |       |   |   |
| Cash Flows from  Financing Activities:                                             |       |                          |       |   |   |
| Proceeds from  exercise of stock options                                           |       | 3,000                         |       | — |   |
| Proceeds from  line of credit, net                                                 |       | (5,000                        | )          | (265,000 | ) |
| Proceeds from  notes payable - investors                                           |       | —                        |       | (22,000 | ) |
| Principal  payments on capital lease obligations, net                              |       | (29,000                       | )          | (35,000 | ) |
| Net cash used in  financing activities                                             |       | (31,000                       | )          | (322,000 | ) |
|                                                                               |       |                          |       |   |   |
| Net increase in  Cash and Cash Equivalents                                         |       | 419,000                       |       | 775,000 |   |
| Cash and Cash  Equivalents, beginning of period                                    |       | 1,588,000                     |       | 977,000 |   |
| Cash and Cash  Equivalents, end of period                                          |       | $                             | 2,007,000  |   | $ | 1,752,000 |   |
| Supplemental  disclosures of cash flow information:                                |       |                          |       |   |   |
| Cash paid during  the period for:                                                  |       |                          |       |   |   |
| Interest                                                                           |       | $                             | 6,000      |   | $ | 21,000 |   |
| Income Taxes                                                                       |       | 8,000                         |       | — |   |
|                                                                               |       |                          |       |   |   |
| Unamortized debt  discount fees                                                    |       | $                             | —     |   | $ | 17,542 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

----

 

**AML COMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**June 30, 2005**

** **

**1.****             Basisof Presentation**

 

Wecurrently design, manufacture, and market radio frequency (RF) and microwave,low noise, medium and high power amplifiers for a variety of frequency rangesand transmission protocols serving primarily the defense microwave market. Ourbusiness is comprised of two reportable segments consisting of amplifiers andrelated products that are designed, manufactured and marketed by AMLCommunications, Inc. for the defense microwave and wireless communicationsmarket (AML) and high power microwave amplifiers that are designed,manufactured and marketed by our division Microwave Power, Inc. (MPI) forthe defense market. Our defense industry products are used primarily inelectronic systems for tactical aircraft, ships, ground systems, and missilesystems. These products are sold directly by us as well as through independentsales representatives. We had two reportable segments in June 2004.  However, we only had the MPI segment for 12days in the three month period ended June 30, 2004.

 

Theaccompanying financial statements have been prepared in conformity withaccounting principles generally accepted in the United States.  However, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beenomitted or condensed pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation have been included.The results of operations and cash flows for the three-month period presentedare not necessarily indicative of the results of operations for a fullyear.  These financial statements shouldbe read in conjunction with the Company’s March 31, 2005 audited financialstatements and notes thereto included in the Company’s Annual Report on Form 10-KSB.

 

**2.****             EarningsPer Share**

 

**Statement of Financial Accounting Standards No. 128, “Earningsper share” requires the presentation of basic earnings per share and dilutedearnings per share.  Basic and dilutedearnings per share computations are presented by the Company conform to thestandard and are based on the weighted average number of shares of Common Stockoutstanding during the year.**

** **

Basicearnings per share is computed by dividing net income or loss by the weightedaverage number of shares outstanding for the year.  “Diluted” earnings per share is computed bydividing net income or loss by the total of the weighted average number ofshares outstanding, and the dilutive effect of outstanding stock options(applying the treasury stock method).

 

**TheCompany had approximately 1,943,000 of granted stock options and warrants thatwere exercisable as of June 30, 2005 and approximately 1,566,000 ofgranted stock options and warrants exercisable at June 30, 2004.**

** **

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

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

 

6

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| **Three months ended  June 30, 2004**   | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|----------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings  per shares:                  |       |           |       |       |       |          |       |
| Net income  available to common stockholders |       | 326,000        |       | 8,143,000  |       | $             | 0.04       |   |
| Effect of  dilutive securities:              |       |           |       |       |       |          |       |
| Stock options                                |       |           |       | 1,566,000  |       |          |       |
| Diluted earnings  per share:                 |       | 326,000        |       | 9,709,000  |       | $             | 0.03       |   |

 

**3.**             **Inventories**

 

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

 

| ** **                    | ** ** | **June 30, 2005** | ** ** |
|-------------------------------|------------|------------------------|------------|
|                          |       |                   |       |
| Raw material,  net of reserve |       | $                      | 1,048,000  |   |
| Work-in-process               |       | 494,000                |       |
| Finished goods                |       | 197,000                |       |
|                          |       | $                      | 1,739,000  |   |

 

Thereserve for inventory at June 30, 2005 was $539,000.

 

**4.**             **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 three months ended June 30 2005, the Company recognized no impairment.

 

At June 30, 2005, intangibles consist of the following:

 
| ** **                | ** ** | ** **                | ** ** | **June 30, 2005**       | ** ** | ** ** | ** ** |
|---------------------------|------------|---------------------------|------------|------------------------------|------------|------------|------------|
| **Intangibles**           | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** | **Net**    | ** ** |
|                      |       |                      |       |                         |       |       |       |
| Amortized  intangibles:   |       |                      |       |                         |       |       |       |
| Patents                   |       | $                         | 189,000    |                         | $          | (26,000    | )          | $ | 163,000 |   |
| Existing  Technology      |       | 961,000                   |       | (90,000                      | )          | 871,000    |       |
| Customer List             |       | 339,000                   |       | (123,000                     | )          | 216,000    |       |
|                      |       |                      |       |                         |       |       |       |
| Unamortized  intangibles: |       |                      |       |                         |       |       |       |
| Trademarks                |       | 181,000                   |       | —                       |       | 181,000    |       |
|                      |       | $                         | 1,670,000  |                         | $          | (239,000   | )          | $ | 1,431,000 |   |

 

Due tothe acquisition of MPI in the quarter ended June 30, 2004, we recorded theintangible assets above. We assigned an 8 year life to patents, a 12 year lifeto Existing Technology, and a 3 year life to Customer Lists. All are subject toamortization.  The value assigned totrademarks, which have an indefinite life, should not be amortized.

 

7

----

 

Amortizationexpense from continuing operation for quarter ended June 30, 2005 was$54,000.  We expect amortization expensefor the next five years to be as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| 2006                           |       | $          | 216,305    |   |
| 2007                           |       | $          | 216,305    |   |
| 2008                           |       | $          | 122,200    |   |
| 2009                           |       | $          | 103,379    |   |
| 2010                           |       | $          | 103,379    |   |

 

**5**.             **Accounts Receivable Financing**

 

At June 30, 2005, we had a line of creditagreement with Bridge Bank. On July 27, 2005, we signed a BusinessFinancing Modification Agreement with Bridge Bank to renew our line of credit,increasing the credit facility from $1.5 million to $2.0 million. Of this $2.0million, $1.0 million may be used for cash advances against accountsreceivables and $1.0 million may be used for equipment advances. Our ability toborrow under this agreement varies based upon eligible accounts receivable andeligible equipment purchases. We are obligated to pay the bank a finance chargeat a rate per year equal to the prime rate, which in no event shall be lessthan 5.50%, plus .25% with respect to cash advances and a rate of such primerate plus 2.0% with respect to equipment advances. We are obligated to pay anannual facility fee of $5,000 (0.50% of the gross facility amount). We mustmaintain certain financial requirements, including net profit after tax, on aquarterly basis, of at least $0.01, and a debt service coverage ratio withrespect to equipment advances. We were in compliance with these requirements atJune 30, 2005; however, there is no assurance that we will be incompliance at future dates. This agreement terminates on July 27, 2006 orupon a date that the bank 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 27, 2005, we will berequired to pay an early termination fee of 1.0% of the credit facility amountunder the terms of the agreement. At June 30, 2005 we had an outstandingbalance of $75,000 under this agreement and our remaining borrowing capacitywas approximately $511,000 available under the accounts receivable agreementand $500,000 available under the equipment financing agreement.

 

**6.****             EquityTransactions**

** **

During quarter, the Board of Directors granted stock options of 105,000 shares as employee compensation.  The options prices range from $1.05 to $1.07 per share.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends SFAS 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

 

The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per share as if stock-based employee compensation had been recognized during the three month period ended June 30, 2005 and June 30, 2004. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

 

8

----

 
| ** **                                                         | ** ** | **Three Month Periods Ended** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                         | ** ** | **June 30, 2005**        | ** ** | **June 30, 2004** | ** ** |
|                                                               |       |                          |       |   |   |
| Net income as reported                                             |       | $                             | 249,000    |   | $ | 326,000 |   |
| Less: stock-based compensation expense, net of related tax effects |       | (47,000                       | )          | (26,000 | ) |
| Pro forma net income                                               |       | $                             | 202,000    |   | $ | 300,000 |   |
|                                                               |       |                          |       |   |   |
| Basic earnings per share - as reported                             |       | 0.02                          |       | 0.04 |   |
| Diluted earnings per share - as reported                           |       | 0.02                          |       | 0.03 |   |
| Basic earnings per share - pro forma                               |       | 0.02                          |       | 0.03 |   |
| Diluted earnings per share - pro forma                             |       | 0.01                          |       | 0.03 |   |

 

**7.**             **Related Party**

 

During the quarter ended June 30, 2005, theCompany paid approximately $13,000 to the previous stockholders of MPI inconnection with the property rent for the premises located in Santa Clara.

 

On August 1, 2005 we entered into a newCommercial Lease Agreement with Microwave Holdings, LLC for the premiseslocated at 3350 Scott Blvd., Bldg: 25, in Santa Clara, California. The term ofthe lease is August 1, 2005 to September 19, 2006 at a monthly rateof $5,000.00.

 

**8.****             ListingHistory**

 

Our common stock currently trades on NASDAQ’s OTCBulletin Board under the symbol “AMLJ.OB”. Our common stock traded on theNasdaq Small Cap Market from October 8, 2001 to August 13, 2002 andon the Nasdaq National Market prior to that time.  The Company was de-listed from NASDAQ becauseof its failure to meet the $1.00 minimum bid price requirement.

 

**9.**             **Acquisitions**

 

On May 25,2004, we signed a definitive agreement for the acquisition of Microwave Power, Inc.which was completed on June 18, 2004. MPI was merged into our wholly ownedsubsidiary, with the subsidiary as the surviving entity. The totalconsideration for the acquisition was $3,028,000. Pursuant to the acquisitionagreement, 2,117,108 shares as consideration for the acquisition and 21,174shares to be issued to the broker were committed, or authorized for issuance byour board of directors, as of June 18, 2004. There was no change in MPI’smanagement and we entered into employment agreements with two of MPI’s seniorofficers, its past President and Secretary. MPI will continue to operate as ourdivision from its facility in Santa Clara, which is owned by MPI’s priorshareholders and leased to the us.

 

The MPI acquisition was driven by a number of keyfactors, including:

 

1)    Technologically,MPI’s semi-monolithic, gold filled via’s, air bridge andmicrowave-monolithic-ceramic (MMCC) technology provide access to processes thatwe believe are complimentary and additive to those available to AML prior tothe acquisition.

2)    MPI’s productbase addresses higher power and higher frequency sectors of the microwavemarket.  This acquisition was intended tostrengthen our product offerings to this market by adding higher powermicrowave amplifiers.

 

9

----

 

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

 
| ** **                   | ** ** | **June 18, 2004** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | ** **             | ** ** |
| Cash                         |       | $                      | 1,150,000  |   |
| Receivables                  |       | 124,000                |       |
| Inventory                    |       | 494,000                |       |
| Property and  equipment, net |       | 61,000                 |       |
| Intangible  assets           |       | 1,670,000              |       |
| Total assets  acquired       |       | $                      | 3,499,000  |   |
| Current  liabilities         |       | (295,000               | )          |
| Net assets  acquired         |       | $                      | 3,204,000  |   |

 

Of the1,670,000 of acquired intangible assets, $189,000 was assigned to patents (8year useful life), $961,000 was assigned to Existing Technology (12 year usefullife), and $339,000 was assigned to Customer Lists (3 year useful life).  All are subject to amortization.  The balance of $181,000 was assigned to trademarks,which have an indefinite life and therefore should not be amortized.

 

**10.****          Segments**

 

The Company has two reportable segments consisting of (1) AMLCommunications, Inc. and (2) the Microwave Power, Inc.  AML Communications is a designer,manufacturer, and marketer of amplifiers and related products that address thedefense microwave and wireless communications markets. These products aremanufactured and sold through operations in Camarillo, California. MicrowavePower, Inc. is a designer, manufacturer and marketer of high powermicrowave amplifiers. These products are manufactured and sold throughoperations in Santa Clara, California. The Company evaluates performance basedon sales, gross profit margins and operating profit before income taxes.

 

The following is information for the Company’sreportable segments for the three months periods ended June 30, 2005:

 

**For the three months ended June 30, 2005**

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

 

10

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**For the three months ended June 30, 2004**

 
| **(In thousands)**                                            | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                          |       |    |       |    |       |            |       |      |       |
| Revenue                                                       |       | $       | 2,098      |    | $          | 76              |       | —    |       | $ | 2,174 |   |
|                                                          |       |    |       |    |       |            |       |      |       |
| Gross Profit                                                  |       | 878     |       | 56      |       | —          |       | 934       |       |
| Depreciation &  amortization  (includes intangibles) |       | 63      |       | 1       |       | —          |       | 64        |       |
|                                                          |       |    |       |    |       |            |       |      |       |
| Interest expense                                              |       | 21      |       | —  |       | —          |       | 21        |       |
|                                                          |       |    |       |    |       |            |       |      |       |
| Other, net                                                    |       | 491     |       | 32      |       | —          |       | 523       |       |
| Profit from  continuing Operations before tax                 |       | $       | 303        |    | $          | 23              |       | —    |       | $ | 326 |   |
|                                                          |       |    |       |    |       |            |       |      |       |
| Identifiable  assets                                          |       | $       | 3,094      |    | $          | 3,507           |       | —    |       | $ | 6,601 |   |
|                                                          |       |    |       |    |       |            |       |      |       |
| Capital  Expenditures                                         |       | $       | 437        |    | $          | 27              |       | —    |       | $ | 464 |   |

 

We had two reportable segments in the three monthsended June 30, 2004.  However, weonly had the MPI segment for 12 days of the three month period ended June 30,2004.

 

**11.****         ****Major customers and vendors**

 

Two customers provided 30% and 38% of net revenue forthe three months ended June 30, 2005 and 2004, respectively. Totalaccounts receivable due from these customers was approximately $274,000 and$368,000 as of June 30, 2005 and 2004 respectively.

 

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

 

Two vendors accounted for 27% and 34% of the Company’snet purchases for the three months ended June 30, 2005 and 2004,respectively. Total accounts payable due to these vendors was $19,000 and$12,000 as of ended June 30, 2005 and 2004, respectively.

 

**12.****          SubsequentEvent**

** **

**On July 27, 2005, we signed aBusiness Financing Modification Agreement with Bridge Bank to renew our line ofcredit, increasing the credit facility from $1.5 million to $2.0 million. Ofthis $2.0 million, $1.0 million may be used for cash advances againstreceivables and $1.0 million may be used for equipment advances. Our ability toborrow under this agreement varies based upon eligible accounts receivable andeligible equipment purchases. We are obligated to pay the bank a finance chargeat a rate per year equal to the prime rate, which in no event shall be lessthan 5.50%, plus .25% with respect to cash advances and a rate of such primerate plus 2.0% with respect to equipment advances. We are obligated to pay anannual facility fee of $5,000 (0.50% of the gross facility amount). Thisagreement terminates on July 27, 2006 or upon a date that the bank choosesto terminate 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 27, 2005, wewill be required to pay and early termination fee of 1.0% of the CreditFacility amount.**

 

11

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**On August 1, 2005 we entered into a new CommercialLease Agreement with Microwave Holdings, LLC for the premises located at 3350Scott Blvd., Bldg: 25, in Santa Clara, California. The term of the lease is August 1,2005 to September 19, 2006 at a monthly rate of $5,000.00.**

** **

**13.****          Reclassifications**

** **

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

** **

**Item2.  Management’s Discussion and Analysisor Plan of Operation**

** **

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

 

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

•              ourability to attract and retain qualified, knowledgeable employees;

•              theimpact of general economic conditions on our business;

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

•              thelimited number of potential customers for our products;

•              thevariability in gross margins on our products;

•              ourability to design  and market newproducts successfully;

•              ourfailure to acquire new customers in the future;

•              deteriorationof business and economic conditions in our markets;

•              intenselycompetitive industry conditions with increasing price competition; and

•              therate of growth in the defense markets.

 

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

** **

**Overview**

 

We are based in southernCalifornia and design, manufacture and market Radio Frequency (RF) andMicrowave power and low noise amplifiers for a variety of frequency ranges andtransmission protocols serving the defense microwave and wirelesscommunications markets. Our defense industry products, which representsapproximately 90% of our sales, are used in communications and radar equipmentintegrated into electronic systems for tactical aircraft, ships, ground systems,and missile systems. Our wireless products consist of an array of low noise andpower amplifiers serving the wireless, PCS, and two-way messaging market, aswell as Cellular Coverage Enhancement amplifiers.  These products, representing approximately10% of our sales, are sold to cellular operators and to original equipmentmanufactures. The demand for products manufactured by us and used in thedefense industry has been growing during the last 2 years and is expected tocontinue to grow in the near to medium term. This growth is attributable to anincrease in demand for our products by government prime contractors, as well asto our strategy to acquire market share. The demand for wireless products has seen a recent increase due to thecompetition among cellular operators

 

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and original equipmentmanufactures to provide improved products and services. The acquisition of MPIwas part of a strategic move to complement the existing AML product line andexpand our technology base. We will continue to operate MPI from the currentfacility in Santa Clara, with the current management in place, but plan tounify the website of MPI with our website.

 

**Resultsof Operations**

** **

**ThreeMonths Ended June 30, 2005 Compared to Three Months Ended June 30,2004**

** **

*Net sales. *Netsales for the three months ended June 30, 2005 were $2.48 million, ascompared to net sales of $2.17 million for the three months ended June 30,2004, an increase of $310,000 or 14%. The increase in net sales is attributable to having MPI for 91 days inthe quarter ended June 30, 2005, as compared to having MPI for only 12days in the quarter ended June 30, 2004. Defense related MIC productsaccounted for $2.45 million, or 98.4% of net sales for the three months ended June 30,2005, compared to $1.7 million or 79.6% of net sales for the three months endedJune 30, 2004. The cellular and wireless messaging market produced only$40,000, or 1.6% of net sales for the three months ended June 30, 2005, ascompared to $431,000, or 20.5% of net sales for the three months ended June 30,2004.

 

*Gross profit. *Gross profit for the three months ended June 30,2005 was $1.1 million, or 45.8% of net sales, compared to a gross profit of$934,000, or 42.9% of net sales for the three months ended June 30, 2004.Gross profit, as a percentage of net sales, increased due to reductions indirect material costs.  Direct materialcosts vary from month to month, due to the product mix. Our products arecustomer specific and therefore, the material content for these units willvary.

 

*Selling, general and administrative costs. *Selling, general, andadministrative costs were $603,000, or 24.2% of net sales, for the three monthsended June 30, 2005, compared to $409,000, or 18.8% of net sales, for thethree months ended June 30, 2004. Of the $194,000 increase, $119,000 isattributable to having MPI for 91 days in the quarter ended June 30, 2005,as compared to having MPI for only 12 days in the quarter ended June 30,2004. Additionally, we incurred a $54,000 in increases for legal and auditfees, which were directly related to maintaining the MPI division.  There was also an increase in spending of$15,000 for consulting fees in connection with investor relations and $9,000increase in expense for Sarbanes Oxley requirements.

 

*Research and development costs. *Research and developmentcosts were $283,000, or 11.4% of net sales, for the three months ended June 30,2005, as compared to $183,000, or 8.4% of net sales, for the three months endedJune 30, 2004. Of the $100,000 increase, $30,000 is attributable to havingMPI for 91 days in the quarter ended June 30, 2005, as compared to havingMPI for only 12 days in the quarter ended June 30, 2004. For the AMLdivision, salaries and related benefits increased by $70,000 due to theexpansion of the research and development staff, which includes five newengineers.

 

*Other income, net. *Other income was $3,000 for the three months ended June 30,2005, as compared to other expense of $16,000 for the three months ended June 30,2004.  We had $9,000 in interest income,offset by $6,000 in interest expense for the three months ended June 30,2005. The decrease in interest expense is attributed to paying down our capitalleases and switching from the Receivables Financing Agreement to a moretraditional line of credit. For the three months ended June 30, 2004,interest expense was $21,000, offset by $1,000 of interest income plus $4,000in proceeds for the sale of assets.

 

*Provision for income taxes.* Forthe three months ended June 30, 2005, we recorded a provision of $4,500for federal AMT taxes and a provision of $3,800 for state AMT taxes, ascompared to the three months ended June 30, 2004, where we recorded noprovision due to the loss carry-forward benefits.

 

*Net profit. *Netprofit was $249,000, or $0.02 per share, for the three months ended June 30,2005, compared to a net profit of $326,000, or $0.04 per share, for the threemonths ended June 30, 2004.

 

13

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**Liquidityand Capital Resources**

** **

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

 

Between July 1, 2000 and December 31, 2001,we entered into capital leases for the purpose of acquiring production and testequipment valued in aggregate at $740,000. The terms of the leases range from 36 months to 60 months and theinterest charges range from 8.6% to 15.6%. The total amount remaining on the leases at June 30, 2005 was$17,000.

 

In December 2002, the Company entered into anon-cancelable capital lease to acquire test equipment valued in aggregate atapproximately $50,000. The terms of the lease call for 36 equal monthly paymentsof $1,699 commencing in December 2002 and at an annual interest rate of13.7%. The total amount remaining on the lease at June 30, 2005 wasapproximately $8,000.

 

In July 2003, we raised $245,000 ($100,000 of whichwas a conversion from an advance received in June 2003) from currentofficers and directors and $43,000 from other investors in the form of notespayable with warrants attached. The funds were used for working capital. Thepromissory notes bear interest at the rate of 8% and have a two-year maturity.Warrants to purchase a total of 240,000 shares of our common stock were issuedin connection with the funding.  The pershare exercise price of the warrants is $0.24. The warrants expire five years from the date of issuance.  We have valued these warrants at $35,000 andare expensing this value over the term of the notes payable. On November 2,2004, the Board of Directors approved the early payoff of these notes payableand these notes were paid in full on November 9, 2004. As of June 30,2005, the number of warrants exercised was 52,500.

 

At June 30, 2005, we had a line of credit agreement with BridgeBank. On July 27, 2005, we signed a Business Financing ModificationAgreement with Bridge Bank to renew our line of credit, increasing the creditfacility from $1.5 million to $2.0 million. Of this $2.0 million, $1.0 millionmay be used for cash advances against accounts receivables and $1.0 million maybe used for equipment advances. Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipmentpurchases. We are obligated to pay the bank a finance charge at a rate per yearequal to the prime rate, which in no event shall be less than 5.50%, plus .25%with respect to cash advances and a rate of such prime rate plus 2.0% withrespect to equipment advances. We are obligated to pay an annual facility feeof $5,000 (0.50% of the gross facility amount). We must maintain certainfinancial requirements, including net profit after tax, on a quarterly basis,of at least $0.01, and a debt service coverage ratio with respect to equipmentadvances. We were in compliance with these requirements at June 30, 2005;however, there is no assurance that we will be in compliance at future dates.This agreement terminates on July 27, 2006 or upon a date that the bankchooses to terminate the agreement.  Anyunpaid balance 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 27, 2005, wewill be required to pay an early termination fee of 1.0% of the credit facilityamount under the terms of the agreement. At June 30, 2005 we had anoutstanding balance of $75,000 under this agreement and our remaining borrowingcapacity was approximately $511,000 available under the accounts receivableagreement and $500,000 available under the equipment financing agreement.

 

At June 30, 2005, we had $2.0 million in cash andcash equivalents. For the three months ended June 30, 2005, our operatingactivities provided cash of approximately $844,000, compared to providing cashof 31,000 for the three months ended June 30, 2004. Of the $844,000 ofcash provided by operating activities, $480,000 was provided by AML’s operatingactivities and $364,000 was provided by MPI’s operating activities. Net cashused in investing activities, for the acquisition of production equipment,amounted to $394,000 for the three months ended June 30, 2005, as comparedto $1.1 million net cash provided by investing activities during the threemonths ended June 30, 2004, a result of MPI acquisition in which $1.2million received and offset by net capital equipment expenditures of $84,000.Net cash used in financing activities was $31,000 for the three months ended June 30,2005, $29,000 was the result of the paying down capital lease obligations,$5,000 was used to pay down our receivables line of credit, offset by $3,000 inproceeds from options being exercised, as compared to $322,000 used infinancing activities for the three months ended June 30, 2004, of which$265,000 was a result of paying down our balance on our accounts receivablefinancing with Silicon Valley Bank, $35,000 in payments on lease obligationsand $22,000 in payments on Notes Payable.

 

Weanticipate capital expenditures of approximately $702,000 in fiscal 2006. Webelieve that funds will be provided by our operating activities. However, wemay choose to finance some of these expenditures through our

 

14

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financing agreement with Bridge Bank. At June 30, 2005, we had aline of credit agreement with Bridge Bank, of which $500,000 may be used forequipment advances at a rate of such prime rate plus 3.5%. At June 30,2005, our remaining borrowing capacity was $500,000 available under theequipment financing agreement.

 

Inaddition to the funds raised in July 2003, we may attempt to procureadditional sources of financing in the event that the capital available as of June 30,2005 is insufficient for our operating needs and capital expenditures. Thesesources may include, but are not limited to, additional sales of oursecurities.  There are, however, noassurances that we will be able to successfully obtain additional financing atterms acceptable to us.  Failure toobtain such financing could have a material adverse effect on our ability tooperate as a going concern.

 

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

 

**CriticalAccounting Policies**

 

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

 

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

 

•      *Persuasive evidence of an arrangement exists;*

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

•      *Price is fixed or determinable; and*

•      *Collectibility is reasonably assured*

 

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

 

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

 

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

 

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accounts receivable write-offs; and (iii) the overallcreditworthiness of the customer base. A considerable amount of judgment isrequired in assessing the realizability of accounts receivables. Should any ofthe factors considered in determining the adequacy of the overall allowancechange, an adjustment to the provision for doubtful accounts receivable may benecessary.

 

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

 

*Intangible Assets*. We testintangible assets with indefinite lives for impairment on an annual basis ormore frequently if certain events occur. If the assets are considered to be impaired, the impairment to berecognized will be measured by the amount in which the carrying amount exceedsthe fair value of the assets.  For ourintangible assets with finite lives, including our customer lists, existingtechnology, and patents, we amortize the costs of the assets over their usefullives and assess impairment at least annually or whenever events andcircumstances suggest the carrying value of an asset may not be recoverable.Determining the life of the assets with finite lives is judgmental in natureand involves the use of estimates and assumptions. These estimates andassumptions involve a variety of factors, including future market growth andconditions, forecasted revenues and costs and a strategic review of ourbusiness and operations. We base our fair value estimates on assumptions webelieve to be reasonable but that are unpredictable and inherently uncertain.Actual future results may differ from those estimates. In the event wedetermine that an intangible asset is impaired in the future, an adjustment tothe value of the asset would be charged to earnings in the period suchdetermination is made.

 

*Existing Technology.*Our existingtechnology is based on a patent issued in 1990, which continues to be the maintechnology of MPI.  It is a substratedeposition technology that is mature and with no replacement technologyforecasted.

 

**AdditionalFactors That May Affect Future Results**

 

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

 

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

 

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

 

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

 

•              ourability to accurately anticipate customer demand;

 

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

 

•              theavailability and cost of components;

 

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

 

•              Theability to integrate potential future acquisitions into our existingoperations.

 

We believe that, to the extent that foreign sales arerecognized, we may face increased risk associated with political and economicinstability, compliance with foreign regulatory rules governing exportrequirements, tariffs and other trade barriers, differences in intellectualproperty protections, longer accounts receivable cycles, currency

 

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fluctuations and general trade restrictions. If any of these risksmaterialize, they could have a material adverse effect on our business, resultsof operations, and financial condition.

 

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

 

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

 

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

 

The markets in which we compete are characterized byrapidly changing technology and continuous improvements in products andservices.  Our future success depends onour ability to enhance our current products and to develop and introduce, in atimely manner, new products that keep pace with technological developments, thatmeet or exceed industry standards, that compete effectively on the basis ofprice, performance and quality, that adequately address OEM customer andend-user customer 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 require theinvestment of significant financial resources in new product development.  In the event our newly developed products arenot timely developed or do not gain market acceptance, our business, results ofoperations and financial condition could be materially adversely affected.

 

Our quarterly and annual results have in the pastbeen, and will continue to be, subject to significant fluctuations due to anumber of factors, any of which could have a material adverse effect on ourbusiness, financial condition and results of operations. There can be noassurance that we will not experience such fluctuations in the future. Weestablish our expenditure levels for product development and other operatingexpenses based on expected revenues, and expenses are relatively fixed in theshort term. As a result, variations in timing of revenues can cause significantvariations in quarterly results of operations. There can be no assurances thatwe will be profitable on a quarter-to-quarter basis in the future. We believethat period-to-period comparisons of our financial results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance. Due to these factors, it is likely that in some future quarter orquarters our revenues or operating results will not meet the expectations ofpublic stock market analysts or investors. In such event, the market price ofour common stock would be materially adversely affected.

 

**Item 3. Controls and Procedures**

 

(a)   *Evaluation of disclosure controls and procedures*. As of theend of the period covered by this report, we carried out an evaluation, underthe supervision and with the participation of our management, including ourChief Executive Officer and Director of Finance, of the effectiveness of thedesign and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended. Based uponthat evaluation, our Chief Executive Officer and Director of Finance concludedthat our disclosure controls and procedures were effective as of the end of theapplicable period to ensure that the information required to be disclosed bythe Company in reports that it files or submits under the Exchange Act (i) isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms

 

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and (ii) is accumulated and communicated to our management, including our ChiefExecutive Officer and Director of Finance, as appropriate to allow timelydecisions regarding required disclosures.

 

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

 

#### **PART II – OTHER INFORMATION**

#### ** **

**Item1.  LegalProceedings**

** **

Not Applicable

** **

**Item2.  Unregistered Sales ofEquity Securities and Use of Proceeds**

 

Not Applicable

 

**Item3.  Defaults Upon Senior Securities**

** **

Not Applicable

** **

**Item4.  Submission of Matters to aVote of Security Holders**

** **

Not Applicable

** **

**Item5.  OtherInformation**

** **

Not applicable

** **

**Item6.**   Exhibits

** **

The exhibits listed in the Exhibit Index arefiled as part of this report.

 

18

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#### **SIGNATURES**

 

 

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | AML  Communications Inc. |                        |
|--------|--------------------------|-----------------------------|
|   |                     |                        |
|   |  /s/: Jacob  Inbar  |                        |   |
|   |  By:                | Jacob Inbar,  President and |   |
|   |                     | Chief Executive  Officer    | Dated:  August 12, 2005 |
|        |                          |                             |  |  |

 

19

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EXHIBIT INDEX

 
| 2.1    |   | Merger Agreement  entered into as of May 25, 2004 by and among AML Communications Inc., a  Delaware corporation, AML Holdings, LLC, a California limited liability  company and Microwave Power, Inc., a California corporation (1) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    |   | Certificate of  Incorporation (2)                                                                                                                                                                                                             |
| 3.2    |   | Bylaws (2)                                                                                                                                                                                                                                    |
| 10.1   |   | Form of  Indemnity Agreement (2)                                                                                                                                                                                                         |
| 10.2   |   | Lease, dated  March 11, 1996, between the Company and Parr-Bohn Properties, Ltd. II, a  California

Limited Partnership  (3)                                                                                                             |
| 10.3   |   | Intellectual  Property Security Agreement (4)                                                                                                                                                                                                 |
| 10.4   |   | Loan and  Security Agreement dated November 10, 2000 between the Company and  Silicon Valley Bank  (5)                                                                                                                              |
| 10.5   |   | Intellectual  Property Security Agreement dated November 10, 2000 between the Company  and Silicon Valley Bank (5)                                                                                                                       |
| 10.6   |   | Warrant to  purchase stock dated November 9, 2000 between the Company and Silicon  Valley Bank (5)                                                                                                                                       |
| 10.7   |   | Accounts  Receivable Purchase Agreement dated November 20, 2001 between AML  Communications, Inc. and Silicon Valley Bank (6)                                                                                                            |
| 10.8   |   | Promissory Note  dated December 30, 2001 between Tiberiu, Mazilu, and AML Communications Inc.(6)                                                                                                                                         |
| 10.9   |   | Accounts  Receivable Purchase Modifications Agreement dated September 24, 2003  between Silicon Valley Bank and AML Communications (7)                                                                                                   |
| 10.10  |   | Form of  Promissory Note date July 16, 2003 between the Company and the  following:  Jacob Inbar, Tiberiu  Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The Oliver Family  Trust (7)                               |
| 10.11  |   | Form of  Warrant dated July 16, 2003 between the Company and the following: Jacob  Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The  Oliver Family Trust (7)                                             |
| 10.12  |   | Fourth Amended  and Restated 1995 Stock Option Agreement at June 10, 2002 (8)                                                                                                                                                            |
| 10.13  |   | Parr-Bohn  Properties First Amendment to lease of 1000 Avenida Acaso, Camarillo, CA. (8)                                                                                                                                                      |
| 10.14  |   | Interim Lease  and Proposed Lease Terms (9)                                                                                                                                                                                                   |
| 10.15  |   | Financing  Agreement dated July 8, 2004 with Bridge Bank (10)                                                                                                                                                                            |
| 10.16  |   | Enterprise  Agreement Number 4627 dated August 26, 2004 (11) *                                                                                                                                                                           |
| 10.17  |   | Business  Financing Modification Agreement with Bridge Bank, dated July 27,  2005(12)                                                                                                                                                    |
| 10.18  |   | Commercial Lease  between the Company and Microwave Holdings, LLC dated August 1, 2005(12)                                                                                                                                               |
| 10.19* |   | Purchase Order  from Raytheon Space and Airborne Systems dated September 5, 2004, as  amended (12)                                                                                                                                       |
| 31.1   |   | Certification by  the Chief Executive Officer (12)                                                                                                                                                                                            |
| 31.2   |   | Certification by  the Director of Finance (12)                                                                                                                                                                                                |
| 32.1   |   | Certification  pursuant to Section 906 of the Sarbanes Oxley Act (12)                                                                                                                                                                    |
| 32.2   |   | Certification  pursuant to Section 906 of the Sarbanes Oxley Act (12)                                                                                                                                                                    |

 

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| (1)    |   | Previously filed  with the Securities and Exchange Commission as Exhibit 10.13 to the  company’s Form 10KSB for the fiscal year ended March 31, 2004.                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                     |
| (2)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Registration  Statement on Form SB-2 No. 33-99102-LA and incorporated herein by  reference.                 |
|   |   |                                                                                                                                                                                                     |
| (3)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-KSB for fiscal year ended March 31, 1996 and incorporated  herein by reference      |
|   |   |                                                                                                                                                                                                     |
| (4)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 1999 and  incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                     |
| (5)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended September 30, 2000 and  incorporated herein by reference. |

 

20

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| (6)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 2001 and  incorporated herein by reference.  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                     |
| (7)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 2002 and  incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                     |
| (8)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-KSB for the fiscal year ended March 31, 2004 and  incorporated herein by reference. |
|   |   |                                                                                                                                                                                                     |
| (9)    |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 8-K dated July 6, 2004 and incorporated herein by reference.                           |
|   |   |                                                                                                                                                                                                     |
| (10)   |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended June 30, 2004 and incorporated  herein by reference.      |
|   |   |                                                                                                                                                                                                     |
| (11)   |   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 8-K dated September 1, 2004 and incorporated herein by  reference.                     |
|   |   |                                                                                                                                                                                                     |
| (12)   |   | Filed herewith.                                                                                                                                                                                          |

 

*  Confidential treatmentrequested as to certain portions, which portions were omitted and filedseparately with the Securities and Exchange Commission.

 

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