** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM10-QSB**

 

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended: ****September 30, 2007**

** **

**or**

** **

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to**

** **

**Commission File Number: 0-27252**

** **

**AMLCOMMUNICATIONS, INC.**

(Exact name of smallbusiness 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 numberincluding area code)

 

Check whether the issuer(1) has filed 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 small business issuer was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes xNo o

 

Indicate by check markwhether the small business issuer is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o No x

 

State the number of shares outstanding of each of the issuer’s classesof common stock, as of the latest practicable date.

 

CommonStock Outstanding as of November 5, 2007: 10,256,666 shares

 

Transitional Small Business Disclosure Format: Yes o  No x

 

 

----

 

 

**AMLCommunications, Inc.**

 
|        | **Index to Form 10-QSB**                                                                                                                    |   |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
|        | ** **                                                                                                                                  |   |
| Item 1.     | Financial Statements  (Unaudited)                                                                                                           |   |
|        |                                                                                                                                        |   |
|        | Unaudited Consolidated  Balance Sheet as of September 30, 2007                                                                              |   |
|        |                                                                                                                                        |   |
|        | Unaudited  Consolidated Statements of Operations for the three month and six month  periods ended September 30, 2007 and September 30, 2006 |   |
|        |                                                                                                                                        |   |
|        | Unaudited  Consolidated Statements of Cash flows for the six month periods ended September  30, 2007 and September 30, 2006                 |   |
|        |                                                                                                                                        |   |
|        | Notes to  Unaudited Consolidated Financial Statements                                                                                       |   |
|        |                                                                                                                                        |   |
| Item 2.     | Management’s  Discussion and Analysis or Plan of Operation                                                                             |   |
|        |                                                                                                                                        |   |
| Item 3.     | Controls and  Procedures                                                                                                                    |   |
|        |                                                                                                                                        |   |
| **Part II** | **Other Information**                                                                                                                       |   |
| ** **  | ** **                                                                                                                                  |   |
| Item 1.     | Legal Proceedings                                                                                                                           |   |
|        |                                                                                                                                        |   |
| Item 2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                |   |
|        |                                                                                                                                        |   |
| Item 3.     | Defaults Upon  Senior Securities                                                                                                            |   |
|        |                                                                                                                                        |   |
| Item 4.     | Submission of  Matters to a Vote of Security Holders                                                                                        |   |
|        |                                                                                                                                        |   |
| Item 5.     | Other Information                                                                                                                           |   |
|        |                                                                                                                                        |   |
| Item  6.    | Exhibits                                                                                                                                    |   |
|        |                                                                                                                                        |   |
|        | SIGNATURES                                                                                                                                  |   |
|        |                                                                                                                                        |   |

 

2

----

**PART I - FINANCIAL INFORMATION**

 

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

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED BALANCE SHEET**

**(unaudited)**
| ** **                                                                                                                    | ** ** | **September 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
|                                                                                                                          |       |                         |       |
| **ASSETS**                                                                                                                    |       |                         |       |
| Current Assets:                                                                                                               |       |                         |       |
| Cash and cash  equivalents                                                                                                    |       | $                            | 626,000    |   |
| Accounts  receivable, net                                                                                                     |       | 2,226,000                    |       |
| Inventories, net                                                                                                              |       | 2,963,000                    |       |
| Note receivable                                                                                                               |       | 8,000                        |       |
| Prepaid Expenses                                                                                                              |       | 138,000                      |       |
| Deferred Tax  Asset - current                                                                                                 |       | 709,000                      |       |
| Total current  assets                                                                                                         |       | 6,670,000                    |       |
|                                                                                                                          |       |                         |       |
| Property and  Equipment, at cost                                                                                              |       | 6,880,000                    |       |
| Less:  Accumulated depreciation                                                                                               |       | (4,241,000                   | )          |
| Property and  Equipment, net                                                                                                  |       | 2,639,000                    |       |
|                                                                                                                          |       |                         |       |
| Deferred Tax  Asset                                                                                                           |       | 2,615,000                    |       |
| Intangible  Assets:                                                                                                           |       |                         |       |
| Technologies,  net                                                                                                            |       | 2,323,000                    |       |
| Patents, net                                                                                                                  |       | 110,000                      |       |
| Customer  relationship, net                                                                                                   |       | 302,000                      |       |
| Backlog                                                                                                                       |       | 114,000                      |       |
| Trademarks and  brand names                                                                                                   |       | 239,000                      |       |
|                                                                                                                          |       | 3,088,000                    |       |
| Deposits                                                                                                                      |       | 33,000                       |       |
|                                                                                                                          |       | $                            | 15,045,000 |   |
|                                                                                                                          |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                |       |                         |       |
|                                                                                                                          |       |                         |       |
| Current  Liabilities:                                                                                                         |       |                         |       |
| Line of Credit                                                                                                                |       | $                            | 1,059,000  |   |
| Accounts payable                                                                                                              |       | 1,190,000                    |       |
| Current portion  of long term debt                                                                                            |       | 11,000                       |       |
| Accrued  expenses:                                                                                                            |       |                         |       |
| Accrued payroll  and payroll related expenses                                                                                 |       | 523,000                      |       |
| Accrued income  taxes                                                                                                         |       | 15,000                       |       |
| Other accrued  liabilities                                                                                                    |       | 243,000                      |       |
| Total current  liabilities                                                                                                    |       | 3,041,000                    |       |
|                                                                                                                          |       |                         |       |
| Notes Payable                                                                                                                 |       | 689,000                      |       |
| Due to Related  Party                                                                                                         |       | 516,000                      |       |
|                                                                                                                          |       |                         |       |
| Minority  Interest                                                                                                            |       | 686,000                      |       |
|                                                                                                                          |       |                         |       |
| Commitments                                                                                                                   |       | —                       |       |
|                                                                                                                          |       |                         |       |
| Stockholders’  Equity:                                                                                                   |       |                         |       |
| Common stock,  $0.01 par value:15,000,000 shares authorized; 10,256,666 shares issued and  outstanding at September 30, 2007. |       | 103,000                      |       |
| Capital in  excess of par value                                                                                               |       | 13,694,000                   |       |
| Accumulated  deficit                                                                                                          |       | (3,684,000                   | )          |
| Total  stockholders’ equity                                                                                              |       | 10,113,000                   |       |
|                                                                                                                          |       | $                            | 15,045,000 |   |

 

The accompanyingnotes are an integral part of these unaudited financial statements.

 

3

----

 

**AMLCOMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Six Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **September 30,  2007**                 | ** ** | **September 30,  2006**               | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Net sales                                                              |       | $                                            | 3,204,000  |                                       | $          | 2,150,000 |   | $ | 5,908,000 |   | $ | 4,452,000 |   |
| Cost of goods  sold                                                    |       | 1,823,000                                    |       | 1,240,000                                  |       | 3,368,000 |   | 2,563,000 |   |
| Gross profit                                                           |       | 1,381,000                                    |       | 910,000                                    |       | 2,540,000 |   | 1,889,000 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Operating  expenses:                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Selling, general  & administrative                                 |       | 736,000                                      |       | 604,000                                    |       | 1,521,000 |   | 1,222,000 |   |
| Research and  development                                              |       | 572,000                                      |       | 325,000                                    |       | 1,147,000 |   | 645,000 |   |
| Total operating  expenses                                              |       | 1,308,000                                    |       | 929,000                                    |       | 2,668,000 |   | 1,867,000 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Income/(loss)  from operations                                         |       | 73,000                                       |       | (19,000                                    | )          | (128,000 | ) | 22,000 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Other  income/(Interest & other expense), net                      |       | (51,000                                      | )          | (5,000                                     | )          | (87,000 | ) | (13,000 | ) |
| Income/(loss)  before provision for income taxes and minority interest |       | 22,000                                       |       | (24,000                                    | )          | (215,000 | ) | 9,000 |   |
| Provision for  income taxes                                            |       | 8,000                                        |       | 8,000                                      |       | 15,000 |   | 15,000 |   |
| Minority  Interest                                                     |       | 90,000                                       |       |                                       |       | 288,000 |   |   |   |
| Net  income/(loss)                                                     |       | $                                            | 104,000    |                                       | $          | (32,000 | ) | $ | 58,000 |   | $ | (6,000 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Basic  earnings/(loss) per common share                                |       | $                                            | 0.01       |                                       | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.00 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Basic weighted  average number of shares of common stock outstanding   |       | 10,257,000                                   |       | 10,234,000                                 |       | 10,257,000 |   | 10,234,000 |   |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Diluted  earnings/(loss) per common share                              |       | $                                            | 0.01       |                                       | $          | (0.00 | ) | $ | 0.01 |   | $ | (0.00 | ) |
|                                                                   |       |                                         |       |                                       |       |   |   |   |   |
| Diluted weighted  average number of shares of common stock outstanding |       | 10,853,000                                   |       | 10,234,000                                 |       | 10,979,000 |   | 10,234,000 |   |

 

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

 

4

----

 

**AMLCOMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                           | ** ** | **Six Month Periods Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **September 30,  2007**               | ** ** | **September 30,  2006** | ** ** |
| Cash Flows from  Operating Activities:                                                               |       |                                       |       |   |   |
| Net income  (loss)                                                                                   |       | $                                          | 58,000     |   | $ | (6,000 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                       |       |   |   |
| Depreciation                                                                                         |       | 318,000                                    |       | 199,000 |   |
| Bad debt expense                                                                                     |       | (4,000                                     | )          | (4,000 | ) |
| Inventory  Reserves                                                                                  |       | 16,000                                     |       | 12,000 |   |
| Stock Options  Granted for Compensation                                                              |       | 78,000                                     |       | 55,000 |   |
| Amortization                                                                                         |       | 169,000                                    |       | 108,000 |   |
| Minority  Interest                                                                                   |       | (288,000                                   | )          | — |   |
| Changes in  assets and liabilities:                                                                  |       |                                       |       |   |   |
| Decrease  (increase) in:                                                                             |       |                                       |       |   |   |
| Accounts  receivable                                                                                 |       | (868,000                                   | )          | (246,000 | ) |
| Inventories                                                                                          |       | (949,000                                   | )          | (147,000 | ) |
| Other current  assets                                                                                |       | (43,000                                    | )          | 163,000 |   |
| Increase  (decrease) in:                                                                             |       |                                       |       |   |   |
| Accounts payable                                                                                     |       | 200,000                                    |       | 79,000 |   |
| Accrued income  taxes                                                                                |       | 15,000                                     |       | 15,000 |   |
| Accrued expenses                                                                                     |       | (26,000                                    | )          | (191,000 | ) |
| Net cash  provided by (used in) operating activities                                                 |       | (1,324,000                                 | )          | 37,000 |   |
|                                                                                                 |       |                                       |       |   |   |
| Cash Flows from  Investing Activities:                                                               |       |                                       |       |   |   |
| Purchases of  property and equipment                                                                 |       | (133,000                                   | )          | (571,000 | ) |
| Cash used in  Mica-Tech acquisition                                                                  |       | (13,000                                    | )          | — |   |
| Net cash used in  investing activities                                                               |       | (146,000                                   | )          | (571,000 | ) |
|                                                                                                 |       |                                       |       |   |   |
| Cash Flows from  Financing Activities:                                                               |       |                                       |       |   |   |
| Proceeds from  line of credit                                                                        |       | 128,000                                    |       | 62,000 |   |
| Payments on  notes payable                                                                           |       | (99,000                                    | )          | (5,000 | ) |
| Principle  payments capital lease obligations                                                        |       | (11,000                                    | )          | — |   |
| Net cash  provided by financing activities                                                           |       | 18,000                                     |       | 57,000 |   |
|                                                                                                 |       |                                       |       |   |   |
| Net decrease in  Cash and Cash Equivalents                                                           |       | (1,452,000                                 | )          | (477,000 | ) |
| Cash and Cash  Equivalents, beginning of period                                                      |       | 2,078,000                                  |       | 2,368,000 |   |
| Cash and Cash  Equivalents, end of period                                                            |       | $                                          | 626,000    |   | $ | 1,891,000 |   |
| Supplemental  disclosure of cash flow information:                                                   |       |                                       |       |   |   |
| Cash paid during  the period for:                                                                    |       |                                       |       |   |   |
| Interest                                                                                             |       | $                                          | 97,000     |   | $ | 36,000 |   |
| Income Taxes                                                                                         |       | $                                          | —     |   | $ | 15,000 |   |
| Supplemental  disclosure of non-cash flow investing and financing activity:                          |       |                                       |       |   |   |
| Debt incurred to  purchase property and equipment                                                    |       | $                                          | 398,000    |   | $ | 127,000 |   |

 

The accompanying notes are an integral part ofthese unaudited financialstatements.

 

5

----

 

**AMLCOMMUNICATIONS, INC.**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2007**

** **

**1.             Basis of Presentation**

 

          AML Communications (the“Company” or “We”) currently designs, manufactures, and markets radio frequency(RF) and microwave, low noise, medium and high power amplifiers and subsystemsserving primarily the defense microwave market. Our business is comprised of three reportable segments.   AML Communications, Inc. (AML) designs,manufactures, and markets amplifiers and related products for the defensemicrowave.  Our division Microwave Power,Inc. (MPI) designs, manufactures, and markets high power microwave amplifiersfor the defense market.  Our defenseindustry products are used primarily in electronic systems for tactical aircraft,ships, ground systems, and missile systems. These products are sold directly by us as well as through independentsales representatives.  On April 11,2007, we acquired a controlling interest of Mica-Tech, Inc. (Mica-Tech).  Our fifty-one (51) percent subsidiaryMica-Tech designs, manufactures, and markets an intelligent communicationsystem to provide Supervisory Control And Data Acquisition (SCADA) of theelectric power grid.  We had tworeportable segments (AML) and (MPI) for the six month periods ended September30, 2006 and three reportable segments (AML), (MPI), and (Mica-Tech) forthe six month periods ended September 30, 2007.

 

          We were incorporated inCalifornia in 1986 as Advanced Milliwave Laboratories, Inc.  Early in 1994, we changed our name to AMLCommunications, Inc.  In December 1995,in conjunction with the initial public offering of our common stock, we changedour state of incorporation from California to Delaware.  In May 1996, we moved our principle officeand manufacturing facility to our current location, 1000 Avenida Acaso,Camarillo, California 93012.

 

          The accompanying financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States.  However, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationhave been included.  The results ofoperations and cash flows for the six-month period presented are not necessarily indicativeof the results of operations for a full year. These financial statements should be read in conjunction with theCompany’s audited financial statements and notes thereto included in theCompany’s Annual Report on Form 10-KSB for the fiscal year ended March 31, 2007.

 

**Principlesof Consolidation**

 

                The accompanying consolidated financial statementsinclude the accounts of AML, its wholly owned division, MPI, and its fifty-one(51) percent owned subsidiary, Mica-Tech from the acquisition date, April 11,2007.  While the historical financialstatements includes the accounts of AML Communications, Inc., and its whollyowned division, Microwave Power, Inc. All significant inter-company accountsand transactions have been eliminated in consolidation.  The six month period ended September 30, 2007includes 173 days of Mica-Tech, Inc.’s results of operations prospectively fromthe date of the acquisition, or April 11, 2007 through September 30, 2007.

 

**2.             Earnings Per Share**

 

**           Statementof Financial Accounting Standards No. 128, “Earnings per share” requires thepresentation of basic earnings per share and diluted earnings per share.  Basic and diluted earnings per sharecomputations are presented by the Company conform to the standard and are basedon the weighted average number of shares of Common Stock outstanding during theyear.**

 

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

 

**6**

----

** **

**          The Companyhad approximately 1,989,000 of granted stock options and warrants that wereexercisable as of September** 30, 2007 and approximately 1,847,000 of granted stock options and warrants exercisable at September 30, 2006.

** **

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

** **
| **Six months ended September 30, 2007**      | ** ** | **Net Income**  | ** ** | **Shares** | ** ** | **Per Share**  | ** ** |
|----------------------------------------------|------------|-----------------|------------|------------|------------|----------------|------------|
| Basic earnings  per shares:                  |       |            |       |       |       |           |       |
| Net income  available to common stockholders |       | $               | 58,000     |       | 10,257,000 |           | $          | 0.01 |   |
| Effect of  dilutive securities:              |       |            |       |       |       |           |       |
| Stock options  & warrants                |       |            |       | 722,000    |       |           |       |
| Diluted earnings  per share:                 |       | $               | 58,000     |       | 10,979,000 |           | $          | 0.01 |   |
|                                         |       |            |       |       |       |           |       |
| **Six months ended September 30, 2006**      |       | **Net  Income** | ** ** | **Shares** | ** ** | **Per  Share** |       |
| Basic and  Diluted loss per shares:          |       |            |       |       |       |           |       |
| Net loss  available to common stockholders   |       | $               | (6,000     | )          | 10,234,000 |           | $          | (0.00 | ) |

 

3.          **AccountsReceivable**

** **

**Accounts receivable as of**September 30, 2007 are as follows:

** **
| Accounts  receivable     | $       | 2,335,000 |   |   |
|--------------------------|---------|-----------|--------|--------|
| Allowance for  bad debts | 109,000 |      |   |
|                     | $       | 2,226,000 |   |   |
|                          |         |           |        |        |  |

** **

**4.**             **Inventories**

 

          Inventories includecosts of material, labor and manufacturing overhead and are stated at the lowerof cost (first-in, first-out) or market and consist of the following:

 
| ** **                    | **September 30, 2007** | ** ** |
|-------------------------------|------------------------|------------|
|                          |                   |       |
| Raw material,  net of reserve | $                      | 2,560,000  |   |
| Work-in-process               | 498,000                |       |
| Finished goods                | 314,000                |       |
| Inventory  reserve            | (409,000               | )          |
|                          | $                      | 2,963,000  |   |

 

**5.             Property & equipment**

 

                Property and equipment are beingdepreciated and amortized on the straight-line basis over the followingestimated useful lives:

 

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

 

                Depreciation expense was$318,000 and $199,000 for the six months ended September 30, 2007 and September 30, 2006 respectively.

 

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

 

7

----

 

                Property and equipment consistof the following:

 
| ** **                | ** ** | **September 30,  2007** | ** ** |
|---------------------------|------------|------------------------------|------------|
| Building                  |       | $                            | 800,000    |   |
| Machinery and  equipment  |       | 5,216,000                    |       |
| Furniture and  fixtures   |       | 174,000                      |       |
| Leasehold  improvements   |       | 690,000                      |       |
| Accumulated  depreciation |       | (4,241,000                   | )          |
|                      |       | $                            | 2,639,000  |   |

 

**6.     Intangible Assets**

 

          The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 “goodwill and other intangible assets” and SFAS 144 “accounting for the impairment or disposal of long lived assets”.  Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired.  The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished.  Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets.  If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the six months ended September 30, 2007, the Company recognized no impairment.

 

          At September 30, 2007, intangibles consist of the following:

| ** **                  | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** ** | ** ** |
|-----------------------------|------------|-----------------------------|------------|------------------------------|------------|------------|------------|
| **Intangibles**             | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated Amortization** | ** ** | **Net**    | ** ** |
|                        |       |                        |       |                         |       |       |       |
| Amortized  intangibles:     |       |                        |       |                         |       |       |       |
| Patents                     |       | $                           | 464,000    |                         | $          | (354,000   | )          | $ | 110,000 |   |
| Existing  Technology        |       | 2,641,000                   |       | (318,000                     | )          | 2,323,000  |       |
| Customer Lists              |       | 339,000                     |       | (339,000                     | )          | —     |       |
| Customer  Relationship      |       | 328,000                     |       | (26,000                      | )          | 302,000    |       |
| Trademarks and  Brand Names |       | 60,000                      |       | (2,000                       | )          | 58,000     |       |
| Backlog                     |       | 132,000                     |       | (18,000                      | )          | 114,000    |       |
|                        |       |                        |       |                         |       |       |       |
| Unamortized  intangibles:   |       |                        |       |                         |       |       |       |
| Trademarks                  |       | 181,000                     |       | —                       |       | 181,000    |       |
|                        |       | $                           | 4,145,000  |                         | $          | (1,057,000 | )          | $ | 3,088,000 |   |
|                        |       |                        |       |                         |       |       |       |
|                             |            |                             |            |                              |            |            |            |  |  |  |  |  |  |

           Due to the acquisitionof MPI in the quarter ended June 30, 2004 and the acquisition of Mica-Tech onApril 11, 2007, we recorded the intangibleassets above.  For the intangible assetswe acquired from MPI acquisition, we assigned an 8-year life to Patents, a12-year life to Existing Technology, and a 3-year life to Customer Lists. Allitems are subject to amortization. The value assigned to Trademarks, which havean indefinite life, should not be amortized.For the intangible assets we acquired from the Mica-Tech acquisition, weinitially assigned a 12-year life to Existing Technology, a 3-year life to CustomerRelationship, a 1-year life to Backlog and an indefinite life to Trademarks andBrand Names.  During the quarter endedSeptember 30, 2007, Mica-Tech’s management thoroughly reevaluated the life spanof Mica-Tech’s intangible asset and assigned a new life span to theseintangible assets; a 15-year life to Existing Technology, a 6-year life toCustomer Relationship, and a 15-year life to Trademarks and Brand Names. All items stated are subject to amortization.  The value of Backlogwill be amortized as sales order shipped. Every quarter, our management will review the shipments and the dollaramount shipped will be deducted from the original capitalized amount in percentvalue.

 

8

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          Amortization expense from continuing operation for the six months ended September 30, 2007 was $169,000.  We expect amortization expense for the next five years to be as follows:

** **
| **Year Ending March 31:** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|------------|
| 2008                      |       |       | $          | 307,000    |   |
| 2009                      |       |       | $          | 388,000    |   |
| 2010                      |       |       | $          | 274,000    |   |
| 2011                      |       |       | $          | 274,000    |   |
| 2012                      |       |       | $          | 274,000    |   |

** **

**7.             Debtand lease commitments**

 

Line of credit

 

                 At September 30, 2007, AML had a line of credit agreement withBridge Bank. On August 15, 2006, we signed a Business Financing ModificationAgreement with Bridge Bank to renew our line of credit, with a credit facilityof $2.0 million. Of this $2.0 million, $1.0 million may be used for cashadvances against accounts receivables and $1.0 million may be used forequipment advances. On April 5, 2007, we modified this agreement to add a new$600,000 equipment term loan to our existing line of credit and then increasedthis term loan by an additional $300,000 for a total of $900,000 on June 22, 2007.  Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipmentpurchases. We are obligated to pay the bank a finance charge at a rate per yearequal to the prime rate, which in no event shall be less than 5.50%, plus .25%with respect to cash advances and a rate of such prime rate plus 3.0% withrespect to equipment advances and the additional equipment term loans.  We are obligated to pay a facility fee of$5,000 (0.50% of the facility amount) for the first year of the agreement and$2,500 the second year.  We must maintaincertain financial requirements, including a Quick Ratio of 1.05 to 1.00 for themonths of August, September, October, and November 2007 and 1.25 to 1.00 forthe month of December 2007 and for each month thereafter. We are also requiredto stay within 80% of our planned quarterly revenue.  We failed to maintain a monthly quick ratioof 1.05 to 1.00 for the months ended August 31, 2007 and September 30, 2007.However, the defaults were waived by the lender at no cost. This agreementterminates on August 15, 2008 or upon a date that the bank or AML chooses toterminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months following its execution on July 17, 2006, we will berequired to pay an early termination fee of 1.0% of the credit facility amountunder the terms of the agreement. At September 30, 2007, we had an outstanding balance of $0under the accounts receivable agreement and $1,000,000 under the equipmentfinancing agreement.  Our remainingborrowing capacity is approximately $1,000,000 under the accounts receivableagreement and $302,831 under the equipment financing agreement.

 

Note Payable

 

On February 3, 2006 the Company purchased the building thathouses MPI located at 3350 Scott Blvd. Bldg #25, Santa Clara, California for apurchase price of $800,000.  The Companymade a down payment of $160,000.  The buildingis being financed by a bank promissory note in the amount of $640,000 with6.760% interest, payable in 83 regular payments of $4,425.88 each whichincludes principal and interest and one final payment of $556,594.48.  The Company’s final payment is due February10, 2013 and will be for all principal and interest not yet paid.  The note payable is secured by the deed oftrust on the building.  As of September 30, 2007, the outstanding note amounted to$612,000 with $11,000 in current portion.

 

On December 20, 2006, Mica-Tech raised $200,000 from anoutside investor in the form of short term note payable.  The funds were used for working capital.  The promissory note bears interest at therate of 10%.  Mica-Tech makes equalmonthly payments of $25,000, which includes a principal and an accrued intereston the remaining principal balance. Mica-Tech defaulted on its September payment due to a cashdeficiency.  The default was waived bythe lender at no cost. The total amount remaining on the note at September 30,2007 was $75,000.

 

Mica-Tech was advanced working capital from Steven Ow, itspresident and a major shareholder, over a period of time which totaled to$685,000 as of April 10, 2007.  On April10, 2007, Mica-Tech converted these advancements in the form of a single notefor the amount of $685,000, with an annual interest rate of 10%.  Of the $685,000, $200,000 was converted into200,000 shares of Mica-Tech’s common stock and issued to Steven Ow at theclosing of the acquisition on April 11, 2007. Under the terms of the note, no payment is required until April 2,2009.  As of September 30, 2007, theoutstanding note amounted to $516,000 including $31,000 in accrued interest.

 

9

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Operating Lease Obligations

 

          AML leases its officespace, manufacturing facility under an operating lease expiring April2008.  Total rent expense under thisoperating lease was approximately $98,000 and $94,000 during the six months ended September 30, 2007 and 2006, respectively. Mica-Tech leases its officespace, manufacturing facility under an operating lease expiring October2007.  Total rent expense under thisoperating lease was approximately $30,000 and $27,000 during the six months ended September 30, 2007 and 2006, respectively.

 

          Total minimum lease payments underthe above leases are as follows:

 

| ** **                  | ** ** | **Operating  Leases** | ** ** |
|-----------------------------|------------|-----------------------|------------|
| Year ending  March 31, | ** ** | ** **            | ** ** |
| 2008                        |       | $                     | 231,000    |   |
| 2009                        |       | 16,000                |       |
| Thereafter                  |       | —                |       |
|                        |       | $                     | 247,000    |   |

 

**8.           Equity Transactions**

* *

Stock Options

 

The Company adopted SFAS No. 123 (Revised 2004), *Share Based Payment*(“SFAS No. 123R”),under the modified-prospective transition method on April 1, 2006.  SFAS No. 123R requires companies tomeasure and recognize the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value.  Share-based compensation recognized under themodified-prospective transition method of SFAS No. 123R includesshare-based compensation based on the grant-date fair value determined inaccordance with the original provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*forall share-based payments granted prior to and not yet vested as of April 1,2006 and share-based compensation based on the grant-date fair-value determinedin accordance with SFAS No. 123R for all share-based payments grantedafter April 1, 2006. SFAS No. 123R eliminates the ability to account forthe award of these instruments under the intrinsic value method proscribed byAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and allowed under the original provisions of SFAS No. 123.  Prior to the adoption of SFAS No. 123R,the Company accounted for our stock option plans using the intrinsic valuemethod in accordance with the provisions of APB Opinion No. 25 and relatedinterpretations.

 

Primarily as a result of adopting SFAS No. 123R,the Company recognized $78,000 or $0.01 per basic and diluted earnings pershare in share-based compensation expense for the six months ended September 30, 2007 and $55,000 or $0.01 per basic and diluted earnings per sharein share-based compensation expense for the six months ended September 30,2006. The fair valueof our stock options was estimated using the Black-Scholes option pricingmodel.

 

For periods presented prior to the adoption of SFASNo. 123R, pro forma information regarding net income and earnings pershare as required by SFAS No. 123R has been determined as if we hadaccounted for our employee stock options under the original provisions of SFASNo. 123.  The fair value of these optionswas estimated using the Black-Scholes option pricing model. For purposes of proforma disclosure, the estimated fair value of the options is amortized toexpense over the option’s vesting period. There is no pro forma expense to recognize during the six months ended September 30, 2007.

 

In 1995, the board of directors approved the creationof the 1995 Stock Option Plan.  InNovember 2005, the board established the 2005 Equity Incentive Plan (“2005 Plan”).  The total aggregate number of shares initiallyreserved and available for grant and issuance pursuant to the 2005 Plan is150,000 shares.  Incentive stock optionawards may be granted under the 2005 Plan only to employees (including officersand directors who are also employees) of the Company or of a Parent orsubsidiary of the Company.  All other awards (including nonqualified stockoptions, restricted stock or stock awards) under the 2005 Plan may be grantedto employees, officers, directors, consultants, independent contractors andadvisors of the Company or any Parent or Subsidiary of the 

 

10

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Company, provided such consultants, contractors and advisors renderbona fide services not in connection with the offer and sale of securities in acapital-raising transaction.

 

Pursuant to the 2005 Plan, during the six months ended September 30, 2007, the Company granted 168,000 stockoptions to the Company’s employees, two external directors of AML, and anexternal director of Mica-Tech, as follows:

 

On April 5, 2007, the Company granted 28,000 stockoptions to three employees as employee compensation. All of the 28,000 stockoptions have a term of ten (10) years measured from the grant date and shallaccordingly expire at the close of business on the expiration date, unlesssooner terminated in accordance with the 2005 Plan.  These options are vested at the rate oftwenty (20) percent per year over a five year period.  The option exercise price is $1.42, which is the fair market value of ourcommon stock at the time these options were granted.

 

On May 1, 2007, the Company granted 5,000 non qualified stockoptions to Mica-Tech’s external director. All of the 5,000 stock options have a term of ten (10) years measuredfrom the grant date and shall accordingly expire at the close of business onthe expiration date, unless sooner terminated in accordance with the 2005Plan.  The options are vested at the rateof twenty-five (25) percent per year over a four year period.  The option exercise price is $1.45, which isthe fair market value of our common stock at the time these options weregranted.

 

On June 8, 2007, the Company granted 7,000 stockoptions to two employees as employee compensation. All of the 7,000 stockoptions have a term of ten (10) years measured from the grant date and shallaccordingly expire at the close of business on the expiration date, unlesssooner terminated in accordance with the 2005 Plan.  The options are vested at the rate of twenty(20) percent per year over a five year period. The option exercise price is $1.43, which is the fair market value of our common stock atthe time these options were granted.

 

On June 27, 2007, the Company granted 28,000 stockoptions to fifty employees as employee compensation. All of the 28,000 stockoptions have a term of ten (10) years measured from the grant date and shallaccordingly expire at the close of business on the expiration date, unlesssooner terminated in accordance with the 2005 Plan.  Of the 28,000 shares granted, 4,000 sharesare vested at the rate of twenty (20) percent per year over a five yearperiod.  The remaining 24,000 shares arevested as follows: fifty (50) percent after one month from the grant date andthe remaining fifty (50) percent after one year from the grant date. The optionexercise price is $1.36 for all of the 28,000 stock options granted, which isthe fair market value of our common stock at the time these options weregranted.

 

On August 6, 2007, the Company granted 5,000 stockoptions to an employee as employee compensation. All of the 5,000 stock optionshave a term of ten (10) years measured from the grant date and shallaccordingly expire at the close of business on the expiration date, unlesssooner terminated in accordance with the 2005 Plan.  The options are vested at the rate of twenty(20) percent per year over a five year period. The option exercise price is $1.25, which is the fair market value of our common stock atthe time these options were granted.

 

On September 13, 2007, the Company granted a total of95,000 stock options to three employees and two external directors as follows:80,000 stock options to three AML’s officers as employee compensations and15,000 non qualified stock options to two external directors.

 

Of the first 80,000 stock options granted, 55,000stock options have a term of five (5) years and 25,000 stock options have aterm of ten (10) years, measured from the grant date and shall accordinglyexpire at the close of business on the expiration date, unless soonerterminated in accordance with the 2005 Plan. All of the 80,000 stock options are vested at the rate of thirty three(33) percent per year over a three year period.

 

The second 15,000 non qualified stock options grantedhave a term of ten (10) years measured from the grant date and shallaccordingly expire at the close of business on the expiration date, unlesssooner terminated in accordance with the 2005 Plan.  The options are vested at the rate oftwenty-five (25) percent per year over a four year period.

 

The option exercise price is $1.02 for all of the95,000 stock options granted on September 13, 2007, which is the fair marketvalue of our common stock at the time these options were granted.

 

11

----

 

Following is a summary of the stock option activity:

 
| ** **                       | ** ** | **Options   outstanding** | ** ** | **Weighted   Average   Exercise  Price** | ** ** | ** **

**Aggregate   Intrinsic Value** | ** ** |
|----------------------------------|------------|---------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding,  March 31, 2007     |       | 2,232,750                 |       | $                                             | 0.97       |                                        | $          | 341,982 |   |
| Granted                          |       | 168,000                   |       | $                                             | 1.18       |                                        |       |   |
| Forfeited                        |       | 15,500                    |       | $                                             | 5.31       |                                        |       |   |
| Exercised                        |       | 0                         |       |                                          |       |                                        |       |
| Outstanding,  September 30, 2007 |       | 2,385,250                 |       | $                                             | 0.95       |                                        | $          | 225,290 |   |
|                                  |            |                           |            |                                               |            |                                             |            |  |  |  |

 

Following is a summary of the status of options outstanding at September 30,2007:

 
| **Range of  Exercise Prices** | ** **               | **Total  Options  Outstanding** | ** ** | **Weighted  Average  Remaining   Life  (Years)** | ** ** | **Total  Weighted  Average  Exercise   Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------|--------------------------|---------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
|                          |                     |                            |       |                                             |       |                                           |       |                     |       |                                  |       |
| $                             | 0.11 - $  0.50 |                            | 243,700    |                                             | 5.40       |                                           | $          | 0.15                     |       | 243,700                               |       | $ | 0.15 |   |
| $                             | 0.51 - $  1.00 |                            | 1,588,250  |                                             | 5.86       |                                           | $          | 0.92                     |       | 1,277,082                             |       | $ | 0.92 |   |
| $                             | 1.01 - $  2.00 |                            | 509,800    |                                             | 7.63       |                                           | $          | 1.26                     |       | 209,900                               |       | $ | 1.38 |   |
| $                             | 2.01 - $  5.00 |                            | 43,500     |                                             | 2.44       |                                           | $          | 3.19                     |       | 43,500                                |       | $ | 3.19 |   |
| $                             | 5.01 -  $15.75           |                            | —     |                                             | —     |                                           | —     |                     | —     |                                  | —     |   |
| $                             | 0.11 -  $15.75           |                            | 2,385,250  |                                             | 6.32       |                                           | $          | 0.95                     |       | 1,774,182                             |       | $ | 0.92 |   |

 

For options granted during the six months ended September 30, 2007, the weighted-average fair value of suchoptions was $0.52.

 

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

 

                Stock OptionsGranted on April 5, 2007:

 

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

 

Stock Options Granted on May 1, 2007:

 

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

 

 

Stock Options Granted on June 8, 2007:

 

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

 

 

12

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Stock Options Granted on June 27, 2007:

 

24,000 stock options with one year vesting periods:

 

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

 

4,000 stock options with five year vesting periods:

                

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

 

Stock Options Granted on August 6, 2007:

 

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

 

 

Stock Options Granted on September 13, 2007:

 

55,000 stock options with a term of 5 years and threeyear vesting periods:

                

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

 

25,000 stock options with a term of 10 years and threeyear vesting periods:

                

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

 

15,000 stock options with a term of 10 years and fouryear vesting periods:

                

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

 

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

 
| ** **                            | ** ** | **Non-Vested   Options** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Weighted Average Vesting Period** | ** ** | **Grant Date Fair Value** | ** ** |
|---------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
| Non-vested -  March 31, 2007          |       | 582,700                  |       | $                                     | 1.01       |                                | 1.55 Years |                      |       |   |
| Granted                               |       | 168,000                  |       | 1.18                                  |       |                                |       | 86,535                    |       |
| Forfeited                             |       | (500                     | )          | 1.36                                  |       |                                |       |                      |       |
| Vested                                |       | (139,132                 | )          | 1.05                                  |       |                                |       |                      |       |
| Exercised                             |       | —                   |       | —                                |       |                                |       |                      |       |
| Non-vested –  September 30, 2007 |       | 611,068                  |       | 1.05                                  |       | 1.52 Years                          |       |                      |       |
|                                       |            |                          |            |                                       |            |                                     |            |                           |            |  |

 

The total compensation cost relating to non-vested stock options thatis not yet recognized is $312,000, which is expected to be recognized over aperiod of 2.57 years.

13

 

----

 

Warrants

 

Following is a summary of the warrant activity:

 
| ** **                       | ** ** | **Warrants   outstanding** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
|----------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  March 31, 2007     |       | 214,928                    |       | $                                         | 0.49       |                            | $          | 187,000 |   |
| Granted                          |       | —                     |       |                                      |       |                            |       |
| Forfeited                        |       | —                     |       |                                      |       |                            |       |
| Exercised                        |       | —                     |       |                                      |       |                            |       |
| Outstanding,  September 30, 2007 |       | 214,928                    |       | 0.49                                      |       | $                               | 157,000    |   |
|                                  |            |                            |            |                                           |            |                                 |            |  |  |

 

Following is a summary of the status of warrants outstanding at September 30,2007:

 
| **Range of  Exercise Prices** | ** **    | **Total  Warrants  Outstanding** | ** ** | **Weighted  Average  Remaining Life  (Years)** | ** ** | **Total  Weighted  Average  Exercise Price** | ** ** | **Warrants  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------|---------------|----------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
|                          |          |                             |       |                                           |       |                                         |       |                      |       |                                  |       |
| $                             | 0.24 -  $1.00 |                             | 187,499    |                                           | 0.79       |                                         | $          | 0.24                      |       | 187,499                               |       | $ | 0.24 |   |
| $                             | 1.01 -  $5.00 |                             | 27,429     |                                           | 0.16       |                                         | $          | 2.19                      |       | 27,429                                |       | $ | 2.19 |   |
| $                             | 0.24 -  $5.00 |                             | 214,928    |                                           | 0.63       |                                         | $          | 0.49                      |       | 214,928                               |       | $ | 0.49 |   |
|                          |          |                             |       |                                           |       |                                         |       |                      |       |                                  |       |
|                               |               |                                  |            |                                                |            |                                              |            |                           |            |                                       |            |  |  |  |  |  |

 

**9.             Segments**

 

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

 

          The following is information for the Company’s reportable segments for the three month period ended September 30, 2007 and the six month period ended September 30, 2007.

 

 

14

 

**For the three months ended September****30, 2007**

** **
| **(In thousands)**                                                         | ** ** | **AML** | ** **  | **MPI** | ** ** | **Mica-Tech** | ** ** | **Unallocated** | ** **  | **Total** | ** **  |
|----------------------------------------------------------------------------|------------|---------|-------------|---------|------------|---------------|------------|-----------------|-------------|-----------|-------------|
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Revenue                                                                    |       | $       |  2,321 |    | $          |  438     |       | $               |  445   |      | —      |   | $ |  3,204 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Gross Profit                                                               |       | 970     |        | 249     |       | 162           |       | —          |        | $         |  1,381 |   |
| Depreciation  & amortization (includes intangibles)                    |       | 136     |        | 44      |       | 24            |       | —          |        | $         |  204   |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Interest expense                                                           |       | 35      |        | —  |       | 18            |       | —          |        | $         |  53    |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Income/(Loss)  from continuing Operations before tax and minority interest |       | $       |  143   |    | $          |  62      |       | $               |  (183  | )         | —      |   | $ |  22 |   |
| Net Income                                                                 |       | $       |  135   |    | $          |  62      |       | $               |  (93   | )         | —      |   | $ |  104 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Identifiable  assets                                                       |       | $       |  7,426 |    | $          |  4,863   |       | $               |  2,756 |      | —      |   | $ |  15,045 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Capital  Expenditures                                                      |       | $       |  61    |    | $          |  4       |       | $               |  0     |      | —      |   | $ |  65 |   |
|                                                                            |            |         |             |         |            |               |            |                 |             |           |             |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**For the****six****months ended September****30, 2007**

 
| **(In thousands)**                                                         | ** ** | **AML** | ** **  | **MPI** | ** ** | **Mica-Tech** | ** ** | **Unallocated** | ** **  | **Total** | ** **  |
|----------------------------------------------------------------------------|------------|---------|-------------|---------|------------|---------------|------------|-----------------|-------------|-----------|-------------|
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Revenue                                                                    |       | $       |  4,562 |    | $          |  857     |       | 489             |        | —    |        | $ |  5,908 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Gross Profit                                                               |       | 1,883   |        | 488     |       | 169           |       | —          |        | $         |  2,540 |   |
| Depreciation  & amortization (includes intangibles)                    |       | 263     |        | 106     |       | 118           |       | —          |        | $         |  487   |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Interest expense                                                           |       | 63      |        | —  |       | 34            |       | —          |        | $         |  97    |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Income/(Loss)  from continuing Operations before tax and minority interest |       | $       |  268   |    | $          |  103     |       | (586            | )           | —    |        | $ |  (215 | ) |
| Net Income                                                                 |       | $       |  254   |    | $          |  103     |       | $               | (299        | )         | —      |   | $ |  58 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Identifiable  assets                                                       |       | $       |  7,426 |    | $          |  4,863   |       | $               |  2,756 |      | —      |   | $ |  15,045 |   |
|                                                                       |       |    |        |    |       |          |       |            |        |      |        |
| Capital  Expenditures                                                      |       | $       |  520   |    | $          |  9       |       | $               |  2     |      | —      |   | $ |  531 |   |
|                                                                            |            |         |             |         |            |               |            |                 |             |           |             |  |  |  |  |  |  |  |  |  |  |  |  |

 

**10.          Related PartyTransaction**

 

Mica-Tech was advanced working capital from Steven Ow, itspresident and a major shareholder, over a period of time which totaled to$685,000 as of April 10, 2007.  On April10, 2007, Mica-Tech converted these advancements in the form of a single notefor the amount of $685,000, with an annual interest rate of 10%.  Of the $685,000, $200,000 was converted into200,000 shares of Mica-Tech’s common stock and issued to Steven Ow at theclosing of the acquisition on April 11, 2007. The total amount due to Mr. Ow, as of September 30, 2007, was $516,000,which included an accumulated interest of $31,000.  Both the principal and accrued interest wasclassified as a long term debt on our balance sheet for the quarter endingSeptember 30, 2007. Under the terms of the note, no payment is required untilApril 2, 2009.

 

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**11.          Acquisition of MicaTech Inc**

 

On April 11, 2007, the Companycompleted the acquisition of a controlling position in Mica-Tech in acash-for-stock transaction. Under the terms of the agreement, AML purchased 51%or 4,146,400 shares of Mica-Tech’s outstanding common stock for an aggregateprice of $800,000. Mica-Tech, Inc., designs, manufactures, and markets anintelligent satellite communication system to provide Supervisory Control andData Acquisition (SCADA) of the electric power grid. The satellite system ismarketed to power utility companies and enables remote control of substationsfor reducing black-outs and enhancing power/load regulation during peak demandhours.

 

The Company paid $210,000 of the purchaseprice through the cancellation of Mica-Tech’s two promissory notes to theCompany in the aggregate principal amount of $210,000, and $590,000 of thepurchase price in cash. The cash portion of the purchase consideration was paidfrom working capital of the Company.

 

A summary ofthe assets acquired and liabilities assumed in the acquisition follows:

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

 

Of the $2,205,000 in acquired intangible assets from the Mica-Techacquisition, $328,000 was assigned to Customer Relationship (6-year usefullife), $1,685,000 to Existing Technology (15-year useful life), and $60,000 toTrademarks and Brand Name (15-year useful life).  All items stated are subject toamortization.  The balance of $132,000 was assigned to Backlog, which willbe amortized as sales order shipped. Every quarter we will review the shipments and the dollar amount shippedwill be deducted from the original amount in percent value.

 

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

****FOR THE SIX MONTHPERIODS ENDED SEPTEMBER 30, 2007 AND 2006****

 

The following un-audited pro forma consolidatedfinancial information for the six months period ended September 30, 2007 and2006, as presented below, reflects the results of operations of the Companyassuming the Mica-Tech acquisition occurred on April 1, 2007 and 2006respectively. These pro forma results have been prepared for informationpurposes only and do not purport to be indicative of what operating resultswould have been had the acquisitions actually taken place on April 1, 2007 and2006 respectively, and may not be indicative of future operating results.

 
| ** **                         | ** ** | **Six month periods ended September 30** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(UN-AUDITED AND IN THOUSANDS OF  DOLLARS)** | ** ** |
|                               |       |                                                              |       |   |   |
| Revenues                           |       | $                                                                 | 5,908      |   | $ | 4,750 |   |
|                               |       |                                                              |       |   |   |
| Operating Loss                     |       | $                                                                 | (280       | ) | $ | (701 | ) |
|                               |       |                                                              |       |   |   |
| Net Income/(loss)                  |       | $                                                                 | (21        | ) | $ | (381 | ) |
|                               |       |                                                              |       |   |   |
| Earnings/(loss) per share - basic  |       | $                                                                 | (0.00      | ) | $ | (0.04 | ) |
|                               |       |                                                              |       |   |   |
| Earnings/(loss per share - diluted |       | $                                                                 | (0.00      | ) | $ | (0.04 | ) |

 

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**12.               Major customers and vendors**

 

          Three customers collectively provided36% and 27% of net revenue for the six monthsended September 30, 2007 and 2006, respectively.  Totalaccounts receivable due from these customers was approximately $1,094,000 as ofSeptember 30, 2007.

 

          The Company extends credit to itscustomers based upon its assessment of their credit worthiness and generallydoes not require collateral.  Creditlosses have not been significant.

 

          Three vendors collectively accountedfor 41% and 34% of the Company’s net purchases for the six months ended September 30,2007 and 2006,respectively.  Total accounts payable dueto these vendors was $177,000 as of September 30,2007.

** **

**13.          Reclassifications**

** **

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

 

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

 

          Someof the statements made by us in this Quarterly Report on Form 10-QSB areforward-looking in nature, including but not limited to, 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, and statements including forms of thewords “intend”, “believe”, “will”, “may”, “could”, “expect”, “anticipate”, “plan”,“possible”, and similar terms. Actual results could differ materially from theresults implied by the forward looking statements due to a variety of factors,many of which are discussed throughout this Quarterly Report and particularlyin the section titled “Additional Factors That May Affect Future Results” whichis included in the section titled “Management’s Discussion and Analysis or Planof Operation”. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publiclyrelease any revisions to these forward-looking statements that mayreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events.  Factorsthat could cause actual results to differ materially from those expressed inany forward-looking statement made by us include, but are not limited to:

 

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

•                      ourability to attract and retain qualified, knowledgeable employees;

•                      theimpact of general economic conditions on our business;

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

•                      thelimited number of potential customers for our products;

•                      thevariability in gross margins on our products;

•                      ourability to design and market new products successfully;

•                      ourfailure to acquire new customers in the future;

•                      deteriorationof business and economic conditions in our markets;

•                      intenselycompetitive industry conditions with increasing price competition; and

•                      therate of growth in the defense markets.

 

**          In thisdocument, the words “we,” “our,” “ours,” and “us” refer to AML Communications,Inc. and our sub divisions, Microwave Power, Inc. and Mica-Tech, Inc.**

 

**Overview**

 

Our business is comprised of three reportable segments, AMLCommunications, Inc. (“AML”), Microwave Power, Inc. (“MPI”), and Mica-Tech, Inc(“Mica-Tech”).  AML and MPI design,manufacture, and market RF and microwave, low noise, medium and high poweramplifiers and subsystems serving, primarily, the defense microwavemarket.  AML represented 76.6% of our2007 product revenue and MPI represented 23.4% of our 2007 productrevenue.  Mica-Tech, our fifty-one (51%)percent subsidiary acquired on April 11, 2007, designs, manufactures, andmarkets an intelligent communication system to provide Supervisory Control andData Acquisition (SCADA) of the electric power grid.

 

Our AML segment includes low noise, power amplifiers andintegrated sub assemblies with frequencies that range from 50 kHz to 26GHz.  In February 2001, we made astrategic decision to focus our resources on the defense markets.  As such, we moved rapidly to utilize ourknowledge base in defense microwave related design and manufacturing to offernew products, as well as variations of existing products.  The results of this strategy have been anincrease in revenues for defense related products, from $3.7 million in fiscal2003 to $6.3 million in fiscal 2004 to $6.6 million in fiscal 2005 and to $9.1million in fiscal 2006.

 

We consider the AML segment to be our core business since ithas a larger revenue base, and investments have been made in this segment thataddress long term growth.  We devote mostof our management time and other resources to improving the prospects for thissegment.  Most of our sales and marketingexpenses are from the AML segment.  Themajority of our research and development spending is dedicated to this segmentas well.

 

Our MPI segment includes solid state microwave amplifiersoperating in the frequency range from 1 to 40 GHz with output power from 10mWto 500 W.  In June 2004, we acquired MPIand has since operated it as a division of AML. The MPI division operates independently, with its own marketing,production, and general management team. We continue to expandMPI’s managerial and technical capabilities to address thepotential for growth of this division.

 

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Our Mica-Tech segment designs and manufactures theUltraSatNet, an Intelligent Satellite Utility Communication Solution for themonitoring and control of power grid distribution.  The operating software and hardware aredesigned in-house with support from outside consultants.  Mica-Tech is located in Camarillo, CA andoperates independently, with its own management team.

**Resultsof Operations**

**ThreeMonths Ended**September 30, 2007 Compared to ThreeMonths Ended September 30, 2006

*           Net sales. *Net sales for the three months ended September 30,2007 were $3.2 million, as compared to net sales of $2.2 million for the threemonths ended September 30, 2006, an increase of $1.1 million or 49.0%. Salesfor the AML segment for the three months ended September 30, 2007 were higherthan sales during the same period of the prior year by $560,000 or 32.1%primarily due to large program orders received during the second part of fiscalyear 2007.  We commenced production onthese orders during the last quarter and continued to deliver the bulk of thefinished products to our customers this quarter.   Mica-Tech contributed $445,000 to our totalsales during this quarter.  AML and, to alesser extent, MPI have devoted significant resources during the last threefiscal years towards the development of products that address long termcontracts to reduce our reliance on spot-market and incidental orders.  These investments and associated strategyhave, in management’s opinion, reached maturity.  Starting with the first quarter of fiscalyear 2008, we believe that the Company stands to benefit from the investmentsmade as these programs enter their production phases.

 

*         Gross profit. *Gross profit for the three months endedSeptember 30, 2007 was $1.4 million, or 43.1% of net sales, compared to a grossprofit of $910,000, or 42.3% of net sales for the three months ended September30, 2006.  Change in gross profit, as apercentage of net sales, is insignificant.

*          Selling, general and administrativecosts. *Selling, general, and administrative costs were$736,000, or 22.9% of net sales, for the three months ended September 30, 2007,as compared to $604,000, or 28.1% of net sales, for the three months endedSeptember 30, 2006.  The increase ismainly attributed to administrative cost in connection with maintaining ourMica-Tech segment, which we acquired on April 11, 2007.  Mica-Tech incurred $184,000 for 92 daysduring the three months ended September 30, 2007.  Selling, general and administrative costs forboth AML and MPI decreased, compared to the same period of the prior year, dueto decreased spending in salary and related benefits, advertising, andcommission expenses and a reduction in amortization expense as certainintangibles were fully amortized.

*          Research and development costs. *Research and development costs were $572,000, or 17.8%of net sales, for the three months ended September 30, 2007, as compared to$325,000, or 15.1% of net sales, for the three months ended September 30,2006.  The increase reflects the hiringof additional R&D employees and continued investment in R&Dprojects.  Additionally, $143,000 isattributable to Mica-Tech’s research and development expenses for 92 daysduring the quarter.

          *Other expense net. *Other expense was $51,000 for thethree months ended September 30, 2007 and $5,000 for the three months endedSeptember 30, 2006. Interest expense of $53,000 is attributed to the outstandingnotes payable and line of credit. Interest income on short tem and long termcash investments was $2,000.  Transfer ofmatured CDs to operating cash resulted in a lower interest income compared tothe same period last year.

*          Provision for income taxes.* We recorded a provision of $8,000 forfederal and state AMT taxes for the three months ended September 30, 2007 andfor the three months ended September 30, 2006.

          *Net income (loss). *Net income was $104,000, or $0.01per share, for the three months ended September 30, 2007, compared to a netloss of $32,000, or ($0.00) per share, for the three months ended September 30,2006.

**SixMonths Ended September 30, 2007 Compared to Six Months Ended September 30, 2006**

*           Net sales. *Net sales for the six months ended September 30, 2007were $5.9 million, as compared to net sales of $4.5 million for the six monthsended September 30, 2006, an increase of $1.5 million or 32.7%.  Sales for the AML segment for the six monthsended September 30, 2007 increased by $980,000, or 27.2%, compared to the sameperiod last year, primarily due to the start of production for large programorders received.  Mica-Tech contributed$489,000 to the total sales during the six months ended September 30, 2007.

 

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*         Gross profit. *Gross profit for the six months endedSeptember 30, 2007 was $2.5 million, or 43.0% of net sales, as compared to agross profit of $1.9 million, or 42.4% of net sales for the six months endedSeptember 30, 2006. Change in gross profit, as a percentage of net sales, isinsignificant.

 

*         Selling, general and administrative costs. *Selling, general, and administrative costs were $1.5million, or 25.7% of net sales, for the six months ended September 30, 2007, ascompared to $1.2 million, or 27.4% of net sales, for the six months endedSeptember 30, 2006. The dollar amount increase is mainly attributed toadministrative cost in connection with maintaining our Mica-Tech segment, whichwe acquired on April 11, 2007.  Mica-Techincurred $437,000 for 173 days during the six months ended September 30,2007.  Selling, general andadministrative costs for both AML and MPI decreased, compared to the sameperiod of the prior year, due to decreased spending in salary and relatedbenefits, advertising, and commission expenses, and a reduction in amortizationexpense as certain intangibles were fully amortized.

*          Research and development costs. *Research and development costs were $1,147,000 or19.4% of net sales, for the six months ended September 30, 2007, as compared to$645,000, or 14.5% of net sales, for the six months ended September 30, 2006.We incurred a $138,000 increase in salaries and related benefits and $37,000increase in R&D supplies and small equipment, a result of continuinginvestment in R&D projects. The increase reflects our commitment to investin long term, large size projects. Additionally, $286,000 is attributable toMica-Tech’s research and development expenses for 173 days during the sixmonths ended September 30, 2007.

          *Other expense, net. *Other expense was $87,000 for thesix months ended September 30, 2007 and $13,000 for the six months endedSeptember 30, 2006.  Interest expense of$97,000 is attributed to the note payable related to the financing of the MPIbuilding in Santa Clara, California and the existing equipment line ofcredit.  Interest income on short tem andlong term cash investments was $10,000.

*          Provision for income taxes.* We recorded a provision of $15,000 forfederal and state AMT taxes for the six months ended September 30, 2007 and forthe six months ended September 30, 2006.

          *Net income. *Net income was $58,000 or $0.01per share, for the six months ended September 30, 2007, compared to a net lossof $6,000, or ($0.00) per share, for the six months ended September 30, 2006.

**Liquidityand Capital Resources**

 

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

 

At September 30, 2007,AML had a line of credit agreement with Bridge Bank. On August 15, 2006, wesigned a Business Financing Modification Agreement with Bridge Bank to renewour line of credit, with a credit facility of $2.0 million. Of this $2.0million, $1.0 million may be used for cash advances against accountsreceivables and $1.0 million may be used for equipment advances. On April 5,2007, we modified this agreement to add a new $600,000 equipment term loan toour existing line of credit and then increased this term loan by an additional$300,000 for a total of $900,000 on June 22, 2007. Our ability to borrow under this agreement varies based upon eligibleaccounts receivable and eligible equipment purchases. We are obligated to paythe bank a finance charge at a rate per year equal to the prime rate, which inno event shall be less than 5.50%, plus .25% with respect to cash advances anda rate of such prime rate plus 3.0% with respect to equipment advances and theadditional equipment term loans.  We areobligated to pay a facility fee of $5,000 (0.50% of the facility amount) forthe first year of the agreement and $2,500 the second year.  We must maintain certain financial requirements,including a quick ratio of 1.05 to 1.00 for the months of August, September,October, and November 2007, and 1.25 to 1.00 for the month of December 2007 andfor each month thereafter. Also we are required to stay within 80% of plannedquarterly revenue.  We failed to maintaina monthly quick ratio of 1.05 to 1.00 for the months ended August 31, 2007 andSeptember 30, 2007. However, the defaults were waived by the lender at no cost.  This agreement terminates on August 15, 2008or upon a date that the bank or AML chooses to terminate the agreement.  Any unpaid balance is due and payablepursuant to the agreement on the termination date.  If the agreement is terminated within thefirst 12 months following its execution on July 17, 2006, we will be requiredto pay an early termination fee of 1.0% of the credit facility amount under theterms of the agreement. At September 30, 2007, we had an outstanding balance of $0 under theaccounts receivable agreement and $1,000,000 under the equipment financingagreement.  Our remaining borrowingcapacity is approximately $1,000,000 under the accounts receivable agreementand $302,831 under the equipment financing agreement.

 

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          AtSeptember 30, 2007, we had $626,000 in cash and cash equivalents.  For the six months ended September30, 2007, our operating activities used cashof approximately $1.3 million, as compared to $37,000 cash provided by ouroperating activities for the six months ended September 30, 2006.  Net cashused in investing activities, primarily for the acquisition of productionequipment, amounted to $146,000 for the six months ended September 30,2007 and $571,000 for the six months ended September30, 2006. Net cash provided by financing activities was $18,000 for the six monthsended September 30, 2007 and $57,000for the six months ended September 30, 2006.  The proceeds from our line ofcredit was $128,000 and we paid down $107,000 toward outstanding notes payable.

 

                We anticipate capital expenditures of approximately$800,000 in fiscal 2008.  We believe thatfunds for these expenditures will be provided by our operating activities.  However, we may choose to finance some ofthese expenditures through our financing agreement with Bridge Bank.  At September 30, 2007, we had a line ofcredit agreement with Bridge Bank and our remaining borrowing capacity underthis financing agreement for equipment advances was $302,831.

 

                In addition to the funds we raised in July 2003, wemay attempt to procure additional sources of financing in the event that thecapital available as of September 30, 2007 is insufficient for our operatingneeds and capital expenditures. These sources may include, but are not limitedto, additional sales of our securities. There are, however, no assurances that we will be able to successfullyobtain additional financing at terms acceptable to us.  Failure to obtain such financing could have amaterial adverse effect on our ability to operate as a going concern.

** **

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

 

**Critical Accounting Policies**

** **

Ourdiscussion and analysis of our financial conditions and results of operationsare based upon our financial statements, which have been prepared in accordancewith generally accepted accounting principles in the United States. Thepreparation of financial statements requires managers to make estimates anddisclosures on the date of the financial statements.  On an on-going basis, we evaluate ourestimates, including, but not limited to, those related to revenuerecognition.  We use authoritativepronouncements, historical experience, and other assumptions as the basis formaking judgments.  Actual results coulddiffer from those estimates.  We believethat the following critical accounting policies affect our more significantjudgments and estimates in the preparation of our financial statements.

 

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

 

•                                          *Persuasive evidence of anarrangement exists;*

•                                          *Delivery has occurred or serviceshave been rendered;*

•                                          *Price is fixed or determinable;and*

•                                          *Collectibilityis reasonably assured*

 

Revenue from the sale of products is generally recognized after boththe goods are shipped to the customer and acceptance has been received, ifrequired.  Our products are custom madefor our customers, who primarily consist of original engineer manufacturers(OEMs), and we do not accept returns. Our products are shipped complete and ready to be incorporated intohigher level assemblies by our customers. The terms of the customer arrangements generally pass title and risk ofownership to the customer at the time of shipment.

 

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

 

*          Allowance for Doubtful Accounts*. We maintain an allowance for doubtful accounts receivable based oncustomer-specific allowances, as well as a general allowance.  Specific allowances are maintained forcustomers 

 

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whichare determined to have a high degree of collectibility risk based on suchfactors, among others, as: (i) the aging of the accounts receivable balance;(ii) the customer’s past payment experience; and (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 specificallowance, we maintain a general allowance for all our accounts receivableswhich are not covered by a specific allowance. The general allowance is established based on such factors, amongothers, as: (i) the total balance of the outstanding accounts receivable,including considerations of the aging categories of those accounts receivable;(ii) past history of uncollectible accounts receivable write-offs; and (iii)the overall creditworthiness of the customer base.  A considerable amount of judgment is requiredin assessing the realizability of accounts receivables.  Should any of the factors considered indetermining the adequacy of the overall allowance change, an adjustment to theprovision for doubtful accounts receivable may be necessary.

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

 

          *IntangibleAssets*.  We test intangibleassets with indefinite lives for impairment on an annual basis or morefrequently if certain events occur.  Ifthe assets are considered to be impaired, the impairment to be recognized willbe measured by the amount in which the carrying amount exceeds the fair valueof the assets.  For our intangible assetswith finite lives, including our customer lists, existing technology, andpatents, we amortize the costs of the assets over their useful lives and assessimpairment at least annually or whenever events and circumstances suggest thecarrying value of an asset may not be recoverable.  Determining the life of the assets withfinite lives is judgmental in nature and involves the use of estimates andassumptions.  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 ourfair value estimates on assumptions we believe to be reasonable but that areunpredictable and inherently uncertain. Actual future results may differ from those estimates.  In the event we determine that an intangibleasset is impaired in the future, an adjustment to the value of the asset wouldbe charged to earnings in the period such determination is made.

 

*         Existing Technology. *Our existing technology is based on apatent issued in 1990, which continues to be the main technology of MPI.  It is a substrate deposition technology thatis mature and with no replacement technology forecasted.

 

**Additional Factors That May Affect Future Results**

 

           Future operating results may beimpacted by a number of factors that could cause actual results to differmaterially from those stated herein, which reflect management’s currentexpectations. These factors include:

 

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

 

•                                          our ability totimely develop and produce commercially viable products at competitive prices;

 

•                                          our ability toproduce products which meet the quality standards of both existing andpotential new customers;

 

•                                          our ability toaccurately anticipate customer demand;

 

•                                          our ability tomanage expense levels, in light of varying revenue streams;

 

•                                          the availability andcost of components;

 

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

 

•                                         the ability to integrate potential future acquisitions into our existingoperations.

 

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           Webelieve that, to the extent that foreign sales are recognized, we may faceincreased risk associated with political and economic instability, compliancewith foreign regulatory rules governing export requirements, tariffs and othertrade barriers, differences in intellectual property protections, longeraccounts receivable cycles, currency fluctuations and general traderestrictions.  If any of these risksmaterialize, they could have a material adverse effect on our business, resultsof operations, and financial condition.

 

          We have evaluated thecredit exposure associated with conducting business with foreign customers andhave concluded that such risk is acceptable. Nevertheless, any significant change in the economy or deterioration inthe United States’ trade relations or the economic or political stability offoreign markets could have a material adverse effect on our business, resultsof operations, and financial condition.

 

          Sales to foreign customers areinvoiced in U.S. dollars.  Accordingly,we currently do not engage in foreign currency hedging transactions.  However, as we expand further into foreignmarkets, we may experience greater risk associated with general business,political and economic conditions in those markets.  At such time, we may seek to lessen ourexposure through currency hedging transactions. We cannot assure you that a currency hedging strategy would besuccessful in avoiding currency exchange related losses.  In addition, should the relative value of theU.S. dollar in comparison to foreign currencies increase, the resultingincrease in the price of our products to foreign customers could result indecreased sales which could have a material adverse impact on our business,results of operations, and financial condition.

 

          We experience significant pricecompetition and expect price competition in the sale of our products to remainintense.  We cannot assure you that ourcompetitors will not develop new technologies or enhancements to existingproducts or introduce new products that will offer superior price orperformance features.  We expect ourcompetitors to offer new and existing products at prices necessary to gain orretain market share.  Several of ourcompetitors have substantial financial resources, which may enable them towithstand sustained price competition or a downturn in the pricing of theirproducts in the future.  Substantiallyall of our competitors have, and potential future competitors could have,substantially greater technical, marketing, distribution and other resourcesthan we do and have, or could have, greater name recognition and marketacceptance of their products and technologies.

 

          The markets in which we compete arecharacterized by rapidly changing technology and continuous improvements inproducts and services.  Our futuresuccess depends on our ability to enhance our current products and to developand introduce, in a timely manner, new products that keep pace withtechnological developments and that meet or exceed industry standards thatcompete effectively on the basis of price, performance and quality, thatadequately address OEM customer and end-user customer requirements, and thatachieve market acceptance.  We believethat to remain competitive in the future, we will need to continue to developnew products, which will require the investment of significant financialresources in new product development.  Inthe event our newly developed products are not timely developed or do not gainmarket acceptance, our business, results of operations and financial conditioncould be materially adversely affected.

 

          Our quarterly and annual results havein the past been, and will continue to be, subject to significant fluctuationsdue to a number of factors, any of which could have a material adverse effecton our business, financial condition and results of operations.  There can be no assurance that we will notexperience such fluctuations in the future. We establish our expenditure levels for product development and otheroperating expenses based on expected revenues, and expenses are relativelyfixed in the short term.  As a result,variations in timing of revenues can cause significant variations in quarterlyresults of operations.  There can be noassurances that we will be profitable on a quarter-to-quarter basis in thefuture.  We believe that period-to-periodcomparisons of our financial results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance.  Due to these factors, it is likely that insome future quarter or quarters, our revenues or operating results will notmeet the expectations of public stock market analysts or investors.  In such event, the market price of our commonstock would be materially adversely affected.

 

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**Item 3.    Controls and Procedures**

 

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

 

(b)                                 *Changes ininternal controls over financial reporting*. There was no change in ourinternal control over financial reporting during our most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

24

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#### **PART II – OTHER INFORMATION**

**Item1.  Legal Proceedings**

**NotApplicable.**

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

Not Applicable.

**Item 3.  Defaults Upon Senior Securities**

**Not Applicable.**

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

#### ** **

#### **Our 2007 Annual Meeting ofStockholders (the “2007 Annual Meeting”) was held on September 13, 2007, inCamarillo, California.  Two proposals, asdescribed in our Proxy Statement, dated July 27, 2007, were voted on at themeeting.  The following is a briefdescription of the matters voted upon and the results of the voting:**

 

**1.****             ****Election of Directors:**

** **
| **Nominees**     | ** ** | **Number of Shares** | ** ** |
|------------------|------------|--------------------------------|------------|
|             |       |                           |       |   |   |
| Jacob Inbar      |       | For:                           |       | 7,253,486 |   |
|             |       | Withheld:                      |       | 1,166,797 |   |
|             |       |                           |       |   |   |
| Richard Flatow   |       | For:                           |       | 8,213,703 |   |
|             |       | Withheld:                      |       | 206,580 |   |
|             |       |                           |       |   |   |
| Tiberiu Mazilu   |       | For:                           |       | 7,234,021 |   |
|             |       | Withheld:                      |       | 1,186,262 |   |
|             |       |                           |       |   |   |
| Edwin J. McAvoy  |       | For:                           |       | 7,234,022 |   |
|             |       | Withheld:                      |       | 1,186,261 |   |
|             |       |                           |       |   |   |
| Gerald M. Starek |       | For:                           |       | 8,248,138 |   |
|             |       | Withheld:                      |       | 172,145 |   |

** **

**2.****             ****Ratification of the Appointmentof Kabani & Company, Inc as our Independent Registered Public AccountingFirm:**

** **
| **Nominees**                | ** ** | **Number of Shares** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
|                        |       |                           |       |   |   |
| Kabani &  Company, Inc. |       | For:                           |       | 8,259,793 |   |
|                        |       | Against:                       |       | 148,646 |   |
|                        |       | Abstain:                       |       | 11,844 |   |
|                        |       |                           |       |   |   |

 

**Item5.  Other Information**

** **

**Not applicable.**

** **

**Item 6.  Exhibits**

 

The exhibitslisted in the Exhibit Index are filed as part of this report.

 

25

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#### ** **

#### **SIGNATURES**

 

In accordance 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

      (Principal Executive  Officer) | Dated:  November 14, 2007 |
|   |                                                                                                                                                  |                           |
|   |                                                                                                                                                  |                           |
|   | /s/: Heera Lee                                                                                                                                        |                           |
|   | By: Heera Lee, Director of Finance

      (Principal Accounting  Officer)                           | Dated:  November 14, 2007 |

 

26

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                               |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |       | Merger  Agreement entered into as of May 25, 2004 by and among AML  Communications Inc., a Delaware corporation, AML Holdings, LLC, a California  limited liability company and Microwave Power, Inc., a California  corporation(1) |
| 3.1                 |       | Certificate  of Incorporation(2)                                                                                                                                                                                                              |
| 3.2                 |       | Bylaws(2)                                                                                                                                                                                                                                     |
| 10.1                |       | Form of  Indemnity Agreement(2)                                                                                                                                                                                                          |
| 10.2                |       | Lease,  dated March 11, 1996, between the Company and Parr-Bohn Properties, Ltd.  II, a California Limited Partnership(3)                                                                                                                |
| 10.3                |       | Intellectual  Property Security Agreement(4)                                                                                                                                                                                                  |
| 10.4                |       | Loan and  Security Agreement dated November 10, 2000 between the Company and  Silicon Valley Bank(5)                                                                                                                                     |
| 10.5                |       | Intellectual  Property Security Agreement dated November 10, 2000 between the Company  and Silicon Valley Bank(5)                                                                                                                        |
| 10.6                |       | Warrant to  purchase stock dated November 9, 2000 between the Company and Silicon  Valley Bank(5)                                                                                                                                        |
| 10.7                |       | Accounts  Receivable Purchase Agreement dated November 20, 2001 between AML  Communications, Inc. and Silicon Valley Bank(6)                                                                                                             |
| 10.8                |       | Promissory  Note dated December 30, 2001 between Tiberiu, Mazilu, and AML  Communications Inc.(6)                                                                                                                                        |
| 10.9                |       | Accounts  Receivable Purchase Modifications Agreement dated September 24, 2003  between Silicon Valley Bank and AML Communications(7)                                                                                                    |
| 10.10               |       | Form of  Promissory Note date July 16, 2003 between the Company and the  following: Jacob Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M.  Hawkins, and The Oliver Family Trust(7)                                       |
| 10.11               |       | Form of  Warrant dated July 16, 2003 between the Company and the following: Jacob  Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The  Oliver Family Trust(7)                                              |
| 10.12               |       | Fourth  Amended and Restated 1995 Stock Option Agreement at June 10, 2002(8)                                                                                                                                                             |
| 10.13               |       | Parr-Bohn  Properties First Amendment to lease of 1000 Avenida Acaso, Camarillo, CA.(8)                                                                                                                                                       |
| 10.14               |       | Employment  Agreement with Dr. Marina Bujatti, of MPI, dated June 18, 2004.(8)                                                                                                                                                      |
| 10.15               |       | Employment  Agreement with Dr. Franco Sechi, of MPI, dated June 18, 2004.(8)                                                                                                                                                        |
| 10.16               |       | Interim  Lease and Proposed Lease Terms(9)                                                                                                                                                                                                    |
| 10.17               |       | Financing  Agreement dated July 8, 2004 with Bridge Bank(10)                                                                                                                                                                             |
| 10.18               |       | Enterprise  Agreement Number 4627 dated August 26, 2004(11)                                                                                                                                                                              |
| 10.19               |       | Business  Financing Modification with Bridge Bank, dated December 23, 2005(12)                                                                                                                                                           |
| 10.20               |       | Business  Financing Modification with Bridge Bank dated January 19,2006(12)                                                                                                                                                              |
| 10.21               |       | Fifth  Amended and Restated 1995 Stock Option Agreement at July 12, 2005(13)                                                                                                                                                             |
| 10.22               |       | Loan  Agreement with Bank of America for purchase of MPI building(12)                                                                                                                                                                         |
| 10.23               |       | 2005  Equity Incentive Plan(14)                                                                                                                                                                                                               |
| 10.24               |       | Business  Financing Agreement with Bridge Bank dated July 17, 2006(15)                                                                                                                                                                   |
| 10.25               |       | Stock  Purchase Agreement with Mica-Tech, dated April 11, 2007(16)                                                                                                                                                                       |
| 10.26               |       | Option  Agreement with shareholders and optionholders of Mica-Tech, dated  April 11, 2007(16)                                                                                                                                            |
| 31.1                |       | Certification  by the Chief Executive Officer(17)                                                                                                                                                                                             |
| 31.2                |       | Certification  by the Director of Finance(17)                                                                                                                                                                                                 |
| 32.1                |       | Certification  pursuant to Section 906 of the Sarbanes Oxley Act(17)                                                                                                                                                                     |
| 32.2                |       | Certification  pursuant to Section 906 of the Sarbanes Oxley Act(17)                                                                                                                                                                     |

 

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|   | (1) | Previously  filed with the Securities and Exchange Commission as Exhibit 10.13 to  the company’s Form 10-KSB 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. |

 

27

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|   | (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.                |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (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/A dated May 4, 2007 (unredacted version) and  incorporated herein by reference.                   |
|   | (12) | Previously  filed with Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 2005 and  incorporated herein by reference.                     |
|   | (13) | Previously  filed with the Securities and Exchange Commission as an attachment to the  Company’s Proxy Statement dated July 29, 2005.                                                                         |
|   | (14) | Previously  filed with Securities and Exchange Commission as an exhibit to the Company’s  Form S-8 Registration Statement (no. 333-131588) dated February 6,  2006 and incorporated herein by reference. |
|   | (15) | Previously  filed with Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended June 30, 2006 and incorporated  herein by reference.                         |
|   | (16) | Previously  filed with the Securities and Exchange Commission as an exhibit to the  Company’s Form 8-K dated April 20, 2007 and incorporated herein by  reference.                                       |
|   | (17) | Filed  herewith.                                                                                                                                                                                                        |

 

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