** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-QSB**

 
| **ý**                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                           |                                                                                          |
| **For the quarterly period ended:****      September  30, 2004**                                                                                                 |
|                                                                                                                                                                                           |                                                                                          |
|                                                                                                                                                                                           | **or**                                                                                        |
|                                                                                                                                                                                           |                                                                                          |
| **o**                                                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO SECTION 13 0R  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                           |                                                                                          |
| **For the transition period from                             to** |
|                                                                                                                                                                                           |                                                                                          |
| **Commission File Number:****        0-27252**                                                                                                         |

 

**AMLCOMMUNICATIONS, INC.**

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

 

| **Delaware**                                                        | **77-0130894**                     |
|---------------------------------------------------------------------|------------------------------------|
| (State or Other jurisdiction of incorporation or organization) | (IRS Employer  Identification No.) |
|                                                                |                               |
| **1000 Avenida Acaso  Camarillo, California**                       | **93012**                          |
| (Address of principal executive offices)                            | (Zip Code)                         |
|                                                                |                               |
| **(805) 388-1345**                                                  |
| (Issuer’s telephone number including area code)                |

 

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 registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý  No o

 

State the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

Common Stock Outstanding as ofSeptember 30, 2004:  9,975,866  shares

 

Transitional Small BusinessDisclosure Format: Yes o  Noý

 

 

----

 

**AML COMMUNICATIONS, INC.**

 

**INDEX TO FORM 10QSB**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                                                          |       |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                                                                               |       |
| Item 1.     | Financial Statements                                                                                                                                                               |       |
|        |                                                                                                                                                                               |       |
|        | Balance Sheet at Sept 30, 2004                                                                                                                                                     | 3          |
|        |                                                                                                                                                                               |       |
|        | Statements of Operations for the three  month periods ended September 30, 2004 and  September 30, 2003 and the six month periods ended September 30, 2004 and  September 30, 2003. | 4          |
|        |                                                                                                                                                                               |       |
|        | Statements of Cash Flows for the six month  periods endedSeptember 30, 2004 and September 30,  2003                                                                                | 5          |
|        |                                                                                                                                                                               |       |
|        | Notes to Financial Statements                                                                                                                                                      | 6          |
|        |                                                                                                                                                                               |       |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                        | 12         |
|        |                                                                                                                                                                               |       |
| Item 3.     | Controls and Procedures                                                                                                                                                            | 19         |
|        |                                                                                                                                                                               |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                                                              | ** ** |
| ** **  | ** **                                                                                                                                                                         | ** ** |
| Item 1.     | Legal Proceedings                                                                                                                                                                  | 20         |
|        |                                                                                                                                                                               |       |
| Item 2.     | Unregistered Sales of Equity and Use of  Proceeds                                                                                                                                  | 20         |
|        |                                                                                                                                                                               |       |
| Item 3.     | Defaults Upon Senior Securities                                                                                                                                                    | 20         |
|        |                                                                                                                                                                               |       |
| Item 4.     | Submission of Matters to a Vote of Security  Holders                                                                                                                               | 20         |
|        |                                                                                                                                                                               |       |
| Item 5.     | Other Information                                                                                                                                                                  | 21         |
|        |                                                                                                                                                                               |       |
| Item  6.    | Exhibits                                                                                                                                                                           | 21         |
|        |                                                                                                                                                                               |       |
|        | SIGNATURES                                                                                                                                                                         | 23         |

 

2

----

 

**PART I -FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCE SHEET**

**(unaudited)**

 
| ** **                                                                                                             | ** ** | **For  September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                             | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                             | ** ** | ** **                   | ** ** |
| Current Assets:                                                                                                        |       |                         |       |
| Cash and cash equivalents                                                                                              |       | $                            | 1,820,000  |   |
| Accounts receivable, net of allowance for  doubtful accounts of $43,000 at September 30, 2004                          |       | 860,000                      |       |
| Inventories, net of inventory reserve of  $466,000 at September 30, 2004                                               |       | 1,595,000                    |       |
| Other current assets                                                                                                   |       | 109,000                      |       |
| Total current assets                                                                                                   |       | 4,384,000                    |       |
|                                                                                                                   |       |                         |       |
| Property and Equipment, at cost                                                                                        |       | 4,148,000                    |       |
| Less: Accumulated depreciation and  amortization                                                                       |       | (3,481,000                   | )          |
| Property and Equipment, net                                                                                            |       | 667,000                      |       |
| Intangible Assets:                                                                                                     |       |                         |       |
| Technologies, net                                                                                                      |       | 930,000                      |       |
| Patents                                                                                                                |       | 181,000                      |       |
| Customer lists, net                                                                                                    |       | 301,000                      |       |
| Trademarks                                                                                                             |       | 181,000                      |       |
| Other Assets                                                                                                           |       | 35,000                       |       |
| Total Assets                                                                                                           |       | $                            | 6,679,000  |   |
|                                                                                                                   |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          |       |                         |       |
|                                                                                                                   |       |                         |       |
| Current Liabilities:                                                                                                   |       |                         |       |
| Accounts payable                                                                                                       |       | $                            | 187,000    |   |
| Line of Credit                                                                                                         |       | 100,000                      |       |
| Current portion of capital lease  obligations                                                                          |       | 84,000                       |       |
| Accrued expenses:                                                                                                      |       |                         |       |
| Accrued payroll and payroll related  expenses                                                                          |       | 192,000                      |       |
| Accrued income taxes                                                                                                   |       | 292,000                      |       |
| Other accrued liabilities                                                                                              |       | 134,000                      |       |
| Total current liabilities                                                                                              |       | 989,000                      |       |
|                                                                                                                   |       |                         |       |
| Notes payable – officers, net                                                                                     |       | 284,000                      |       |
| Notes payable – investors, net                                                                                    |       | 41,000                       |       |
| Deferred Taxes                                                                                                         |       | 11,000                       |       |
| Capital Lease Obligations, net of current  portion                                                                     |       | 24,000                       |       |
| Total liabilities                                                                                                      |       | 1,349,000                    |       |
| Stockholders’ Equity:                                                                                             |       |                         |       |
| Common stock, $0.01 par value:15,000,000  shares authorized; 9,975,866 shares issued and outstanding at Sept 30, 2004. |       | 100,000                      |       |
|                                                                                                                   |       |                         |       |
| Capital in excess of par value                                                                                         |       | 13,369,000                   |       |
| Accumulated deficit                                                                                                    |       | (8,139,000                   | )          |
| Total stockholders’ equity                                                                                        |       | 5,330,000                    |       |
|                                                                                                                   |       | $                            | 6,679,000  |   |
|                                                                                                                        |            |                              |            |  |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Six Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | **September 30,  2004**       | ** ** | **September 30,  2003**     | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Net sales                                                              |       | $                             | 1,882,000  |                        | $          | 1,729,000 |   | $ | 4,057,000 |   | $ | 3,277,000 |   |
| Cost of goods sold                                                     |       | 1,097,000                     |       | 805,000                     |       | 2,337,000 |   | 1,636,000 |   |
| Gross profit                                                           |       | 785,000                       |       | 924,000                     |       | 1,720,000 |   | 1,641,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Operating expenses:                                                    |       |                          |       |                        |       |   |   |   |   |
| Selling, general & administrative                                  |       | 537,000                       |       | 379,000                     |       | 947,000 |   | 644,000 |   |
| Research and development                                               |       | 199,000                       |       | 174,000                     |       | 382,000 |   | 373,000 |   |
| SAE                                                                    |       | 736,000                       |       | 553,000                     |       | 1,329,000 |   | 1,017,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Profit (loss) from operations                                          |       | 49,000                        |       | 371,000                     |       | 391,000 |   | 624,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Other (expense) income, net                                            |       | (31,000                       | )          | 14,000                      |       | (48,000 | ) | (16,000 | ) |
| Profit (loss) before provision for income  taxes                       |       | 18,000                        |       | 385,000                     |       | 343,000 |   | 608,000 |   |
| Provision for income taxes                                             |       | —                        |       | 54,000                      |       | — |   | 54,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Net profit                                                             |       | $                             | 18,000     |                        | $          | 331,000 |   | $ | 343,000 |   | $ | 554,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Basic earnings (loss) per common share                                 |       | $                             | 0.00       |                        | $          | 0.04 |   | $ | 0.04 |   | $ | 0.07 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |   |   |   |   |
| Basic weighted average number of shares of  common stock outstanding   |       | 9,976,000                     |       | 7,832,000                   |       | 9,064,000 |   | 7,831,000 |   |
|                                                                   |       |                          |       |                        |       |   |   |   |   |
| Diluted earnings (loss) per common share                               |       | $                             | 0.00       |                        | $          | 0.03 |   | $ | 0.03 |   | $ | 0.06 |   |
| Diluted weighted average number of shares  of common stock outstanding |       | 11,840,000                    |       | 9,616,000                   |       | 10,928,000 |   | 9,615,000 |   |
|                                                                        |            |                               |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

4

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                         | ** ** | **Six Month Periods Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **September 30,  2004**     | ** ** | **September 30,  2003** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                        |       |   |   |
| Net Profit                                                                         |       | $                           | 343,000    |   | $ | 554,000 |   |
| Adjustments to reconcile net profit to net  cash provided by operating activities: |       |                        |       |   |   |
| Debt discount fees                                                                 |       | 9,000                       |       | 4,000 |   |
| Depreciation and amortization                                                      |       | 119,000                     |       | 150,000 |   |
|                                                                               |       |                        |       |   |   |
| Bad debt expense                                                                   |       | 9,000                       |       | (1,000 | ) |
| Loss (Gain) on sale of fixed assets                                                |       | 30,000                      |       | (48,000 | ) |
| Changes in assets and liabilities:                                                 |       |                        |       |   |   |
| Decrease (increase) in:                                                            |       |                        |       |   |   |
| Accounts receivable                                                                |       | (80,000                     | )          | (522,000 | ) |
| Inventories                                                                        |       | (118,000                    | )          | 45,000 |   |
| Inventory Reserves                                                                 |       | 132,000                     |       | — |   |
| Other current assets                                                               |       | 35,000                      |       | 28,000 |   |
| Other assets                                                                       |       | 76,000                      |       | — |   |
| Increase (decrease) in:                                                            |       |                        |       |   |   |
| Accounts payable                                                                   |       | (375,000                    | )          | (60,000 | ) |
| Accrued state income taxes                                                         |       | —                      |       | 54,000 |   |
| Accrued expenses                                                                   |       | (59,000                     | )          | (189,000 | ) |
| Net cash provided by operating activities                                          |       | $                           | 121,000    |   | $ | 15,000 |   |
|                                                                               |       |                        |       |   |   |
| Cash Flows from Investing Activities:                                              |       |                        |       |   |   |
| Purchases of property and equipment                                                |       | (345,000                    | )          | (9,000 | ) |
| Proceeds from the sale of property and  equipment                                  |       | —                      |       | 48,000 |   |
| Cash received in the MPI acquisition                                               |       | 1,150,000                   |       | — |   |
| Net cash provided by investing activities                                          |       | $                           | 805,000    |   | $ | 39,000 |   |
|                                                                               |       |                        |       |   |   |
| Cash Flows from Financing Activities:                                              |       |                        |       |   |   |
| Proceeds from exercise of stock options                                            |       | —                      |       | 1,000 |   |
| Proceeds from line of credit, net                                                  |       | 20,000                      |       | 117,000 |   |
| Proceeds from notes payable - related  parties                                     |       | (14,000                     | )          | 245,000 |   |
| Proceeds from notes payable – investors                                       |       | (8,000                      | )          | 43,000 |   |
| Principal payments on capital lease  obligations, net                              |       | (81,000                     | )          | (26,000 | ) |
| Net cash (used in) provided by financing  activities                               |       | $                           | (83,000    | ) | 380,000 |   |
|                                                                               |       |                        |       |   |   |
| Net increase (decrease) in Cash and Cash  Equivalents                              |       | 843,000                     |       | (434,000 | ) |
|                                                                               |       |                        |       |   |   |
| Cash and Cash Equivalents, beginning of  period                                    |       | 977,000                     |       | 195,000 |   |
| Cash and Cash Equivalents, end of period                                           |       | $                           | 1,820,000  |   | $ | 629,000 |   |
| Supplemental disclosures of cash flow  information:                                |       |                        |       |   |   |
| Cash paid during the period for:                                                   |       |                        |       |   |   |
| Interest                                                                           |       | $                           | 57,000     |   | $ | 64,000 |   |
| Income Taxes                                                                       |       | 1,000                       |       | 1,000 |   |
| Non cash investing and financing  activities:                                      |       |                        |       |   |   |
| Unamortized debt discount fees                                                     |       | $                           | 13,000     |   | $ | 31,000 |   |
| Debt incurred to purchase property and  equipment                                  |       | —                      |       | $ | 50,000 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

----

 

**AML COMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**September30, 2004**

** **

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

 

AMLCommunications, Inc. (the “Company”) is a designer, manufacturer, and marketerof amplifiers and related products that address the defense microwave andwireless communications markets. The Company currently conducts its operationsthrough two reportable segments: (1) amplifiers and related products that aredesigned, manufactured, and marketed by the Company, and (2) high powermicrowave amplifiers that are designed, manufactured, and marketed through itswholly owned division, Microwave Power, Inc.

 

Theaccompanying unaudited financial statements have been prepared in conformitywith accounting principles generally accepted in the United States.  However, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beenomitted or condensed pursuant to the rules and regulations of the Securitiesand Exchange Commission (“SEC”).  In theopinion of management, all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation have been included.  The results of operations and cash flows forthe six month period presented are not necessarily indicative of the results ofoperations for a full year.  Thesefinancial statements should be read in conjunction with the Company’s March 31,2004 audited financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB.

 

**Principlesof consolidation**

 

Theaccompanying consolidated financial statements include the accounts of AMLCommunications, Inc, and its wholly owned division, Microwave Power, Inc. fromthe acquisition date, on June 18, 2004. All significant inter-company accountsand transactions have been eliminated in consolidation.  The six month period ended September 30, 2004includes 104 days of Microwave Power, Inc.’s results of operationsprospectively from the date of the acquisition, or June 19, 2004 throughSeptember 30,2004.

 

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

 

**Statement of Financial AccountingStandards No. 128, “Earnings per share” requires the presentation of basicearnings per share and diluted earnings per share.  Basic and diluted earnings per sharecomputations 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 computed by dividing net incomeor loss by the weighted average number of shares outstanding for the year.  “Diluted” earnings per share is computed bydividing net income or loss by the total of the weighted average number ofshares outstanding, and the dilutive effect of outstanding stock options(applying the treasury stock method).

 

**The Company had 1,864,000 ofgranted stock options and warrants that were exercisable as of September 30,2004 and 1,784,000 of granted stock options and warrants exercisable atSeptember 30, 2003.**

** **

**6**

----

** **

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

** **
| **Six  months ended September 30, 2004**    | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                  |       |           |       |       |       |          |       |
| Net income available to common stockholders |       | $              | 343,000    |       | 9,064,000  |          | $          | 0.04 |   |
| Effect of dilutive securities:              |       |           |       |       |       |          |       |
| Stock options                               |       |           |       | 1,624,000  |       |          |       |
| Warrants                                    |       |           |       | 240,000    |       |          |       |
| Diluted earnings per share:                 |       | $              | 343,000    |       | 10,928,000 |          | $          | 0.03 |   |
|                                             |            |                |            |            |            |               |            |  |  |  |

 
| **Six months  ended September 30, 2003**    | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                  |       |           |       |       |       |          |       |
| Net income available to common stockholders |       | $              | 554,000    |       | 7,831,000  |          | $          | 0.07 |   |
| Effect of dilutive securities:              |       |           |       |       |       |          |       |
| Stock options                               |       |           |       | 1,469,000  |       |          |       |
| Warrants                                    |       |           |       | 315,000    |       |          |       |
| Diluted earnings per share:                 |       | $              | 554,000    |       | 9,615,000  |          | $          | 0.06 |   |
|                                             |            |                |            |            |            |               |            |  |  |  |

 

**3.**             **Inventories**

 

Inventoriesinclude costs of material, labor, and manufacturing overhead and are stated atthe lower of cost (first-in, first-out) or market and consist of the following:

 
| ** **      | ** ** | **September 30, 2004** | ** ** |
|-----------------|------------|------------------------|------------|
|            |       |                   |       |
| Raw materials   |       | $                      | 978,000    |   |
| Work-in-process |       | 398,000                |       |
| Finished goods  |       | 219,000                |       |
|            |       | $                      | 1,595,000  |   |

 

**4****              IntangibleAssets**

 

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 144, when deemed necessary, the Company completes the evaluation of the recoverability of its long-lived assets by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values.  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. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the three months ended September 30 2004, the Company recognized no impairment.

 

7

 

At September 30, 2004, intangibles consist of the following:

 
| ** **               | ** ** | **September 30, 2004**     | ** ** |
|--------------------------|------------|----------------------------|------------|
| **Intangibles**          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                     |       |                       |       |   |   |   |   |
| Amortized intangibles:   |       |                       |       |   |   |   |   |
| Patents                  |       | $                          | 189,000    |   | $ | (8,000 | ) | $ | 181,000 |   |
| Existing Technology      |       | 961,000                    |       | (31,000 | ) | 930,000 |   |
| Customer List            |       | 339,000                    |       | (38,000 | ) | 301,000 |   |
|                     |       |                       |       |   |   |   |   |
| Unamortized intangibles: |       |                       |       |   |   |   |   |
| Trademarks               |       | 181,000                    |       | — |   | 181,000 |   |
|                     |       | $                          | 1,670,000  |   | $ | (77,000 | ) | $ | 1,593,000 |   |

 

The Companyassigned an 8 year life to patents, a 12 year life to Existing Technology, anda 3 year life to Customer Lists. All are subject to amortization.  Trademarks were assigned as having anindefinite life.

 

Amortization expense from continuing operation for quarter ended September 30, 2004 was $77,000.  The Company expects the amortization expenses for the next five years to be as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2005                      |       | $          | 180,026    |   |
| 2006                      |       | $          | 216,305    |   |
| 2007                      |       | $          | 216,305    |   |
| 2008                      |       | $          | 122,200    |   |
| 2009                      |       | $          | 103,379    |   |

 

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

 

In September2003, the Company modified its agreement with Silicon Valley Bank. Under themodification agreement, the aggregate amount of all receivables purchased bythe bank could not exceed $2,000,000. The Company was obligated to pay the banka monthly finance charge which was computed as the greater of $6,500 or 1%above the prime rate, per annum, on the average daily account balanceoutstanding for each month. The Company was also required to pay the bank amonthly collateral handling fee of 0.75% per month on the average daily accountbalance outstanding for the month. The bank refunded any amount remaining frompaid accounts after deducting the 80% advance, the monthly finance charge, thecollateral handling fee and any other adjustments made or fees due pursuant tothe Account Receivable Purchase Agreement. The bank required the Company torepurchase receivables it had purchased if they remained unpaid after 90 daysfrom the invoice date, if the account debtor filed (or has filed against it)bankruptcy or other insolvency proceedings, if the Company breached theAccounts Receivable Purchase Agreement or if the account debtor asserted anyclaim relating to the receivable.  As ofJune 30, 2004, there was $184,000 of refundable reserves due to the Companyunder the borrowing agreement.  On July6, 2004, the Company terminated its agreement with Silicon Valley Bank andentered into a new financing agreement with Bridge Bank.

 

8

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Under theasset-based financing agreement with Bridge Bank, the Company is required topay the bank $7,500 upon execution of the contract and on each anniversarythereafter prior to termination of the agreement. The credit limit under thisagreement is $1,500,000, of which $1,000,000 may be used for cash advancesagainst accounts receivables and $500,000 may be used for equipment advances.The Company is 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 4.0%, plus 2.0%with respect to cash advances and a rate of such prime rate plus 3.5% with respectto equipment advances. The Company is required to maintain certain financialrequirements including net profit after tax, on a quarterly basis, of at least$0.01 and maintain a debt service coverage ratio of at least 1.25 to 1.00, withrespect to equipment advances.  Thisagreement terminates on July 7, 2005, or upon a date that the bank 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, the Company generally is required to pay a $15,000fee to the bank.

 

**6.**             EquityTransactions

** **

During the six months ended September 30, 2004, the Board of Directors granted stock options of 119,500 shares as employee compensation.  The options prices range from $1.40 to $1.55 per share.

 

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

 

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

 
| ** **                                                                                                           | ** ** | **For the six months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                           | ** ** | **September 30, 2004**       | ** ** | **September 30, 2003** | ** ** |
|                                                                                                                 |       |                         |       |   |   |
| Net income (loss) as reported                                                                                        |       | $                            | 343,000    |   | $ | 554,000 |   |
| Less: stock-based compensation  expense, net of related tax effects ok                                               |       | (26,000                      | )          | (15,000 | ) |
| Total stock-based employee compensation  expense determined under fair-value-based method for all Pro forma net loss |       | $                            | 317,000    |   | $ | 539,000 |   |
|                                                                                                                 |       |                         |       |   |   |   |   |
| Basic earnings per share - as  reported                                                                              |       | 0.04                         |       | 0.07 |   |
| Diluted earnings per share - as  reported                                                                            |       | 0.03                         |       | 0.06 |   |
| Basic earnings per share - pro  forma                                                                                |       | 0.03                         |       | 0.06 |   |
| Diluted earnings per share -  pro forma                                                                              |       | 0.03                         |       | 0.05 |   |

 

9

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The assumptionsused in calculating the fair value of options granted using the Black-Scholesoption- pricing model are as follows:

 
| Expected life (years)   |   | 4.90 |       | 4.33 |   |
|-------------------------|--------|------|------------|------|--------|
| Risk-free interest rate |   | 3.10 | %          | 3.30 | %      |
| Dividend yield          |   | 0    | % and | 0    | %      |
| Volatility              |   | 160  | % and | 141  | %      |

** **

**7.****                                      RelatedParty**

 

During thequarter ended September 30, 2004, the Company paid $13,000 to the previousstockholders of MPI in connection with the property rent for the premiseslocated in Santa Clara.

 

**8.****                                      ListingHistory**

 

The Company’scommon stock currently trades on Nasdaq’s OTC Bulletin Board under the symbol “AMLJ.OB”.Its common stock traded on the Nasdaq Small Cap Market from October 8,2001 to August 13, 2002 and on the Nasdaq National Market prior to thattime.  The Company was de-listed fromNASDAQ because of its failure to meet the $1.00 minimum bid price requirement.

 

**9.**                                      **Acquisitions**

 

On May 25,2004, the Company signed a definitive agreement for the acquisition ofMicrowave Power, Inc. (“MPI”), which was completed on June 18, 2004. MPI wasmerged into the Company’s wholly owned subsidiary, with the subsidiary as thesurviving entity. The total consideration for the acquisition was $3,028,000.Pursuant to the acquisition agreement, 2,117,108 as consideration for theacquisition and 21,174 shares to be issued to the broker were committed, orauthorized for issuance by our board of directors, as of June 18, 2004. Therewas no change in MPI’s management and the Company entered into employmentagreements with two of MPI’s senior officers, its past President and Secretary.MPI will continue to operate as the Company’s division from its facility inSanta Clara, which is owned by MPI’s prior shareholders and leased to theCompany.

 

The MicrowavePower, Inc. (MPI) acquisition was driven by a number of key factors, including:

 

1)         Technologically,MPI’s semi-monolithic, gold filled via’s, air bridge andmicrowave-monolithic-ceramic (MMCC) technology provide access to processes thatthe Company believes are complimentary and additive to those available to AMLprior to the acquisition.

 

2)         MPI’sproduct base addresses higher power and higher frequency sectors of themicrowave market.  This acquisition isintended to strengthen the Company’s product offerings to this market by addinghigher power microwave amplifiers.

 

10

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A summary ofthe unaudited condensed balance sheet of MPI as of June 18, 2004 is as follows:

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

 

The purchasedintangible assets will be amortized over their useful lives, which range fromthree to twelve years.  Of the $1,670,000of acquired intangible assets, $189,000 was assigned to patents (8 year usefullife), $961,000 was assigned to Existing Technology (12 year useful life), and$339,000 was assigned to Customer Lists (3 year useful life).  The balanceof $181,000 was assigned to trademarks, having an indefinite life, and will betested annually or on an interim basis for impairment.  We found no indication of impairment for theperiod ended September 30, 2004.

 

##### **10.**                               Segments

 

The Company has two reportable segments consisting of (1) AML Communications, Inc. and (2) the Microwave Power, Inc.  AML Communications is a designer, manufacturer, and marketer of amplifiers and related products that address the defense microwave and wireless communications markets. These products are manufactured and sold through operations in Camarillo, California. Microwave Power, Inc. is a designer, manufacturer and marketer of high power microwave amplifiers. These products are manufactured and sold through operations in Santa Clara, California. 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 and six months periods ended September 30, 2004:

 

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

** **
| **(in  thousands)**                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 1,575      |    | $          | 307             |       | —    |       | $ | 1,882 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 597     |       | 188     |       | —          |       | 785       |       |
| Depreciation & amortization  (Includes intangibles) |       | 46      |       | 61      |       | —          |       | 107       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 35      |       | —  |       | —          |       | 35        |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 577     |       | 48      |       | —          |       | 625       |       |
| (Loss) Profit from continuing  Operations before tax    |       | $       | (61        | )       | $          | 79              |       | —    |       | $ | 18 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                     |       | 3,112   |       | 3,567   |       | —          |       | 6,679     |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | 265     |       | 1       |       | —          |       | 266       |       |

 

11

 

**For the six months ended September 30, 2004**

 
| **(in  thousands)**                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 3,673      |    | $          | 384             |       | —    |       | $ | 4,056 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 1,475   |       | 244     |       | —          |       | 1,719     |       |
| Depreciation & amortization  (Includes intangibles) |       | 111     |       | 81      |       | —          |       | 192       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 57      |       | —  |       | —          |       | 57        |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 1,066   |       | 61      |       | —          |       | 1,127     |       |
| Profit from continuing  Operations before tax           |       | $       | 241        |    | $          | 102             |       | —    |       | $ | 343 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                     |       | 3,112   |       | 3,567   |       | —          |       | 6,679     |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | 344     |       | 1       |       | —          |       | 345       |       |

 

The Companyhad one reportable segment for the three and six month periods ended September30, 2003.

 

**11.****                               Majorcustomers and vendors**

 

Three customers provided 40%, and two customers provided 33%,of net revenue for the six months ended September 30, 2004 and 2003,respectively. Total accounts receivable due from these customers wasapproximately $204,000 and 378,000 as of September 30, 2004 and 2003respectively.

 

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

 

Two vendorsaccounted for 20% and 26% of the Company’s net purchases for the six monthsended September 30, 2004 and 2003, respectively. Total accounts payable due tothese vendors was $0 and $40,000 as of September 30, 2004 and 2003,respectively.

 

**12.****                               Reclassifications**

 

Certaincomparative amounts have been reclassified to conform with the current year’spresentation.

 

**Item 2.**    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

** **

This filingcontains forward-looking statements, which involve risks anduncertainties.  Our actual future resultsmay differ materially from the results discussed in the forward-lookingstatements.  When used in this report,the words “expects” “anticipates” and “estimates” and similar expressions areintended to identify forward-looking statements. Factors that could causeactual results to differ materially from those expressed in any forward-lookingstatement made by us include, but are not limited to:

 

12

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

•      our ability to attract andretain qualified, knowledgeable employees;

•      the impact of generaleconomic conditions on our business;

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

•      the limited number ofpotential customers for our products;

•      the variability in grossmargins on our products;

•      our ability to design  and market new products successfully;

•      our failure to acquire newcustomers in the future;

•      deterioration of businessand economic conditions in our markets;

•      intensely competitiveindustry conditions with increasing price competition; and

•      the rate of growth in thedefense markets.

 

**Overview**

 

We are basedin southern California and design, manufacture, and market Radio Frequency (“RF”)and Microwave low noise and power amplifiers for a variety of frequency rangesand transmission protocols serving the defense microwave and wirelesscommunications markets. Our defense industry products, which representsapproximately 90% of our sales, are used in radar and electronic warfareequipment integrated into electronic systems for tactical aircraft, ships,ground systems, and missile systems. Our wireless products consist of an arrayof low noise and power amplifiers serving the wireless, PCS, and two-waymessaging market, as well as Cellular Coverage Enhancement amplifiers.  These products, representing approximately10% of our sales, are sold to cellular operators and to original equipmentmanufactures. The demand for products manufactured by us and used in thedefense industry has been growing at a fast pace during the last 2 years and isexpected to continue to grow. This growth is attributable to an increase indemand for our products by government prime contractors, as well as to ourstrategy to acquire market share by offering leading edge products.  The demand for wireless products has seen arecent increase due to the competition among cellular operators and originalequipment manufactures to provide improved products and services. Our recentacquisition of MPI was part of a strategic move to complement the existing AMLproduct line and expand our technology base. Our business is currentlycomprised of two reportable segments: amplifiers and related productsmanufactured and marketed through our operations in Camarillo, California, andhigh power microwave amplifiers manufactured and marketed through ouroperations in Santa Clara, California.

 

**Results of Operations**

** **

**Three Months EndedSeptember 30, 2004 Compared to Three Months Ended September 30, 2003**

** **

*Netsales. *Net sales forthe three months ended September 30, 2004 were $1.9 million, as compared to netsales of $1.7 million for the three months ended September 30, 2003, anincrease of 8.1%.  The increase in netsales is attributed to the higher volume of shipments in the defense relatedMIC products.  MIC sales accounted for$1.9 million, or 99.7% of net sales for the three months ended September 30,2004, as compared to $1.6 million, or 93.8% of net sales for the three monthsended September 30, 2003. Additionally, the PCS and wireless messaging market,produced $6,000 or 0.3% of net sales for the three months ended September 30,2004, as compared to $107,000, or 6.2% of net sales for the three months endedSeptember 30, 2003.

 

*Grossprofit. *Gross profitfor the three months ended September 30, 2004 was $785,000 or 41.7% of netsales, compared to a gross profit of $924,000, or 53.4% of net sales for thethree months ended September 30, 2003. Gross profit decreased, as a percentage of net sales, as a result oflower margins due to the Company’s aggressive pricing structure in efforts toobtain a larger market share.

 

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*Selling,general and administrative costs. *Selling,general, and administrative costs were $537,000, or 28.5% of net sales, for thethree months ended September 30, 2004, as compared to $379,000, or 21.9% of netsales, for the three months ended September 30, 2003.  The increase is mainly attributed toadministrative cost in connection with maintaining our Santa Clara facility,which we recently acquired.  We alsoreinstated board member fees, which, in previous years, had been waived due tolimited cash flows.  Additionally, weincurred an early termination fee upon canceling our Receivables FinancingAgreement with Silicon Valley Bank.

 

*Researchand development costs. *Researchand development costs were $199,000, or 10.5% of net sales, for the threemonths ended September 30, 2004, as compared to $174,000 or 10.0% of net sales,for the three months ended September 30, 2003. The increase is attributed tothe growing engineering staff as we move towards expanding our developmentcapabilities.

 

*Otherexpense, net. *Otherexpense was $31,000 for the three months ended September 30, 2004, as comparedto other income of $14,000, for the three months ended September 30, 2003.  The company incurred a $5,000 loss on thesale of fixed assets, plus interest expense of $27,000 for the three monthsended September 30, 2004, as compared to the $48,000 gain on the sale of fixedassets offset by $34,000 in interest expense for the three months endedSeptember 30, 2003.

 

*Provisionfor income taxes.* For the three months ended September 30,2004, we recorded no provision for state income taxes, due to the CaliforniaFranchise Tax Board reversing its suspension of the utilization of loss carryforwards.

 

*NetIncome. *For thereasons set forth above, we generated a net income of $18,000 for the threemonths ended September 30, 2004, as compare to a net income of $331,000 for thethree months ended September 30, 2003.

 

**Six Months EndedSeptember 30, 2004 Compared to Six Months Ended September 30, 2003**

** **

*Netsales. *Net sales were$4.1 million for the six months ended September 30, 2004, as compared to netsales of $3.3 million for the six months ended September 30, 2003, an increaseof 19.2%. The increase in net sales is largely attributed to the higher volumeof shipments in the defense related MIC products.  MIC sales accounted for $3.6 million, or89.2% of net sales for the six months ended September 30, 2004, as compared to$3.2 million, or 96.1% of net sales for the six months ended September 30,2003. The PCS and wireless messaging market produced  $437,000, or 10.8% of net sales for the sixmonths ended September 30, 2004, as compared to $129,000, or 3.9% of net salesfor the six months ended September 30, 2003.

 

*Grossprofit. *Gross profitwas $1.7 million, or 42.3% of net sales, for the six months ended September 30,2004, as compared to $1.6 million, or 50.1% of net sales, for the six monthsended September 30, 2003. Gross profit decreased, as a percentage of net sales,as a result of lower margins due to the Company’s aggressive pricing structurein efforts to obtain a larger market share.

 

*Selling,general, and administrative costs. *Selling,general and administrative costs were $947,000, or 23.3% of net sales, for thesix months ended September 30, 2004, as compared to $644,000, or 19.7% of netsales, for the six months ended September 30, 2003. The increase is mainlyattributed to administrative cost in connection with maintaining our Santa Clarafacility, which we recently acquired.  Wealso reinstated board member fees, which, in previous years, had been waiveddue to limited cash flows. Additionally, we incurred an early termination feeupon canceling our Receivables Financing Agreement with Silicon Valley Bank.

 

*Researchand development costs. *Researchand development costs were $382,000, or 9.4% of net sales, for the six monthsended September 30, 2004, as compared to $373,000, or 11.4% of net sales, forthe six months ended September 30, 2003. The increase is attributed to the growing engineering staff as we movetowards expanding our development capabilities.

 

14

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*Otherexpense. *Other expensewas $57,000 for the six months ended September 30, 2004, as compared to otherexpense of $42,000 for the six months ended September 30, 2003. The companyincurred a $5,000 loss on the sale of fixed assets offset by a $5,000 gain onthe sale of other fixed assets, plus interest expense of $57,000 for the sixmonths ended September 30, 2004, as compared to the $64,000 interest expenseoffset by a $48,000 gain on the sale of fixed assets for the six months endedSeptember 30, 2003.

 

*Provisionfor income taxes. *Forthe six months ended September 30, 2004, we recorded no provision for stateincome taxes, due to the California Franchise Tax Board reversing itssuspension of the utilization of loss carry forwards. For the six months endedSeptember 30, 2003, the Company recorded a provision of $54,000 due to theCalifornia suspension on the utilization of loss carry forwards.

 

*NetIncome. *For thereasons set forth above, we generated a net income of $343,000 for the sixmonths ended September 30, 2004, as compare to a net income of $554,000 for thesix months ended September 30, 2003.

 

**Liquidity and CapitalResources**

** **

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

 

Between July1, 2000 and December 31, 2001, we entered into capital leases for the purposeof acquiring production and test equipment valued in aggregate at$740,000.  The terms of the leases rangefrom 36 months to 60 months and the interest charges range from 8.6% to 15.6%.The total amount remaining on the leases at September 30, 2004 is $86,000.

 

In December2001, we received a loan of $50,000 from Dr. Tiberiu Mazilu, PhD, our officerand director.  The promissory note callsfor quarterly interest payments to Dr. Mazilu commencing on September 30, 2002,with the interest payment calculated quarterly and based on the prime interestrate plus 1.25%.  The principal amount ofthe note is due on January 2, 2005 but would become due and payable by usimmediately upon the consolidation or merger of the Company (“AML”) intoanother entity, the death of Dr. Mazilu, or our termination of Dr. Mazilu’semployment with us. On November 2, 2004, the Board of Directors approved theearly payoff of this note payable. This note is scheduled to be paid in full byNovember 30, 2004.

 

InDecember 2002, we entered into a non-cancelable capital lease to acquiretest equipment valued in aggregate at approximately $50,000. The terms of thelease call for 36 equal monthly payments of $1,699 commencing in December 2002and at an annual interest rate of 13.7%.

 

In July 2003,we raised $245,000 ($100,000 of which was a conversion from an advance receivedin June 2003) from current officers and directors and $43,000 from otherinvestors in the form of notes payable with warrants attached. The funds wereused for working capital. The promissory notes bear interest at the rate of 8%and have a two-year maturity. Warrants to purchase a total of 240,000 shares ofour common stock were issued in connection with the funding.  The per share exercise price of the warrantsis $0.24.  The warrants expire five yearsfrom the date of issuance.  We havevalued these warrants at $35,000 and are expensing this value over the term ofthe notes payable.  For the three monthsended September 30, 2004, a total of $9,000 was charged to the consolidatedstatement of operations. On November 2, 2004, the Board of Directors approvedthe early payoff of these notes payable. These notes are scheduled to be paidin full by November 30, 2004.

 

15

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On July 6,2004, we terminated our agreement with Silicon Valley Bank and entered into anew financing agreement with Bridge Bank. The Company incurred a $25,000 earlytermination fee in connection with the termination of the Receivables Financingagreement with Silicon Valley Bank.

 

At September 30,2004, we had a line of credit agreement with Bridge Bank with credit limit of$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. At September 30,2004 we had an outstanding balance of $100,000 under this agreement.  Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipmentpurchases.  We are obligated to pay thebank a finance charge at a rate per year equal to the prime rate, which in noevent shall be less than 4.00%, plus 2.0% with respect to cash advances and arate of such prime rate plus 3.5% with respect to equipment advances. We mustmaintain certain financial requirements, including net profit after tax, on aquarterly basis, of at least $0.01, and a debt service coverage ratio of atleast 1.25 to 1.00 with respect to equipment advances. We were in compliance withthese requirements at September 30, 2004, however, there is no assurance thatwe will be in compliance at future dates. This agreement terminates on July 7,2005 or upon a date that the bank chooses to terminate the agreement.  Any unpaid balance is due and payablepursuant to the agreement on the termination date.  If the agreement is terminated within thefirst 12 months following its execution on July 6, 2004, we generally arerequired to pay a $15,000 fee to the bank. At September 30, 2004, our remaining available borrowing capacity underthis agreement was approximately $856,000.

 

At September30, 2004, we had $1,820,000 in cash and cash equivalents, compared to cash andcash equivalents of $629,000 at September 30, 2003. Our operating activities providedcash of approximately $121,000, a result of increased profits due to higherrevenues. Cash provided from investing activities amounted to $805,000,primarily as a result of the MPI acquisition, in which cash received in theacquisition was $1,150,000 offset by $346,000 for the purchases of property andequipment. Cash used in financing activities was $83,000, which was a directresult of paying down balances on our lease obligations of $81,000 and paymentson notes payable of an aggregate $22,000, offset by $20,000 in proceeds fromour line of credit. At September 30, 2003, cash from operating activities was$15,000, a result of increased receivables combined with a decrease ininventories and accrued liabilities. Cash provided by financing activities at September 30, 2003 was $39,000;$48,000 from the sale of fixed assets offset by $9,000 in purchases ofproduction equipment. Cash provided from financing activities at September 30,2003 was $380,000. Of this amount $288,000 derived from investors, $117,000from our Accounts Receivable Financing Agreement, offset by $26,000 inconnection with principal payments on capital lease obligations.  In addition, we received $1,000 from theinvestment of stock options.

 

Our primaryneed for capital during the next twelve months, subject to change, is to fundanticipated capital expenditures of approximately $530,000 as well as ouroperations, which consist of our sales, marketing and administrativeactivities, working capital associated with increased product sales, andcontinued product design and development efforts. Our future liquidity willdepend on numerous factors, including the extent to which our present andfuture products gain market acceptance, the costs of sales, marketing andmanufacturing activities, the cost, timing and business management of currentand potential acquisitions and contingent liabilities associated with suchacquisitions, and the extent to which products under development aresuccessfully developed.

 

Our currentfinancial plan indicates that our available cash and cash equivalents, togetherwith cash expected to be generated from future operations and borrowingsexpected to be available under our line of credit, which are subject to ourcompliance with existing financial requirements, should be sufficient to fundour operations through 2004 and to September 30, 2005. If necessary, we may berequired to raise additional capital in the future through one or more of thefollowing: (1) sale of equity or debt securities; (2) obtaining new loans; or(3) sale of assets, products or marketing rights. There is no guarantee thatadditional capital will be available from these sources on acceptable terms, ifat all, and certain of these sources may require approval by existing lenders.If we cannot raise the additional funds through these options on acceptableterms or with the necessary timing, management could also reduce discretionaryspending to decrease our cash burn rate through actions such as delaying orcanceling product development projects or marketing plans. These actions wouldlikely extend the then available cash and cash equivalents, and then availableborrowings.

 

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**Critical AccountingPolicies**

** **

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

 

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

 

•                  *Persuasive evidence of an arrangement exists;*

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

•                  *Price is fixed or determinable; and*

•                  *Collectibility is reasonably assured*

 

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

 

Recordingrevenue from the sale of products involves the use of estimates and managementjudgment. We must make a determination at the time of sale whether the customerhas the ability to make payments in accordance with arrangements. While we doutilize past payment history, and, to the extent available for new customers,public credit information in making our assessment, the determination ofwhether collectibility is reasonably assured is ultimately a judgment decisionthat must be made by management.

 

*Allowance for Doubtful Accounts*.  We maintain an allowance for doubtfulaccounts receivable based on customer-specific allowances, as well as a generalallowance. Specific allowances are maintained for customers which aredetermined to have a high degree of collectibility risk based on such factors,among others, as: (i) the aging of the accounts receivable balance; (ii) thecustomer’s past payment experience; or (iii) a deterioration in the customer’sfinancial condition, evidenced by weak financial condition and/or continuedpoor operating results, reduced credit ratings, and/or a bankruptcy filing. Inaddition to the specific allowance, the Company maintains a general allowancefor all its accounts receivables which are not covered by a specific allowance.The general allowance is established based on such factors, among others, as:(i) the total balance of the outstanding accounts receivable, includingconsiderations of the aging categories of those accounts receivable; (ii) pasthistory of uncollectible accounts receivable write-offs; and (iii) the overallcreditworthiness of the customer base. A considerable amount of judgment isrequired in assessing the realizability of accounts receivables. Should any ofthe factors considered in determining the adequacy of the overall allowancechange, an adjustment to the provision for doubtful accounts receivable may benecessary.

 

*Inventory.* Inventories are stated at the lower of cost or market, cost beingdetermined on the first-in, first-out method. Inventories are written down ifthe estimated net realizable value is less than the recorded value. We reviewthe carrying cost of our inventories by product each quarter to determine theadequacy of our reserves for obsolescence. In accounting for inventories wemust make estimates regarding the estimated net realizable value of ourinventory. This estimate is based, in part, on our forecasts of future salesand age of the inventory.

 

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IntangibleAssets. We test intangible assets with indefinite lives for impairment on anannual basis or more frequently if certain events occur.  If the assets are considered to be impaired,the impairment to be recognized will be measured by the amount by which thecarrying amount exceeds the fair value of the assets.

 

For our intangible assets with finite lives, including our Customer lists, existing technology, and patents, we amortize the costs of the assets over their useful lives and assess impairment at least annually or whenever events and circumstances suggest the carrying value of an asset may not be recoverable.

 

**Additional Factors ThatMay Affect Future Results**

** **

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

 

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

 

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

 

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

 

•                                          ourability to accurately anticipate customer demand;

 

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

 

•                                          theavailability and cost of components;

 

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

 

•                                         Theability to integrate current and potential future acquisitions into ourexisting operations.

 

We believethat, to the extent that foreign sales are recognized, we may face increasedrisk associated with political and economic instability, compliance withforeign regulatory rules governing export requirements, tariffs and other tradebarriers, differences in intellectual property protections, longer accountsreceivable cycles, currency fluctuations and general trade restrictions. If anyof these risks materialize, they could have a material adverse effect on ourbusiness, results of operations, and financial condition.

 

We have evaluatedthe credit exposure associated with conducting business with foreign customersand have concluded that such risk is acceptable. Nevertheless, any significantchange in the economy or a deterioration in United States trade relations orthe economic or political stability of foreign markets could have a materialadverse effect on our business, results of operations, and financial condition.

 

Sales toforeign customers are invoiced in U.S. dollars. Accordingly, we currently donot engage in foreign currency hedging transactions. However, as we expandfurther into foreign markets, we may experience greater risk associated withgeneral business, political and economic conditions in those markets. At suchtime, we may seek to lessen our exposure through currency hedging transactions.We cannot assure you that a currency hedging strategy would be successful inavoiding currency exchange related losses. In addition, should the relativevalue of the U.S. dollar in comparison to foreign currencies increase, theresulting increase in the price of our products to foreign customers couldresult in decreased sales which could have a material adverse impact on ourbusiness, results of operations, and financial condition.

 

18

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We experience significant pricecompetition and expect price competition in the sale of our products to remainintense. We cannot assure you that our competitors will not develop newtechnologies or enhancements to existing products or introduce new productsthat will offer superior price or performance features. We expect ourcompetitors to offer new and existing products at prices necessary to gain orretain market share. Several of our competitors have substantial financialresources, which may enable them to withstand sustained price competition or adownturn in the pricing of their products in the future. Substantially all ofour competitors have, and potential future competitors could have,substantially greater technical, marketing, distribution and other resourcesthan we do and have, or could have, greater name recognition and marketacceptance of their products and technologies.

 

The markets in which we compete are characterized by rapidly changingtechnology and continuous improvements in products and services.  Our future success depends on our ability toenhance our current products and to develop and introduce, in a timely manner,new products that keep pace with technological developments, that meet orexceed industry standards, that compete effectively on the basis of price,performance and quality, that adequately address OEM customer and end-usercustomer requirements, and that achieve market acceptance.  We believe that to remain competitive in thefuture we will need to continue to develop new products, which will require theinvestment of significant financial resources in new product development.  In the event our newly developed products arenot timely developed or do not gain market acceptance, our business, results ofoperations and financial condition could be materially adversely affected.

 

Our quarterly and annual results have in the past been, and willcontinue to be, subject to significant fluctuations due to a number of factors,any of which could have a material adverse effect on our business, financialcondition and results of operations. There can be no assurance that we will notexperience such fluctuations in the future. We establish our expenditure levelsfor product development and other operating expenses based on expectedrevenues, and expenses are relatively fixed in the short term. As a result,variations in timing of revenues can cause significant variations in quarterlyresults of operations. There can be no assurances that we will be profitable ona quarter-to-quarter basis in the future. We believe that period-to-periodcomparisons of our financial results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance. Due to thesefactors, it is likely that in some future quarter or quarters our revenues oroperating results will not meet the expectations of public stock marketanalysts or investors. In such event, the market price of our common stockwould be materially adversely affected.

 

**Item 3.**                              Controls and Procedures

** **

(a)  *Evaluationof disclosure controls and procedures*. As of the end of the periodcovered by this report (the Evaluation Date), we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Director of Finance, of the effectiveness ofthe design and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-14. Based upon that evaluation, the Chief ExecutiveOfficer and Director of Finance concluded as of the Evaluation Date that ourdisclosure controls and procedures were effective in timely alerting them tomaterial information relating to us required to be included in our periodic SECfilings.

 

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

 

19

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#### **PART II – OTHER INFORMATION**

#### ** **

**Item 1.  LegalProceedings**

** **

**Not Applicable**

** **

**Item 2.  Unregistered Sales of Equity and Use ofProceeds**

** **

**On August 20, 2004, we filed aquarterly report on Form 10-QSB disclosing that we had issued 2,117,362 sharesof our common stock to shareholders of MPI for a total consideration of$3,028,000, and 20,090 shares to a business broker in connection with theacquisition of MPI. In that report, the number of shares and the date of theissuance of the shares was incorrectly reported. Pursuant to the acquisitionagreement, 2,117,108 shares as consideration for the acquisition and 21,174shares to be issued to the broker were committed, or authorized for issuance byour board of directors, as of June 18, 2004. The closing of the acquisition ofMPI occurred on June 18, 2004. See Note 9 to the Financial Statements underPart I, Item 1 for a more detailed description of the acquisition.**

** **

Between July19, 2004 and August 3, 2004, we issued 2,117,108 shares of our common stock toshareholders of MPI as consideration for the acquisition, and 21,174 shares ofour common stock to Reuven Sadeh as finder’s fees pursuant to the acquisitionagreement. These transactions were effected under Section 4(2) of theSecurities Act of 1933, as amended. There were no other shares of unregisteredcommon stock issued by us for the three month period ended September 30, 2004.

 

The recipientsof securities in the above-described transactions represented their intentionto acquire the securities for investment only and not with a view to or forsale in connection with any distribution thereof and appropriate legends wereaffixed to the share certificates and other instruments issued in suchtransaction. The recipients either received adequate information about us orhad access, through other relationships, to such information.

 

**Item 3.  Defaults Upon Senior Securities**

** **

**Not Applicable**

** **

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

** **

Our 2004annual meeting of stockholders (the “2004 Annual Meeting”) was held onSeptember 2, 2004 in Camarillo, California. Two proposals, as described in ourProxy Statement dated July 29, 2004, were voted on at the meeting. Following isa brief description of the matters voted upon and the results of the voting:

 

1.               Electionof Directors

 
| **Nominees**           | ** ** | **Number of Shares** |
|------------------------|------------|----------------------|
|                   |       |                 |   |
| Tiberiu  Mazilu, Ph.D. |       | For:                 | 8,701,325 |
|                   |       | Withheld:            | 46,774 |
|                   |       |                 |   |
| Richard W.  Flatow     |       | For:                 | 8,709,929 |
|                   |       | Withheld:            | 38,170 |
|                   |       |                 |   |
| Edwin J.  McAvoy       |       | For:                 | 8,709,929 |
|                   |       | Withheld:            | 38,170 |
|                   |       |                 |   |
| David A.  Derby        |       | For:                 | 8,701,325 |
|                   |       | Withheld:            | 46,774 |
|                   |       |                 |   |
| Jacob Inbar            |       | For:                 | 8,701,325 |
|                   |       | Withheld:            | 46,774 |
|                   |       |                 |   |
| Gerald M.  Starek      |       | For:                 | 8,727,129 |
|                   |       | Withheld:            | 20,670 |

 

20

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2. Ratification of theAppointment of Singer Lewak Greenbaum & Goldstein as our IndependentAuditors

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|      |       |        |       |        |       |                 |       |
| 8,725,290 |       | 11,850      |       | 10,959      |       | 0                    |       |

 

**Item 5.**    Other Information

** **

**Not applicable**

** **

**Item 6.**    Exhibits

** **
| (a) | Exhibits |   |   |
|-----|----------|--------|--------|

 
|   | 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 MicrowavePower, 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)                                                                                                                                                        |
|   | 10.14 | Parr-Bohn  Properties First Amendment to lease of 1000 Avenida Acaso, Camarillo, CA. (8)                                                                                                                                             |
|   | 10.15 | Employment  Agreement with Dr. Marina Bujalti, of MPI, dated June 18, 2004.(8)                                                                                                                                                       |
|   | 10.16 | Employment  Agreement with Dr. Franco Sechi, of MPI, dated June 18, 2004.(8)                                                                                                                                                         |
|   | 10.17 | Interim  Lease and Proposed Lease Terms (9)                                                                                                                                                                                          |
|   | 10.18 | Financing  Agreement dated July 8, 2004 with Bridge Bank.(10)                                                                                                                                                                        |
|   | 10.19 | Enterprise  Agreement Number 4627 dated August 26, 2004 (11) *                                                                                                                                                                       |
|   | 31.1  | Certification  of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                                                    |
|   | 31.2  | Certification of Director of Finance Pursuant to 302 of the  Sarbanes-Oxley Act of 2002 (12)                                                                                                                                         |
|   | 32.1  | Certification  of Chief Executive Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                                                    |
|   | 32.2  | Certification  of Director of Finance Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (12)                                                                                                                                         |

 

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| *      | Confidential  treatment requested as to certain portions, which portions were omitted and  filed separately with the Securities and Exchange Commission.                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                       |
| (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. |

 

21

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| (4)  | Previously  filed with the Securities and Exchange Commission as an exhibit to the  Company’s Form 10-QSB for the quarter ended December 31, 1999 and  incorporated herein by reference.  |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5)  | Previously  filed with the Securities and Exchange Commission as an exhibit to the  Company’s Form 10-QSB for the quarter ended September 30, 2000 and  incorporated herein by reference. |
| (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.                                       |
| (9)  | Previously  filed with the Securities and Exchange Commission as an exhibit to the  Company’s Form 8-K dated July 6, 2004.                                                                |
| (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.                                            |
| (11) | Previously  filed with the Securities and Exchange Commission as an exhibit to the  Company’s Form 8-K dated September 1, 2004.                                                           |
| (12) | Filed  herewith.                                                                                                                                                                               |

 

22

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#### **SIGNATURES**

#### ** **

In accordancewith the requirements of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | AML  Communications, Inc.                                      |
|--------|----------------------------------------------------------------|
|   |                                                           |
|   |                                                           |
| Date:  | November 15,  2004                                             | /s/ Jacob  Inbar |   |
|   | Jacob Inbar                                                    |
|   | Chairman  of the Board, President  and Chief Executive Officer |
|   |                                                           |
|   |                                                           |
| Date:  | November 15,  2004                                             | /s/ Susan J.  Fite |   |
|   | Susan J.  Fite                                                 |
|   | Director of Finance and  Principal Accounting Officer          |

 

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