** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-QSB**

 

**ý****         QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended:**        **September 30, 2005**

 

**or**

 

**o****         TRANSITION REPORT PURSUANTTO SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to             **

** **

**CommissionFile Number:                                0-27252**

** **

**AMLCOMMUNICATIONS, INC.**

(Exactname of small business issuer as specified in its charter)

 

| **Delaware**                     | ** ** | **77-0130894**       |
|----------------------------------|------------|----------------------|
| (State  or Other jurisdiction of |       | (IRS  Employer       |
| incorporation  or organization)  |       | Identification  No.) |

 

| **1000 Avenida Acaso**                    | ** ** | ** **  |
|-------------------------------------------|------------|-------------|
| **Camarillo, California**                 | ** ** | **93012**   |
| (Address  of principal executive offices) |       | (Zip  Code) |

 

 

**(805)388-1345**

(Issuer’stelephone number including area code)

 

Check whether the issuer (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý No o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No ý

 

State the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

CommonStock Outstanding as of November 4, 2005: 10,096,116 shares

 

Transitional Small Business DisclosureFormat: Yes o No ý

 

----

 

**AML Communications, Inc.**

 
| ** **  | **Index to Form 10-QSB**                                                                                                                                                             |       |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                                                                                 |       |
| Item 1.     | Financial  Statements (Unaudited)                                                                                                                                                    |       |
|        |                                                                                                                                                                                 |       |
|        | Balance Sheet as of September 30, 2005                                                                                                                                               |       |
|        |                                                                                                                                                                                 |       |
|        | Statements of Operations for the three month periods  ended September 30, 2005 and September 30, 2004 and for the six month periods  ended September 30, 2005 and September 30, 2004 |       |
|        | Statements of Cash flows for the six month periods  ended September 30, 2005 and September 30, 2004                                                                                  |       |
|        |                                                                                                                                                                                 |       |
|        | Notes to Financial Statements                                                                                                                                                        |       |
|        |                                                                                                                                                                                 |       |
| Item  2.    | Management’s  Discussion and Analysis or Plan of Operation.                                                                                                                     |       |
|        |                                                                                                                                                                                 |       |
| Item  3.    | Controls  and Procedures                                                                                                                                                             |       |
|        |                                                                                                                                                                                 | ** ** |
| **Part II** | **Other  Information**                                                                                                                                                               | ** ** |
|        |                                                                                                                                                                                 |       |
| Item 1.     | Legal  Proceedings                                                                                                                                                                   |       |
|        |                                                                                                                                                                                 |       |
| Item  2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                         |       |
|        |                                                                                                                                                                                 |       |
| Item  3.    | Defaults  Upon Senior Securities                                                                                                                                                     |       |
|        |                                                                                                                                                                                 |       |
| Item  4.    | Submission  of Matters to a Vote of Security Holders                                                                                                                                 |       |
|        |                                                                                                                                                                                 |       |
| Item 5.     | Other  Information                                                                                                                                                                   |       |
|        |                                                                                                                                                                                 |       |
| Item 6.     | Exhibits                                                                                                                                                                             |       |
|        |                                                                                                                                                                                 |       |
|        | SIGNATURES                                                                                                                                                                           |       |
|        |                                                                                                                                                                                 |       |

 

2

----

 

**PART I- FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCE SHEET**

**(unaudited)**
| ** **                                                                                             | ** ** | **September  30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                             | ** ** | **2005**           | ** ** |
| ** **                                                                                             | ** ** | ** **         | ** ** |
| **ASSETS**                                                                                             | ** ** | ** **         | ** ** |
| Current Assets:                                                                                        |       |               |       |
| Cash and cash equivalents                                                                              |       | $                  | 2,111,000  |   |
| Accounts receivable, net of allowance for doubtful accounts of  $60,000                                |       | 1,325,000          |       |
| Inventories, net                                                                                       |       | 1,655,000          |       |
| Other current assets                                                                                   |       | 133,000            |       |
| Total current assets                                                                                   |       | 5,224,000          |       |
|                                                                                                   |       |               |       |
| Property and Equipment, at cost                                                                        |       | 4,197,000          |       |
| Less: Accumulated depreciation and amortization                                                        |       | (3,263,000         | )          |
| Property and Equipment, net                                                                            |       | 934,000            |       |
| Intangible Assets:                                                                                     |       |               |       |
| Technologies, net                                                                                      |       | 850,000            |       |
| Patents                                                                                                |       | 158,000            |       |
| Customer lists, net                                                                                    |       | 188,000            |       |
| Trademarks                                                                                             |       | 181,000            |       |
| Other Assets                                                                                           |       | 19,000             |       |
| Total Assets                                                                                           |       | $                  | 7,554,000  |   |
|                                                                                                   |       |               |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                         |       |               |       |
|                                                                                                   |       |               |       |
| Current Liabilities:                                                                                   |       |               |       |
| Line of Credit                                                                                         |       | $                  | 334,000    |   |
| Accounts payable                                                                                       |       | 320,000            |       |
| Current portion of capital lease obligations                                                           |       | 12,000             |       |
| Accrued expenses:                                                                                      |       |               |       |
| Accrued payroll and payroll related expenses                                                           |       | 306,000            |       |
| Accrued income taxes                                                                                   |       | (3,000             | )          |
| Other accrued liabilities                                                                              |       | 120,000            |       |
| Total current liabilities                                                                              |       | $                  | 1,089,000  |   |
|                                                                                                   |       |               |       |
| Stockholders’ Equity:                                                                             |       |               |       |
| Common stock, $0.01 par value:15,000,000 shares authorized;  10,096,116 shares issued and outstanding. |       | 101,000            |       |
|                                                                                                   |       |               |       |
| Capital in excess of par value                                                                         |       | 13,403,000         |       |
| Accumulated deficit                                                                                    |       | (7,039,000         | )          |
| Total stockholders’ equity                                                                        |       | 6,465,000          |       |
| Total liabilities and  stockholder’s equity                                                       |       | $                  | 7,554,000  |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 

 
| ** **                                                            | ** ** | **Three Month Periods Ended** | ** ** | **Six Month Periods Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **September 30,**             | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                            | ** ** | **2005**                      | ** ** | **2004**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Net sales                                                             |       | $                             | 2,542,000  |                        | $          | 1,882,000 |   | $ | 5,028,000 |   | $ | 4,057,000 |   |
| Cost of goods sold                                                    |       | 1,420,000                     |       | 1,097,000                   |       | 2,766,000 |   | 2,337,000 |   |
| Gross profit                                                          |       | 1,122,000                     |       | 785,000                     |       | 2,262,000 |   | 1,720,000 |   |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Operating expenses:                                                   |       |                          |       |                        |       |   |   |   |   |
| Selling, general & administrative                                 |       | 545,000                       |       | 537,000                     |       | 1,148,000 |   | 947,000 |   |
| Research and development                                              |       | 316,000                       |       | 199,000                     |       | 599,000 |   | 382,000 |   |
| Total operating expenses                                              |       | 861,000                       |       | 736,000                     |       | 1,747,000 |   | 1,329,000 |   |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Income from operations                                                |       | 261,000                       |       | 49,000                      |       | 515,000 |   | 391,000 |   |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Other income (expense), net                                           |       | 5,000                         |       | (31,000                     | )          | 8,000 |   | (48,000 | ) |
| Income before provision for income taxes                              |       | 266,000                       |       | 18,000                      |       | 523,000 |   | 343,000 |   |
| Provision for income taxes                                            |       | 8,000                         |       | —                      |       | 16,000 |   | — |   |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Net income                                                            |       | $                             | 258,000    |                        | $          | 18,000 |   | $ | 507,000 |   | $ | 343,000 |   |
|                                                                  |       |                          |       |                        |       |   |   |   |   |
| Basic earnings per common share                                       |       | $                             | 0.03       |                        | $          | 0.00 |   | $ | 0.05 |   | $ | 0.04 |   |
| Basic weighted average number of shares of common stock outstanding   |       | 10,082,000                    |       | 9,976,000                   |       | 10,074,000 |   | 9,064,000 |   |
| Diluted earnings per common share                                     |       | $                             | 0.02       |                        | $          | 0.00 |   | $ | 0.04 |   | $ | 0.03 |   |
| Diluted weighted average number of shares of common stock outstanding |       | 12,016,000                    |       | 11,840,000                  |       | 12,008,000 |   | 10,928,000 |   |

 

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,**           | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                        |       |   |   |
| Net Income                                                                         |       | $                           | 507,000    |   | $ | 343,000 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                        |       |   |   |
| Debt discount fees                                                                 |       | —                      |       | 9,000 |   |
| Depreciation                                                                       |       | 159,000                     |       | 119,000 |   |
| Bad debt expense                                                                   |       | 10,000                      |       | 9,000 |   |
| Inventory Reserves                                                                 |       | (53,000                     | )          | 132,000 |   |
| Amortization                                                                       |       | 108,000                     |       | 76,000 |   |
| Loss (Gain) on sale of fixed assets                                                |       | (1,000                      | )          | 30,000 |   |
| Changes in assets and liabilities:                                                 |       |                        |       |   |   |
| Decrease (increase) in:                                                            |       |                        |       |   |   |
| Accounts receivable                                                                |       | (44,000                     | )          | (80,000 | ) |
| Inventories                                                                        |       | 128,000                     |       | (118,000 | ) |
| Other current assets                                                               |       | 16,000                      |       | 35,000 |   |
| Increase (decrease) in:                                                            |       |                        |       |   |   |
| Accounts payable                                                                   |       | 73,000                      |       | (375,000 | ) |
| Accrued income taxes                                                               |       | (21,000                     | )          | — |   |
| Accrued expenses                                                                   |       | (142,000                    | )          | (59,000 | ) |
| Net cash provided by operating activities                                          |       | $                           | 740,000    |   | $ | 121,000 |   |
|                                                                               |       |                        |       |   |   |
| Cash Flows from Investing Activities:                                              |       |                        |       |   |   |
| Purchases of property and equipment                                                |       | (447,000                    | )          | (345,000 | ) |
| Cash received in the MPI acquisition                                               |       | —                      |       | 1,150,000 |   |
| Net cash (used in) provided by investing activities                                |       | $                           | (447,000   | ) | $ | 805,000 |   |
|                                                                               |       |                        |       |   |   |
| Cash Flows from Financing Activities:                                              |       |                        |       |   |   |
| Proceeds from exercise of stock options                                            |       | 17,000                      |       | — |   |
| Proceeds from line of credit, net                                                  |       | 254,000                     |       | 20,000 |   |
| Proceeds from notes payable — related parties                                 |       | —                      |       | (14,000 | ) |
| Proceeds from notes payable - investors                                            |       | —                      |       | (8,000 | ) |
| Principal payments on capital lease obligations, net                               |       | (41,000                     | )          | (81,000 | ) |
| Net cash provided by (used in) financing activities                                |       | $                           | 230,000    |   | $ | (83,000 | ) |
|                                                                               |       |                        |       |   |   |   |   |
| Net increase in Cash and Cash Equivalents                                          |       | 523,000                     |       | 843,000 |   |
| Cash and Cash Equivalents, beginning of period                                     |       | 1,588,000                   |       | 977,000 |   |
| Cash and Cash Equivalents, end of period                                           |       | $                           | 2,111,000  |   | $ | 1,820,000 |   |
|                                                                               |       |                        |       |   |   |   |   |
| Supplemental disclosures of cash flow information:                                 |       |                        |       |   |   |
| Cash paid during the period for:                                                   |       |                        |       |   |   |
| Interest                                                                           |       | $                           | 10,000     |   | $ | 57,000 |   |
|                                                                               |       |                        |       |   |   |   |   |
| Income Taxes                                                                       |       | $                           | 16,000     |   | $ | 1,000 |   |
| Non cash investing and financing activities:                                       |       |                        |       |   |   |
| Unamortized debt discount fees                                                     |       | $                           | —     |   | $ | 13,000 |   |
|                                                                               |       |                        |       |   |   |   |   |
| Debt incurred to purchase property and equipment                                   |       | $                           | 264,000    |   | $ | — |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

5

----

 

**AML COMMUNICATIONS, INC.**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

** September 30,2005**

** **

** **

**1.             Basis of Presentation**

 

          We currently design,manufacture, and market radio frequency (RF) and microwave, low noise, mediumand high power amplifiers for a variety of frequency ranges and transmissionprotocols serving primarily the defense microwave market. Our business iscomprised of two reportable segments consisting of amplifiers, subsystems, andrelated products that are designed, manufactured, and marketed by AMLCommunications, Inc. for the defense microwave and wireless communicationsmarket (AML) and high power microwave amplifiers that are designed, manufactured,and marketed by our division Microwave Power, Inc. (MPI) for the defensemarket. Our defense industry products are used primarily in electronic systemsfor tactical aircraft, ships, ground systems, and missile systems. Theseproducts are sold directly by us as well as through independent salesrepresentatives. We had two reportable segments in September 2005 and tworeportable segments in September 2004.

 

          The accompanying financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States.  However, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted or condensed pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationhave been included. The results of operations and cash flows for the three monthperiod and six month period presented are not necessarily indicative of theresults of operations for a full year. These financial statements should be read in conjunction with theCompany’s March 31, 2005 audited financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-KSB.

 

 

**2.             Earnings Per Share**

 

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

 

         Basic earnings per share is computed by dividing net income or loss bythe 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 Companyhad approximately 1,934,000 of granted stock options and warrants that wereexercisable as of September 30, 2005 and approximately 1,864,000 of grantedstock options and warrants exercisable at September 30, 2004.**

** **

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

** **
| **Six months ended September 30, 2005**     | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                  |       |           |       |       |       |          |       |
| Net income available to common stockholders |       | $              | 507,000    |       | 10,074,000 |          | $          | 0.05 |   |
| Effect of dilutive securities:              |       |           |       |       |       |          |       |
| Stock options                               |       |           |       | 1,671,000  |       |          |       |
| Warrants                                    |       |           |       | 263,000    |       |          |       |
| Diluted earnings per share:                 |       | $              | 507,000    |       | 12,008,000 |          | $          | 0.04 |   |

** **

**6**

----

** **
| **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 |   |

** **

**3.**             **Inventories**

 

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

 

| ** **                    | ** ** | **September 30, 2005** | ** ** |
|-------------------------------|------------|------------------------|------------|
|                          |       |                   |       |
| Raw material, net of  reserve |       | $                      | 1,048,000  |   |
| Work-in-process               |       | 364,000                |       |
| Finished goods                |       | 243,000                |       |
|                          |       | $                      | 1,655,000  |   |

 

The reserve for inventory at September 30, 2005 was$463,000.

 

 

**4.****             ****       Intangible Assets**

 

          The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 “goodwill and other intangible assets” and SFAS 144 “accounting for the impairment or disposal of long lived assets”. Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired. The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished. Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the assets to future net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the six month period ended September 30 2005, the Company recognized no impairment.

 

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

 
| ** **               | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|--------------------|------------|------------------|------------|------------|------------|
| **Intangibles**          | ** ** | **Amount**         | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                     |       |               |       |             |       |       |       |
| Amortized intangibles:   |       |               |       |             |       |       |       |
| Patents                  |       | $                  | 189,000    |             | $          | (31,000    | )          | $ | 158,000 |   |
| Existing Technology      |       | 961,000            |       | (111,000         | )          | 850,000    |       |
| Customer List            |       | 339,000            |       | (151,000         | )          | 188,000    |       |
|                     |       |               |       |             |       |       |       |
| Unamortized intangibles: |       |               |       |             |       |       |       |
| Trademarks               |       | 181,000            |       | ——     |       | 181,000    |       |
|                     |       | $                  | 1,670,000  |             | $          | (293,000   | )          | $ | 1,377,000 |   |

 

7

----

 

         Due to the acquisition of MPI in the quarter ended June 30, 2004, werecorded the intangible assets above. Weassigned 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.  The value assigned to trademarks, which havean indefinite life, should not be amortized.

 

          Amortization expense from continuing operation for the six months ended September 30, 2005 was $108,000.  We expect amortization expense for the next five years to be as follows:

 

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

 

 

**5**.          **Accounts ReceivableFinancing**

 

 At September 30, 2005, we had a line of creditagreement with Bridge Bank. On July 27, 2005, we signed a Business FinancingModification Agreement with Bridge Bank to renew our line of credit, increasingthe credit facility from $1.5 million to $2.0 million. Of this $2.0 million,$1.0 million may be used for cash advances against accounts receivables and$1.0 million may be used for equipment advances. Our ability to borrow underthis agreement varies based upon eligible accounts receivable and eligibleequipment purchases. We are obligated to pay the bank a finance charge at arate per year equal to the prime rate, which in no event shall be less than5.50%, plus .25% with respect to cash advances and a rate of such prime rateplus 2.0% with respect to equipment advances. We are obligated to pay an annualfacility fee of $5,000 (0.50% of the gross facility amount). We must maintaincertain financial requirements, including net profit after tax, on a quarterlybasis, of at least $0.01, and a debt service coverage ratio with respect toequipment advances. We were in compliance with these requirements at September30, 2005; however, there is no assurance that we will be in compliance atfuture dates. This agreement terminates on July 27, 2006 or upon a date thatthe bank chooses to terminate the agreement. Any unpaid balance is due and payable pursuant to the agreement on thetermination date.  If the agreement isterminated within the first 12 months following its execution on July 27, 2005,we will be required to pay an early termination fee of 1.0% of the creditfacility amount under the terms of the agreement. At September 30, 2005 we hadan outstanding balance of $70,000 under this agreement and our remainingborrowing capacity was approximately $464,000 available under the accountsreceivable agreement. Under the equipment financing agreement, we had anoutstanding balance of $264,000 at September 30, 2005 with a remainingborrowing capacity of approximately $736,000 available.

** **

**6.           Equity Transactions**

* *

          For the six months ended September 30, 2005, the Board of Directors granted stock options of 192,500 shares as employee compensation.  The prices of the options range from $0.95 to $1.13 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 month periods ended September 30, 2005 and 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.

 

8

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| ** **                                                          | ** ** | **Six Month Periods Ended** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **September 30, 2005**      | ** ** | **September 30, 2004** | ** ** |
|                                                                |       |                        |       |   |   |
| Net income as reported                                              |       | $                           | 507,000    |   | $ | 343,000 |   |
| Less: stock-based compensation expense, net of  related tax effects |       | (52,000                     | )          | (26,000 | ) |
| Pro forma net income                                                |       | $                           | 455,000    |   | $ | 317,000 |   |
|                                                                |       |                        |       |   |   |
| Basic earnings per share — as reported                         |       | $                           | 0.05       |   | $ | 0.04 |   |
| Diluted earnings per share — as reported                       |       | $                           | 0.04       |   | $ | 0.03 |   |
| Basic earnings per share — pro forma                           |       | $                           | 0.04       |   | $ | 0.03 |   |
| Diluted earnings per share — pro forma                         |       | $                           | 0.03       |   | $ | 0.03 |   |

 

**7.             Related Party**

 

                During the six month periodended September 30, 2005, the Company paid approximately $28,000 to theprevious stockholders of MPI in connection with the property rent for thepremises located in Santa Clara.

 

                On August 1, 2005 we enteredinto a new Commercial Lease Agreement with Microwave Holdings, LLC for thepremises located at 3350 Scott Blvd., Bldg: 25, in Santa Clara, California. Theterm of the lease is August 1, 2005 to September 19, 2006 at a monthly rate of$5,000.00.

 

**8.             Listing History**

 

                Ourcommon stock currently trades on NASDAQ’s OTC Bulletin Board under the symbol “AMLJ.OB”.Our 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.  TheCompany was de-listed from NASDAQ because of its failure to meet the $1.00minimum bid price requirement.

 

**9.             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, subsystems, 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 on the Company’s reportable segments for the three month period ended September 30, 2005 and the six month period ended September 30, 2005.

 

9

 

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

** **
| **(In thousands)**                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                   |       |    |       |    |       |            |       |      |       |
| Revenue                                                |       | $       | 2,015      |    | $          | 527             |       | —    |       | $ | 2,542 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Gross Profit                                           |       | 762     |       | 360     |       | —          |       | 1,122     |       |
| Depreciation & amortization (includes intangibles) |       | 85      |       | 54      |       | —          |       | 139       |       |
|                                                   |       |    |       |    |       |            |       |      |       |
| Interest expense                                       |       | 4       |       | —  |       | —          |       | 4         |       |
|                                                   |       |    |       |    |       |            |       |      |       |
| Other, net                                             |       | 577     |       | 136     |       | —          |       | 713       |       |
| Profit from continuing Operations before tax           |       | $       | 96         |    | $          | 170             |       | —    |       | $ | 266 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                    |       | $       | 3,377      |    | $          | 4,102           |       | —    |       | $ | 7,479 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                   |       | $       | 51         |    | 2          |            | —     |      | $          | 53 |   |

 

 

**For the six months ended September 30, 2005**

 
| **(In thousands)**                                     | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                   |       |    |       |    |       |            |       |      |       |
| Revenue                                                |       | $       | 3,908      |    | $          | 1,120           |       | —    |       | $ | 5,028 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Gross Profit                                           |       | 1,536   |       | 726     |       | —          |       | 2,262     |       |
| Depreciation & amortization (includes intangibles) |       | 151     |       | 116     |       | —          |       | 267       |       |
|                                                   |       |    |       |    |       |            |       |      |       |
| Interest expense                                       |       | 10      |       | —  |       | —          |       | 10        |       |
|                                                   |       |    |       |    |       |            |       |      |       |
| Other, net                                             |       | 1,205   |       | 257     |       | —          |       | 1,462     |       |
| Profit from continuing Operations before tax           |       | $       | 170        |    | $          | 353             |       | —    |       | $ | 523 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                    |       | $       | 3,377      |    | $          | 4,102           |       | —    |       | $ | 7,479 |   |
|                                                   |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                   |       | $       | 445        |    | $          | 2               |       | —    |       | $ | 447 |   |

 

                We had tworeportable segments in the three month period and the six month period endedSeptember 30, 2005.

 

**10.          Acquisitions**

 

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

 

10

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will continue to operate as our division fromits facility in Santa Clara, which is owned by MPI’s prior shareholders andleased to the us.

 

                TheMPI 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 thatwe believe are complimentary and additive to those available to AML prior tothe acquisition.

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

 

 

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

 

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

 

                Ofthe 1,670,000 of acquired intangible assets, $189,000 was assigned to patents(8 year useful life), $961,000 was assigned to Existing Technology (12 yearuseful life), and $339,000 was assigned to Customer Lists (3 year usefullife).  All are subject to amortization.  The balance of $181,000 was assigned totrademarks, which have an indefinite life and therefore should not beamortized.

 

 

**11.                          Major customers andvendors**

 

                Three customers provided 28% and40% of net revenue for the six month periods ended September 30, 2005 and 2004,respectively. Total accounts receivable due from these customers wasapproximately $261,000 and $204,000 as of September 30, 2005 and 2004,respectively.

 

                The Company extends credit toits customers based upon its assessment of their credit worthiness andgenerally does not require collateral. Credit losses have not been significant.

### ** **

                Three vendors accounted for 28%and 34% of the Company’s net purchases for the six months ended September 30,2005 and 2004, respectively. Total accounts payable due to these vendors was$16,000 and $40,000 as of September 30, 2005 and 2004, respectively.

 

 

**12.                          Reclassifications**

** **

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

** **

**11**

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** **

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

 

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

 

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

•                      ourability to attract and retain qualified, knowledgeable employees;

•                      theimpact of general economic conditions on our business;

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

•                      thelimited number of potential customers for our products;

•                      thevariability in gross margins on our products;

•                      ourability to design  and market newproducts successfully;

•                      ourfailure to acquire new customers in the future;

•                      deteriorationof business and economic conditions in our markets;

•                      intenselycompetitive industry conditions with increasing price competition; and

•                      therate of growth in the defense markets.

 

 

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

** **

 

**Overview**

 

          We are based in southern California and design, manufacture, and marketRadio Frequency (RF) and Microwave power and low noise amplifiers for thedefense microwave markets. Our defense industry products, which representsapproximately 90% of our sales, are used in radar equipment integrated intoelectronic systems for tactical aircraft, ships, ground systems, and missilesystems. We continue to support a limited amount of wireless products,consisting of low noise and power amplifiers serving the wireless, PCS, andtwo-way messaging market, as well as Cellular Coverage Enhancementamplifiers.  These products representapproximately 10% of our net sales. The demand for products manufactured by usand used in the defense industry has been growing during the last two years andis expected to continue to grow in the near term. This growth is attributableto an increase in demand for our products by government prime contractors, aswell as to our strategy to acquire market share. The acquisition of MPI was part of a strategic move to complement theexisting AML product line and expand our technology base. We will continue tooperate MPI from the current facility in Santa Clara, with the currentmanagement in place, but plan to unify the Web-site of MPI with our Web-site.

 

 

**Resultsof Operations**

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

*           Net sales. *Net sales for the threemonths ended September 30, 2005 were $2.5 million, as compared to net sales of$1.9 million for the three months ended September 30, 2004, an increase of$660,000 or 35%.  The increase was due toincreased demand in the defense sector. Defense related microwave integratedcircuits (MIC) products 

 

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accounted for $2.5million, or 99.3% of net sales for the three months ended September 30, 2005,compared to $1.9 million or 99.7% of net sales for the three months endedSeptember 30, 2004. The cellular and wireless messaging market produced only$19,000, or 0.7% of net sales for the three months ended September 30, 2005, ascompared to $6,000, or 0.3% of net sales for the three months ended September30, 2004.

 

*          Gross profit. *Gross profit for the threemonths ended September 30, 2005 was $1.1 million, or 44% of net sales, comparedto a gross profit of $785,000, or 41.7% of net sales for the three months endedSeptember 30, 2004. Gross profit, as a percentage of net sales, increased dueto the improved revenues while maintaining consistent standards costs.

*          Selling, general and administrativecosts. *Selling,general, and administrative costs were $545,000, or 22% of net sales, for thethree months ended September 30, 2005, compared to $537,000, or 28.5% of netsales, for the three months ended September 30, 2004. We incurred a $48,000increase in salaries and related benefits, a $9,000 increase in commissionexpense, and a $10K increase in consulting fees, offset by a $14,000 reductionin legal and audit fees, an $8,000 decrease in depreciation expense, and a$34,000 reduction in bank fees, a result of changing from a receivablesfinancing agreement to a more traditional line of credit.

*          Research and development costs. *Research and developmentcosts were $316,000, or 12% of net sales, for the three months ended September30, 2005, as compared to $199,000, or 10.5% of net sales, for the three monthsended September 30, 2004. We incurred a $104,000 increase in salaries andbenefits, a result of augmenting our engineering staff by four, a $4,000expenditure for recruitment, and a $16,000 increase for research anddevelopment materials, offset by a $7,000 reduction in depreciation expense.

          *Other income, net. *Other income was $5,000 for thethree months ended September 30, 2005, as compared to other expense of $31,000for the three months ended September 30, 2004. The increased income was due toshort term cash investments coupled with a reduction in finance chargesassociated with capital leases coming to an end, along with a reduction in bankfinance charges, a result of changing from a receivable financing agreement toa more traditional line of credit. For the three months ended September 30,2004, the Company incurred a $5,000 loss on the sale of a fixed asset, plus interestexpense of approximately $35,000, offset by interest income of $8,000.

*          Provision for income taxes.*For the three months ended September 30, 2005, we recorded a provision of$5,000 for federal AMT taxes and a provision of $3,000 for state AMT taxes, ascompared to the three months ended September 30, 2004, where we recorded noprovision due to the loss carry-forward benefits.

          *Net income. *Net income was $258,000 or $0.03per share, for the three months ended September 30, 2005, compared to a netprofit of $18,000, or $0.00 per share, for the three months ended September 30,2004.

 

**Resultsof Operations**

**SixMonths Ended September 30, 2005 Compared to Six Months Ended September 30, 2004**

*           Net sales. *Net sales for the six monthsended September 30, 2005 were $5 million, as compared to net sales of $4.1million for the six months ended September 30, 2004, an increase of $972,000 or24%. The increase was due to increased demand in the defense sector. Defenserelated MIC products accounted for $4.9 million, or 98.8% of net sales for thesix months ended September 30, 2005, compared to $3.6 million or 89.2% of netsales for the six months ended September 30, 2004. The cellular and wirelessmessaging market produced only $59,000 or 1.2% of net sales for the six monthsended September 30, 2005, as compared to $437,000, or 10.8% of net sales forthe six months ended September 30, 2004.

 

*          Gross profit. *Gross profit for the sixmonths ended September 30, 2005 was $2.3 million, or 45% of net sales, comparedto a gross profit of $1.7 million, or 42.3% of net sales for the six monthsended September 30, 2004. Gross profit, as a percentage of net sales, increaseddue to the improved revenues while maintaining consistent standards costs.

*          Selling, general and administrativecosts. *Selling,general, and administrative costs were $1.1 million, or 23% of net sales, forthe six months ended September 30, 2005, compared to $947,000, or 23.3% of netsales, for the six 

 

13

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months endedSeptember 30, 2004. We incurred a $85,000 increase in salaries and relatedbenefits, a $16,000 increase in taxes and insurance, a $13,000 increase infacility rent for our Santa Clara (MPI) facility. Additionally, we had a$36,000 increase in amortization expense for intangible assets in connectionwith June 2004 acquisition of MPI.  Theremaining $52,000 was attributed to having our MPI facility for 183 days in thesix month period ended September 30, 2005 as compared to 104 days only for thesix month period ended September 30, 2004.

*          Research and development costs. *Research and developmentcosts were $599,000 or 12% of net sales, for the six months ended September 30,2005, as compared to $382,000, or 9.4% of net sales, for the six months endedSeptember 30, 2004. We incurred a $197,000 increase in salaries and relatedbenefits, a result of augmenting our engineering staff by six, a $4,000expenditure for recruitment, and a $21,000 increase for research anddevelopment materials, offset by a $7,000 reduction in depreciation expense.

          *Other income, net. *Other income was $8,000 for thesix months ended September 30, 2005, as compared to other expense of $57,000for the six months ended September 30, 2004. The increased income was due toshort term cash investments coupled with a reduction in finance chargesassociated with capital leases coming to an end, along with a reduction in bankfinance charges, a result of changing from a receivable financing agreement toa more traditional line of credit. For the six months ended September 30, 2004,the Company incurred a $5,000 loss on the sale of a fixed asset offset by a$5,000 gain on the sale of another asset, plus interest expense of approximately$57,000.

*          Provision for income taxes.*For the six months ended September 30, 2005, we recorded a provision of $9,000for federal AMT taxes and a provision of $7,000 for state AMT taxes, ascompared to the six months ended September 30, 2004, where we recorded noprovision due to the loss carry-forward benefits.

          *Net profit. *Net profit was $507,000 or $0.05per share, for the six months ended September 30, 2005, compared to a netprofit of $343,000, or $0.04 per share, for the six months ended September 30,2004.

**Liquidity and CapitalResources**

 

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

 

          Between July 1, 2000 and December 31, 2001, weentered into capital leases for the purpose of acquiring production and testequipment valued in aggregate at $740,000. The terms of the leases range from 36 months to 60 months and theinterest charges range from 8.6% to 15.6%. The total amount remaining on the leases at September 30, 2005 was approximately $9,000.

 

          InDecember 2002, the Company entered into a non-cancelable capital lease toacquire test equipment valued in aggregate at approximately $50,000. The termsof the lease call for 36 equal monthly payments of $1,699 commencing inDecember 2002 and at an annual interest rate of 13.7%. The total amountremaining on the lease at September 30, 2005 was approximately $3,000.

 

          In July 2003, we raised $245,000($100,000 of which was a conversion from an advance received in June 2003) fromcurrent officers and directors and $43,000 from other investors in the form ofnotes payable with warrants attached. The funds were used for working capital.The promissory notes bear interest at the rate of 8% and have a two-yearmaturity. Warrants to purchase a total of 240,000 shares of our common stockwere issued in connection with the funding. The per share exercise price of the warrants is $0.24.  The warrants expire five years from the dateof issuance.  We have valued thesewarrants at $35,000 and are expensing this value over the term of the notespayable. On November 2, 2004, the Board of Directors approved the early payoffof these notes payable and these notes were paid in full on November 9, 2004.As of September 30, 2005, the number of warrants exercised was 52,500.

 

 

          At September 30, 2005, we had a lineof credit agreement with Bridge Bank. On July 27, 2005, we signed a BusinessFinancing Modification Agreement with Bridge Bank to renew our line of credit,increasing the credit facility from $1.5 million to $2.0 million. Of this $2.0million, $1.0 million may be used for cash advances against 

 

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accountsreceivables and $1.0 million may be used for equipment advances. Our ability toborrow under this agreement varies based upon eligible accounts receivable andeligible equipment purchases. We are obligated to pay the bank a finance chargeat a rate per year equal to the prime rate, which in no event shall be lessthan 5.50%, plus .25% with respect to cash advances and a rate of such primerate plus 2.0% with respect to equipment advances. We are obligated to pay anannual facility fee of $5,000 (0.50% of the gross facility amount). We mustmaintain certain financial requirements, including net profit after tax, on aquarterly basis, of at least $0.01, and a debt service coverage ratio withrespect to equipment advances. We were in compliance with these requirements atSeptember 30, 2005; however, there is no assurance that we will be incompliance at future dates. This agreement terminates on July 27, 2006 or upona date that the bank chooses to terminate the agreement.  Any unpaid balance is due and payablepursuant to the agreement on the termination date.  If the agreement is terminated within thefirst 12 months following its execution on July 27, 2005, we will be requiredto pay an early termination fee of 1.0% of the credit facility amount under theterms of the agreement. At September 30, 2005 we had an outstanding balance of$70,000 under this agreement and our remaining borrowing capacity wasapproximately $464,000 available under the accounts receivable agreement. Underthe equipment financing agreement, we had an outstanding balance of $264,000 atSeptember 30, 2005 with a remaining borrowing capacity of approximately$736,000 available.

 

          At September 30, 2005,we had $2.1 million in cash and cash equivalents. For the six months endedSeptember 30, 2005, our operating activities provided cash of approximately$740,000, compared to operating activities providing cash of $121,000 for thesix months ended September 30, 2004. Net cash used in investing activitiesamounted to $447,000 for the six months ended September 30, 2005, as comparedto $805,000 of net cash provided by investing activities during the six monthsended September 30, 2004. We had $447,000 in expenditures for capital equipmentto expand our production capabilities and for use in research and development,for the period ending September 30, 2005. We had $805,000 in cash provided byinvesting activities for the six month period ended September 2004, of which$1.1 million in cash was received in connection with the MPI acquisition offsetby $345,000 expended for capital equipment. Net cash provided by financing activities was $230,000 for the sixmonths ended September 30, 2005, $254,000 being proceeds from our line ofcredit, $17,000 being proceeds from the exercising of stock options, offset by$41,000 used to pay down capital lease obligations.  For the six months ended September 30, 2004,$83,000 was used in financing activities, of which $81,000 was a direct resultof paying down our lease obligations and an aggregate $22,000 for payments onnotes payable, offset by $20,000 in proceeds from our line of credit

 

                Weanticipate capital expenditures of approximately $702,000 in fiscal 2006. Webelieve that funds will be provided by our operating activities. However, wemay choose to finance some of these expenditures through our financingagreement with Bridge Bank. At September 30, 2005, we had a line of creditagreement with Bridge Bank, of which $1,000,000 may be used for equipmentadvances.  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 5.50%, plus 2.0% with respect to equipment advances.At September 30, 2005, our remaining borrowing capacity was $736,000 availableunder the equipment financing agreement.

 

                In addition to the funds raisedin July 2003, we may attempt to procure additional sources of financing in theevent that the capital available as of September 30, 2005 is insufficient forour operating needs and capital expenditures. These sources may include, butare not limited to, additional sales of our securities.  There are, however, no assurances that wewill be able to successfully obtain additional financing at terms acceptable tous.  Failure to obtain such financingcould have a material adverse effect on our ability to operate as a goingconcern.

** **

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

 

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**Critical Accounting Policies**

** **

            Ourdiscussion and analysis of our financial conditions and results of operationsare based upon our financial statements, which have been prepared in accordancewith generally accepted accounting principles in the United States. Thepreparation of financial statements requires managers to make estimates anddisclosures on the date of the financial statements. On an on-going basis, weevaluate our estimates, including, but not limited to, those related to revenuerecognition. We use authoritative pronouncements, historical experience, andother assumptions as the basis for making judgments. Actual results coulddiffer from those estimates. We believe that the following critical accountingpolicies affect our more significant judgments and estimates in the preparationof our financial statements.

 

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

 

•                  *Persuasiveevidence of an arrangement exists;*

•                  *Deliveryhas occurred or services have been rendered;*

•                  *Priceis fixed or determinable; and*

•                  *Collectibility is reasonably assured*

 

             Revenue from the sale of products isgenerally recognized after both the goods are shipped to the customer andacceptance has been received, if required. Our products are custom made for ourcustomers, who primarily consist of original engineer manufacturers (OEMs), andwe do not accept returns. Our products are shipped complete and ready to beincorporated into higher level assemblies by our customers. The terms of thecustomer arrangements generally pass title and risk of ownership to thecustomer 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 decision thatmust be made by management.

 

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

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

 

         *Intangible Assets*. We test intangibleassets with indefinite lives for impairment on an annual basis or morefrequently if certain events occur.  Ifthe assets are considered to be impaired, the impairment to be recognized willbe measured by the amount in which the carrying amount exceeds the fair valueof the assets.  For our intangible assetswith finite lives, including our customer lists, existing technology, andpatents, we amortize the costs of the assets over their useful lives and assessimpairment at least annually or whenever events and circumstances suggest thecarrying value of an asset may not be recoverable. Determining the life of theassets with finite lives is judgmental in nature and involves the use ofestimates and assumptions. These estimates and assumptions involve a variety offactors, including future market growth and conditions, forecasted revenues andcosts and a strategic review of our business and operations. We base our fairvalue estimates on assumptions we believe to be reasonable 

 

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but that are unpredictable and inherentlyuncertain. Actual future results may differ from those estimates. In the eventwe determine that an intangible asset is impaired in the future, an adjustmentto the value of the asset would be charged to earnings in the period suchdetermination is made.

 

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

 

 

**Additional Factors That MayAffect 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, new productdevelopment, product obsolescence, and significant price erosion over the lifeof a product);

 

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

 

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

 

•                                          ourability to accurately anticipate customer demand;

 

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

 

•                                          theavailability and cost of components;

 

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

 

•                                         the ability tointegrate potential future acquisitions intoour existing operations.

 

 

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

 

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

 

         Sales to foreign customers are invoiced in U.S. dollars. Accordingly, wecurrently do not engage in foreign currency hedging transactions. However, aswe expand further into foreign markets, we may experience greater riskassociated with general business, political and economic conditions in thosemarkets. At such time, we may seek to lessen our exposure through currencyhedging transactions. We cannot assure you that a currency hedging strategywould be successful in avoiding currency exchange related losses. In addition,should the relative value of the U.S. dollar in comparison to foreigncurrencies increase, the resulting increase in the price of our products toforeign customers could result in decreased sales which could have a materialadverse impact on our business, results of operations, and financial condition.

 

         We experience significant price competition and expect price competitionin the sale of our products to remain intense. We cannot assure you that ourcompetitors will not develop new technologies or enhancements to existingproducts or introduce new products that will offer superior price orperformance features. We expect our competitors 

 

17

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to offer new and existing products at pricesnecessary to gain or retain market share. Several of our competitors havesubstantial financial resources, which may enable them to withstand sustainedprice competition or a downturn in the pricing of their products in the future.Substantially all of our competitors have, and potential future competitorscould have, substantially greater technical, marketing, distribution and otherresources than we do and have, or could have, greater name recognition andmarket acceptance of their products and technologies.

 

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

 

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

 

**Item 3.Controls and Procedures**

 

(a)          *Evaluation of disclosure controls and procedures*. As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Director of Finance, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Director of Finance concluded that our disclosurecontrols and procedures were effective as of the end of the applicable periodto ensure that the information required to be disclosed by the Company inreports that it files or submits under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms  and (ii) is accumulated and communicated to our management, including our ChiefExecutive Officer and Director of Finance, as appropriate to allow timelydecisions regarding required disclosures.

 

(b)         *Changes in internal controls over financial reporting*. There was no change in our internal control over financial reportingduring our most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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#### **PART II — OTHER INFORMATION**

** **

**Item1.  Legal Proceedings**

**          **Not Applicable

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

**         **Not Applicable

**Item 3. Defaults Upon Senior Securities**

**         **Not Applicable

 

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

 

#### **           **Our 2005 Annual Meeting of Stockholders (the “2005 Annual Meeting”) washeld on September 9, 2005, in Camarillo, California. Three proposals, asdescribed in our Proxy Statement, dated July 29, 2005, were voted on at themeeting.  The following is a briefdescription of the matters voted upon and the results of the voting:

 

**1.****             ****Electionof Directors:**

** **
| **Nominees**     | ** ** | **Number of Shares** |
|------------------|------------|----------------------|
|             |       |                 |   |
| Jacob Inbar      |       | For:                 |    8,626,435 |
|             |       | Withheld:            |       253,835 |
|             |       |                 |   |
| David A. Derby   |       | For:                 |    8,611,570 |
|             |       | Withheld:            |       268,700  |
|             |       |                 |   |
| Richard Flatow   |       | For:                 |    8,611,570 |
|             |       | Withheld:            |       268,700 |
|             |       |                 |   |
| Tiberiu Mazilu   |       | For:                 |    8,646,110 |
|             |       | Withheld:            |       234,160 |
|             |       |                 |   |
| Edwin J. McAvoy  |       | For:                 |    8,647,410 |
|             |       | Withheld:            |       232,860 |
|             |       |                 |   |
| Gerald M. Starek |       | For:                 |    8,652,910 |
|             |       | Withheld:            |       227,360 |
|             |       |                 |   |

 

 

**2.****             ****Ratificationof the Appointment of Kabani & Company, Inc as our Independent RegisteredPublic Accounting Firm:**

** **
| **Nominees**               | ** ** | **Number of Shares** |
|----------------------------|------------|----------------------|
|                       |       |                 |   |
| Kabani & Company, Inc. |       | For:                 |    8,868,820 |
|                       |       | Against:             |           8,720 |
|                       |       | Abstain:             |           2,730 |
|                       |       |                 |   |
|                       |       |                 |   |

 

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**3.****             ****Toamend the Company’s 1995 Stock Incentive Plan and increase the number of sharesreserved thereunder:**

** **
| **Increase Plan by**                     | ** ** | **Number of Shares** |
|------------------------------------------|------------|----------------------|
|                                     |       |                 |   |
|      500,000 Options |       | For:                 |    5,060,546 |
|                                     |       | Against:             |       255,920 |
|                                     |       | Abstain:             |         15,680 |
|                                     |       |                 |   |

 

**Item 5. Other Information**

**         **Not Applicable

**Item 6.    Exhibits**

 

          The exhibits listed in the ExhibitIndex are filed as part of this report.

 

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#### **SIGNATURES**

 

** **

 

                In accordance with Section 13 or 15(d) of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | AML Communications Inc.                                     |                     |
|--------|-------------------------------------------------------------|--------------------------|
|   |                                                        |                     |
|   | /s/: Jacob Inbar                                            |                     |   |
|   | By: Jacob Inbar, President and Chief Executive Officer | Dated: November 14, 2005 |
|        |                                                             |                          |  |

 

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EXHIBITINDEX

 
| 2.1   |   | Merger Agreement entered into as of May 25, 2004 by and  among AML Communications Inc., a Delaware corporation, AML Holdings, LLC, a  California limited liability company and Microwave Power, Inc., a California  corporation (1) |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Certificate of Incorporation (2)                                                                                                                                                                                                    |
| 3.2   |   | Bylaws (2)                                                                                                                                                                                                                          |
| 10.1  |   | Form of Indemnity Agreement (2)                                                                                                                                                                                                     |
| 10.2  |   | Lease, dated March 11, 1996, between the Company and  Parr-Bohn Properties, Ltd. II, a California Limited Partnership (3)                                                                                                           |
| 10.3  |   | Intellectual Property Security Agreement (4)                                                                                                                                                                                        |
| 10.4  |   | Loan and Security Agreement dated November 10, 2000  between the Company and Silicon Valley Bank   (5)                                                                                                                         |
| 10.5  |   | Intellectual Property Security Agreement dated November  10, 2000 between the Company and Silicon Valley Bank (5)                                                                                                                   |
| 10.6  |   | Warrant to purchase stock dated November 9, 2000  between the Company and Silicon Valley Bank (5)                                                                                                                                   |
| 10.7  |   | Accounts Receivable Purchase Agreement dated November  20, 2001 between AML Communications, Inc. and Silicon Valley Bank (6)                                                                                                        |
| 10.8  |   | Promissory Note dated December 30, 2001 between  Tiberiu, Mazilu, and AML Communications Inc.(6)                                                                                                                                    |
| 10.9  |   | Accounts Receivable Purchase Modifications Agreement  dated September 24, 2003 between Silicon Valley Bank and AML Communications  (7)                                                                                              |
| 10.10 |   | Form of Promissory Note date July 16, 2003 between the  Company and the following:  Jacob  Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The  Oliver Family Trust (7)                                |
| 10.11 |   | Form of Warrant dated July 16, 2003 between the Company  and the following: Jacob Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek,  Bob M. Hawkins, and The Oliver Family Trust (7)                                              |
| 10.12 |   | Fifth Amended and Restated 1995 Stock Option Agreement  at July 12, 2005 (13)                                                                                                                                                       |
| 10.13 |   | Parr-Bohn Properties First Amendment to lease of 1000  Avenida Acaso, Camarillo, CA. (8)                                                                                                                                            |
| 10.14 |   | Interim Lease and Proposed Lease Terms (9)                                                                                                                                                                                          |
| 10.15 |   | Financing Agreement dated July 8, 2004 with Bridge Bank  (10)                                                                                                                                                                       |
| 10.16 | *      | Enterprise Agreement Number 4627 dated August 26, 2004  (11)                                                                                                                                                                        |
| 10.17 |   |  Business  Financing Modification Agreement with Bridge Bank, dated July 27, 2005(12)                                                                                                                                          |
| 10.18 |   | Commercial Lease between the Company and Microwave  Holdings, LLC dated August 1, 2005(12)                                                                                                                                          |
| 10.19 | *      | Purchase Order from Raytheon Space and Airborne Systems  dated September 5, 2004, as amended (12)                                                                                                                                   |
| 31.1  |   | Certification by the Chief Executive Officer (14)                                                                                                                                                                                   |
| 31.2  |   | Certification by the Director of Finance (14)                                                                                                                                                                                       |
| 32.1  |   | Certification pursuant to Section 906 of the Sarbanes  Oxley Act (14)                                                                                                                                                               |
| 32.2  |   | Certification pursuant to Section 906 of the Sarbanes  Oxley Act (14)                                                                                                                                                               |

 

 

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

 

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

 

                                                (3)           Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-KSBfor fiscal year ended March 31, 1996 and incorporated herein by reference

 

                                                (4)           Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 1999 and incorporated herein by reference.

 

                                                (5)           Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended September 30, 2000 and incorporated herein by reference.

 

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                                                (6)           Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2001 and incorporated herein by reference.

 

                                                (7)           Previously filed withthe Securities and Exchange Commission as an exhibit to the Company’s Form 10-QSBfor the quarter ended December 31, 2002 and incorporated herein by reference.

 

(8)                                  Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-KSB for the fiscal year ended March 31, 2004 and incorporatedherein by reference.

 

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

 

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

 

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

 

(12)                            Previouslyfiled with the Securities and Exchange Commission as an exhibit to the Company’sForm 10-QSB for the quarter ended June 30, 2005 and incorporated herein byreference.

 

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

 

(14)                            Filedherewith.

 

*  Confidential treatment requested as tocertain portions, which portions were omitted and filed separately with theSecurities and Exchange Commission.

 

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