** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

**ý****        ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thequarterly period ended:   December 31, 2004**

 

**or**

 

**o****        ****TRANSITIONREPORT PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For thetransition period from                     to                     **

 

**CommissionFile Number:    0-27252**

 

**AML COMMUNICATIONS, INC.**

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

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

 

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

 

Yes  ý   No  o

 

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

 

Common Stock Outstandingas of February 4, 2005: 10,011,699 shares.

 

Transitional Small BusinessDisclosure Format: Yes  o   No  ý

 

 

----

 

**AML COMMUNICATIONS, INC.**

 

**INDEX TO FORM 10QSB**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                                                                          |       |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                                                                                               |       |
| Item 1.     | Financial Statements                                                                                                                                                                               |       |
|        |                                                                                                                                                                                               |       |
|        | Balance Sheet at December 31,  2004                                                                                                                                                           |       |
|        |                                                                                                                                                                                               |       |
|        | Statements of  Operations for the three month periods ended December 31, 2004 and December 31,  2003 and the nine month periods ended December 31, 2004 and December 31,  2003 |       |
|        |                                                                                                                                                                                               |       |
|        | Statements of Cash  Flows for the nine month periods ended December 31, 2004 and December 31,  2003                                                                                      |       |
|        |                                                                                                                                                                                               |       |
|        | Notes  to Financial Statements                                                                                                                                                                     |       |
|        |                                                                                                                                                                                               |       |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                        |       |
|        |                                                                                                                                                                                               |       |
| Item 3.     | Controls and Procedures                                                                                                                                                                            |       |
|        |                                                                                                                                                                                               |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                                                                              | ** ** |
| ** **  | ** **                                                                                                                                                                                         | ** ** |
| Item 1.     | Legal Proceedings                                                                                                                                                                                  |       |
|        |                                                                                                                                                                                               |       |
| Item  2.    | Unregistered  Sales of Equity and Use of Proceeds                                                                                                                                                  |       |
|        |                                                                                                                                                                                               |       |
| Item 3.     | Defaults Upon  Senior Securities                                                                                                                                                                   |       |
|        |                                                                                                                                                                                               |       |
| Item  4.    | Submission  of Matters to a Vote of Security Holders                                                                                                                                               |       |
|        |                                                                                                                                                                                               |       |
| Item 5.     | Other Information                                                                                                                                                                                  |       |
|        |                                                                                                                                                                                               |       |
| Item 6.     | Exhibits                                                                                                                                                                                           |       |
|        |                                                                                                                                                                                               |       |
|        | SIGNATURES                                                                                                                                                                                         |       |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED CONDENSED BALANCESHEET**

**(unaudited)**

 
| ** **                                                                                                                      | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                      | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **                  | ** ** |
| Current Assets:                                                                                                                 |       |                        |       |
| Cash and cash equivalents                                                                                                       |       | $                           | 1,738,000  |   |
| Accounts receivable, net of allowance for doubtful  accounts of $45,000 at December 31, 2004                               |       | 927,000                     |       |
| Inventories, net of inventory reserve of $496,000 at  December 31, 2004                                                    |       | 1,636,000                   |       |
| Other current assets                                                                                                            |       | 122,000                     |       |
| Total current assets                                                                                                            |       | 4,423,000                   |       |
|                                                                                                                            |       |                        |       |
| Property and Equipment, at cost                                                                                                 |       | 3,746,000                   |       |
| Less: Accumulated depreciation and amortization                                                                                 |       | (3,095,000                  | )          |
| Property and Equipment, net                                                                                                     |       | 651,000                     |       |
| Intangible Assets:                                                                                                              |       |                        |       |
| Technologies, net                                                                                                               |       | 910,000                     |       |
| Patents                                                                                                                         |       | 175,000                     |       |
| Customer lists, net                                                                                                             |       | 273,000                     |       |
| Trademarks                                                                                                                      |       | 181,000                     |       |
| Other Assets                                                                                                                    |       | 33,000                      |       |
| Total Assets                                                                                                                    |       | $                           | 6,646,000  |   |
|                                                                                                                            |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                   |       |                        |       |
|                                                                                                                            |       |                        |       |
| Current Liabilities:                                                                                                            |       |                        |       |
| Accounts payable                                                                                                                |       | $                           | 167,000    |   |
| Line of Credit                                                                                                                  |       | 85,000                      |       |
| Current portion of capital lease obligations                                                                                    |       | 71,000                      |       |
| Accrued payroll and payroll related expenses                                                                                    |       | 155,000                     |       |
| Accrued income taxes                                                                                                            |       | 284,000                     |       |
| Other accrued liabilities                                                                                                       |       | 145,000                     |       |
| Total current liabilities                                                                                                       |       | 907,000                     |       |
|                                                                                                                            |       |                        |       |
| Deferred Taxes                                                                                                                  |       | 11,000                      |       |
| Capital Lease Obligations, net of current portion                                                                               |       | 10,000                      |       |
| Total liabilities                                                                                                               |       | 928,000                     |       |
| Stockholders’ Equity:                                                                                                      |       |                        |       |
| Common stock, $0.01 par value:15,000,000 shares authorized;  9,984,199 shares issued and outstanding at December 31, 2004. |       | 100,000                     |       |
|                                                                                                                            |       |                        |       |
| Capital in excess of par value                                                                                                  |       | 13,378,000                  |       |
| Accumulated deficit                                                                                                             |       | (7,760,000                  | )          |
| Total stockholders’ equity                                                                                                 |       | 5,718,000                   |       |
|                                                                                                                            |       |                        |       |
|                                                                                                                            |       | $                           | 6,646,000  |   |

 

The accompanying notes are an integral part of these unauditedfinancial statements.

 

3

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Month Periods Ended** | ** ** | **Nine Month Periods Ended** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **December 31,  2004**   | ** ** | **December 31,  2003**  | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Net sales                                                              |       | $                             | 2,284,000  |                         | $          | 2,003,000 |   | $ | 6,340,000 |   | $ | 5,280,000 |   |
| Cost of goods sold                                                     |       | 1,146,000                     |       | 1,047,000                    |       | 3,483,000 |   | 2,683,000 |   |
| Gross profit                                                           |       | 1,138,000                     |       | 956,000                      |       | 2,857,000 |   | 2,597,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Operating expenses:                                                    |       |                          |       |                         |       |   |   |   |   |
| Selling, general & administrative                                  |       | 521,000                       |       | 349,000                      |       | 1,467,000 |   | 993,000 |   |
| Research and development                                               |       | 226,000                       |       | 177,000                      |       | 609,000 |   | 550,000 |   |
|                                                                   |       | 747,000                       |       | 526,000                      |       | 2,076,000 |   | 1,543,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Profit from operations                                                 |       | 391,000                       |       | 430,000                      |       | 781,000 |   | 1,054,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Other (expense) income, net                                            |       | (12,000                       | )          | (40,000                      | )          | (59,000 | ) | (56,000 | ) |
| Profit before provision for income taxes                               |       | 379,000                       |       | 390,000                      |       | 722,000 |   | 998,000 |   |
| Provision for income taxes                                             |       | —                        |       | 34,000                       |       | — |   | 88,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Net profit                                                             |       | $                             | 379,000    |                         | $          | 356,000 |   | $ | 722,000 |   | $ | 910,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Basic earnings per common share                                        |       | $                             | 0.04       |                         | $          | 0.05 |   | $ | 0.08 |   | $ | 0.12 |   |
| Basic weighted average number of shares of common  stock outstanding   |       | 9,982,000                     |       | 7,838,000                    |       | 9,119,000 |   | 7,833,000 |   |
|                                                                   |       |                          |       |                         |       |   |   |   |   |
| Diluted earnings per common share                                      |       | $                             | 0.03       |                         | $          | 0.04 |   | $ | 0.07 |   | $ | 0.09 |   |
| Diluted weighted average number of shares of common  stock outstanding |       | 11,933,000                    |       | 9,616,000                    |       | 11,070,000 |   | 9,611,000 |   |

 

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

 

4

----

 

**AML COMMUNICATIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Nine Month Periods Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,  2004**  | ** ** | **December 31,  2003** | ** ** |
| Cash Flows from Operating Activities:                                              |       |                         |       |   |   |
| Net Profit                                                                         |       | $                            | 722,000    |   | $ | 910,000 |   |
| Adjustments to reconcile net profit to net cash  provided by operating activities: |       |                         |       |   |   |
| Debt discount fees                                                                 |       | 22,000                       |       | 9,000 |   |
| Depreciation and amortization                                                      |       | 194,000                      |       | 204,000 |   |
|                                                                               |       |                         |       |   |   |
| Bad debt expense                                                                   |       | 11,000                       |       | (2,000 | ) |
| Inventory reserves                                                                 |       | 162,000                      |       | — |   |
| Gain on sale of fixed assets                                                       |       | —                       |       | (48,000 | ) |
| Changes in assets and liabilities:                                                 |       |                         |       |   |   |
| Decrease (increase) in:                                                            |       |                         |       |   |   |
| Accounts receivable                                                                |       | (149,000                     | )          | (311,000 | ) |
| Inventories                                                                        |       | (190,000                     | )          | 137,000 |   |
| Other current assets                                                               |       | 23,000                       |       | (20,000 | ) |
| Other assets                                                                       |       | 130,000                      |       | — |   |
| Increase (decrease) in:                                                            |       |                         |       |   |   |
| Accounts payable                                                                   |       | (376,000                     | )          | 17,000 |   |
| Accrued state income taxes                                                         |       | (8,000                       | )          | 88,000 |   |
| Accrued expenses                                                                   |       | (129,000                     | )          | (198,000 | ) |
| Net cash provided by operating activities                                          |       | 412,000                      |       | 786,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Investing Activities:                                              |       |                         |       |   |   |
| Purchases of property and equipment                                                |       | (404,000                     | )          | (18,000 | ) |
| Proceeds from the sale of property and equipment                                   |       | 34,000                       |       | 48,000 |   |
| Cash received in the MPI acquisition                                               |       | 1,150,000                    |       | — |   |
| Net cash provided by investing activities                                          |       | 780,000                      |       | 30,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash Flows from Financing Activities:                                              |       |                         |       |   |   |
| Proceeds from exercise of warrants                                                 |       | 9,000                        |       | 2,000 |   |
| Proceeds from line of credit, net                                                  |       | 5,000                        |       | 202,000 |   |
| Proceeds (payments) notes payable - related parties                                |       | (295,000                     | )          | 245,000 |   |
| Proceeds (payments) notes payable - investors                                      |       | (43,000                      | )          | 43,000 |   |
| Principal payments on capital lease obligations, net                               |       | (107,000                     | )          | (71,000 | ) |
| Net cash provided by (used in) financing activities                                |       | (431,000                     | )          | 421,000 |   |
|                                                                               |       |                         |       |   |   |
| Net increase in Cash and Cash Equivalents                                          |       | 761,000                      |       | 1,237,000 |   |
|                                                                               |       |                         |       |   |   |
| Cash and Cash Equivalents, beginning of period                                     |       | 977,000                      |       | 195,000 |   |
| Cash and Cash Equivalents, end of period                                           |       | $                            | 1,738,000  |   | $ | 1,432,000 |   |
| Supplemental disclosures of cash flow information:                                 |       |                         |       |   |   |
| Cash paid during the period for:                                                   |       |                         |       |   |   |
| Interest                                                                           |       | $                            | 83,000     |   | $ | 104,000 |   |
| Income Taxes                                                                       |       | $                            | —     |   | $ | — |   |

 

The accompanying notes are an integral part of these unauditedfinancial statements.

 

5

----

 

**AML COMMUNICATIONS, INC.**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**December 31, 2004**

** **

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

 

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

 

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

 

**Principlesof consolidation**

 

Theaccompanying consolidated financial statements include the accounts of AMLCommunications, Inc, and its wholly owned division, Microwave Power, Inc. fromthe acquisition date, on June 18, 2004. All significant inter-companyaccounts and transactions have been eliminated in consolidation.  The nine month period ended December 31,2004 includes 196 days of Microwave Power, Inc.’s results of operationsprospectively from the date of the acquisition, or June 19, 2004 through December 31,2004.

 

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

** **

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

 

**TheCompany had 1,951,000 of granted stock options and warrants that were exercisableas of December 31, 2004 and 1,778,000 of granted stock options andwarrants exercisable at December 31, 2003.**

 

**6**

----

 

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

 
| **Nine months ended December 31,  2004** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                    |       |           |       |       |       |          |       |
| Net income available to common stockholders   |       | $              | 722,000    |       | 9,119,000  |          | $          | 0.08 |   |
| Effect of dilutive securities:                |       |           |       |       |       |          |       |
| Stock options                                 |       |           |       | 1,644,000  |       |          |       |
| Warrants                                      |       |           |       | 307,000    |       |          |       |
| Diluted earnings per share:                   |       | $              | 722,000    |       | 11,070,000 |          | $          | 0.07 |   |

 
| **Nine months ended December 31,  2003** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|---------------|------------|
| Basic earnings per shares:                    |       |           |       |       |       |          |       |
| Net income available to common stockholders   |       | $              | 910,000    |       | 7,833,000  |          | $          | 0.12 |   |
| Effect of dilutive securities:                |       |           |       |       |       |          |       |
| Stock options                                 |       |           |       | 1,463,000  |       |          |       |
| Warrants                                      |       |           |       | 315,000    |       |          |       |
| Diluted earnings per share:                   |       | $              | 910,000    |       | 9,611,000  |          | $          | 0.09 |   |

 

**3.**                                      **Inventories**

 

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

 

| ** **                    | ** ** | **December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------|------------|
|                          |       |                       |       |
| Raw materials, net of reserve |       | $                          | 992,000    |   |
| Work-in-process               |       | 408,000                    |       |
| Finished goods                |       | 236,000                    |       |
|                          |       | $                          | 1,636,000  |   |

 

**4.****                                      IntangibleAssets**

 

The Company accounts for its intangible assets under the applicable guidelines of SFAS 142 “goodwill and other intangible assets” and SFAS 144 “accounting for the impairment or disposal of long lived assets”. Where intangible assets have finite lives, they are amortized over their useful life unless factors exist to indicate that the asset has been impaired. The Company evaluates if the assets are impaired annually or on an interim basis if an event occurs or circumstances change to suggest that the assets value has diminished. Under SFAS 144, when deemed necessary, the Company completes the evaluation of the recoverability of its long-lived assets by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values.  Under SFAS 142 intangible assets with indefinite useful lives are required to be tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets.  During the three months ended December 31, 2004, the Company recognized no impairment.

 

7

 

At December 31, 2004, intangibles consist of the following:

 
| ** **               | ** ** | **December 31, 2004** | ** ** |
|--------------------------|------------|----------------------------|------------|
| **Intangibles**          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                     |       |                       |       |   |   |   |   |
| Amortized intangibles:   |       |                       |       |   |   |   |   |
| Patents                  |       | $                          | 189,000    |   | $ | (14,000 | ) | $ | 175,000 |   |
| Existing Technology      |       | 961,000                    |       | (51,000 | ) | 910,000 |   |
| Customer List            |       | 339,000                    |       | (66,000 | ) | 273,000 |   |
|                     |       |                       |       |   |   |   |   |
| Unamortized intangibles: |       |                       |       |   |   |   |   |
| Trademarks               |       | 181,000                    |       | — |   | 181,000 |   |
|                     |       | $                          | 1,670,000  |   | $ | (131,000 | ) | $ | 1,539,000 |   |

 

TheCompany assigned an 8 year life to patents, a 12 year life to ExistingTechnology, and a 3 year life to Customer Lists. All are subject toamortization.  Trademarks were assignedas having an indefinite life.

 

Amortization expense from continuing operation for quarter ended December 31, 2004 was $54,000.  The Company expects the amortization expenses for the next five years to be as follows:

 

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

 

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

 

In September 2003,the Company modified its agreement with Silicon Valley Bank. Under themodification agreement, the aggregate amount of all receivables purchased bythe bank could not exceed $2,000,000. The Company was obligated to pay the banka monthly finance charge which was computed as the greater of $6,500 or 1%above the prime rate, per annum, on the average daily account balanceoutstanding for each month. The Company was also required to pay the bank amonthly collateral handling fee of 0.75% per month on the average daily accountbalance outstanding for the month. The bank refunded any amount remaining frompaid accounts after deducting the 80% advance, the monthly finance charge, thecollateral handling fee and any other adjustments made or fees due pursuant tothe Account Receivable Purchase Agreement. The bank required the Company torepurchase receivables it had purchased if they remained unpaid after 90 days fromthe invoice date, if the account debtor filed (or has filed against it)bankruptcy or other insolvency proceedings, if the Company breached theAccounts Receivable Purchase Agreement or if the account debtor asserted anyclaim relating to the receivable.  As of June 30,2004, there was $184,000 of refundable reserves due to the Company under theborrowing agreement.  On July 6,2004, the Company terminated its agreement with Silicon Valley Bank and enteredinto a new financing agreement with Bridge Bank.  The refundable reserve, less interest, fees,and penalties for early termination, was released to the Company on July 6,2004 in the net amount of $148,000.

 

8

----

 

Under the asset-basedfinancing agreement with Bridge Bank, the Company is required to pay the bank$7,500 upon execution of the contract and on each anniversary thereafter priorto termination of the agreement. The credit limit under this agreement is$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. The Company isobligated to pay the bank a finance charge at a rate per year equal to theprime rate, which in no event shall be less than 4.0%, plus 2.0% with respectto cash advances and a rate of such prime rate plus 3.5% with respect toequipment advances. The Company is required to maintain certain financialrequirements including net profit after tax, on a quarterly basis, of at least$0.01 and maintain a debt service coverage ratio of at least 1.25 to 1.00, withrespect to equipment advances.  Thisagreement terminates on July 7, 2005, or upon a date that the bank choosesto terminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months, the Company generally is required to pay a $15,000fee to the bank.

 

**6.**                                      EquityTransactions

** **

During the nine months ended December 31, 2004, the Board of Directors granted stock options of 140,500 shares as employee compensation and 22,500 shares as non-employee Director compensation.  The options prices range from $1.20 to $1.55 per share.

 

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

 

The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per share as if stock-based employee compensation had been recognized during the nine months ended December 31, 2004. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

 
| **For the  nine months ended:**                                                                   | ** ** | **December 31,  2004** | ** ** | **December 31,****2003** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
|                                                                                              |       |                        |       |                          |       |
| Net income as reported                                                                            |       | $                           | 722,000    |                          | $          | 910,000 |   |
| Less: stock-based compensation  expense, net of related tax effects                               |       | (89,000                     | )          | (221,000                      | )          |
| Total stock-based employee compensation expense  determined under fair-value-based method for all |       |                        |       |                          |       |
| Pro forma net income                                                                              |       | $                           | 633,000    |                          | $          | 689,000 |   |
|                                                                                              |       |                        |       |                          |       |
| Basic earnings per share - as  reported                                                           |       | 0.08                        |       | 0.12                          |       |
| Diluted earnings per share -  as reported                                                         |       | 0.07                        |       | 0.09                          |       |
| Basic earnings per share - pro  forma                                                             |       | 0.07                        |       | 0.09                          |       |
| Diluted earnings per share -  pro forma                                                           |       | 0.06                        |       | 0.07                          |       |

 

9

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The assumptions used incalculating the fair value of options granted using the Black-Scholes option-pricing model are as follows:

 

| Expected life (years)   |   | 4.71 |   | 4.85 |   |
|-------------------------|--------|------|--------|------|--------|
| Risk-free interest rate |   | 4.75 | %      | 4.00 | %      |
| Dividend yield          |   | 0    | % and  | 0    | %      |
| Volatility              |   | 46   | % and  | 136  | %      |

 

**7.****                                      RelatedParty Transactions**

 

During the nine-monthsended December 31, 2004, the Company paid $28,000 to the previous stockholdersof MPI in connection with the property rent for the premises located in SantaClara, California.

 

**8.****                                      ListingHistory**

 

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

 

**9.****                                      Acquisitions**

 

On May25, 2004, the Company signed a definitive agreement for the acquisition ofMicrowave Power, Inc. (“MPI”), which was completed on June 18, 2004. MPIwas merged into the Company’s wholly owned subsidiary, with the subsidiary asthe surviving entity. The total consideration for the acquisition was$3,028,000. Pursuant to the acquisition agreement, 2,117,108 as considerationfor the acquisition and 21,174 shares to be issued to the broker werecommitted, or authorized for issuance by our board of directors, as of June 18,2004. There was no change in MPI’s management and the Company entered intoemployment agreements with two of MPI’s senior officers, its past President andSecretary. MPI will continue to operate as the Company’s division from itsfacility in Santa Clara, which is owned by MPI’s prior shareholders and leasedto the Company.

 

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 thatthe Company believes are complimentary and additive to those available to AMLprior to the acquisition.

 

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

 

10

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

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

 

Thepurchased intangible assets will be amortized over their useful lives, whichrange from three to twelve years.  Of the$1,670,000 of acquired intangible assets, $189,000 was assigned to patents (8year useful life), $961,000 was assigned to Existing Technology (12 year usefullife), and $339,000 was assigned to Customer Lists (3 year useful life). The balance of $181,000 was assigned to trademarks, having an indefinite life,and will be tested annually or on an interim basis for impairment.  We found no indication of impairment for theperiod ended December 31, 2004.

 

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

##### ** **

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

 

The following is information for the Company’s reportable segments for the three and nine months periods ended December 31, 2004:

 

**For the three months ended December 31, 2004**

 
| **(in thousands)**                                      | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 1,907      |    | $          | 376             |       | —    |       | $ | 2,284 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 895     |       | 243     |       | —          |       | 1,138     |       |
| Depreciation & amortization (Includes  intangibles) |       | 66      |       | 61      |       | —          |       | 127       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 26      |       | —  |       | —          |       | 26        |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 539     |       | 67      |       | —          |       | 606       |       |
| Profit from continuing Operations before tax            |       | $       | 264        |    | $          | 115             |       | —    |       | $ | 379 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                     |       | 2,969   |       | 3,677   |       | —          |       | 6,646     |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | 53      |       | 6       |       | —          |       | 59        |       |

 

11

 

**For the nine months ended December 31, 2004**

 
| **(in thousands)**                                      | ** ** | **AML** | ** ** | **MPI** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|---------|------------|---------|------------|-----------------|------------|-----------|------------|
|                                                    |       |    |       |    |       |            |       |      |       |
| Revenue                                                 |       | $       | 5,580      |    | $          | 760             |       | —    |       | $ | 6,340 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Gross Profit                                            |       | 2,370   |       | 487     |       | —          |       | 2,857     |       |
| Depreciation & amortization (Includes  intangibles) |       | 177     |       | 142     |       | —          |       | 319       |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Interest expense                                        |       | 83      |       | —  |       | —          |       | 83        |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Other, net                                              |       | 1,605   |       | 128     |       | —          |       | 1,733     |       |
| Profit from continuing Operations before tax            |       | $       | 505        |    | $          | 217             |       | —    |       | $ | 722 |   |
|                                                    |       |    |       |    |       |            |       |      |       |
| Identifiable assets                                     |       | 2,969   |       | 3,677   |       | —          |       | 6,646     |       |
|                                                    |       |    |       |    |       |            |       |      |       |
| Capital Expenditures                                    |       | 397     |       | 7       |       | —          |       | 404       |       |

 

TheCompany had one reportable segment for the three and nine month periods ended December 31,2003.

 

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

 

Threecustomers provided 33%, and 37%, of net revenue for the nine months ended December 31,2004 and 2003, respectively. Total accounts receivable due from these customerswas approximately $259,000 and $319,000 as of December 31, 2004 and 2003respectively.

 

The Companyextends credit to its customers based upon its assessment of their creditworthiness and generally does not require collateral. Credit losses have notbeen significant.

 

Threevendors accounted for 25% and 29% of the Company’s net purchases for the ninemonths ended December 31, 2004 and 2003, respectively. Total accountspayable due to these vendors was $2,000 and $63,000 as of December 31,2004 and 2003, respectively.

 

**12.****                               Reclassifications**

 

Certain comparativeamounts might have been reclassified to conform with the current year’spresentation.

 

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

** **

This filing containsforward-looking statements, which involve risks and uncertainties.  Our actual future results may differmaterially from the results discussed in the forward-looking statements.  When used in this report, the words “expects”“anticipates” and “estimates” and similar expressions are intended to identifyforward-looking statements. Factors that could cause actual results to differmaterially from those expressed in any forward-looking statement made by usinclude, but are not limited to:

 

12

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

•                  ourability to attract and retain qualified, knowledgeable employees;

•                  theimpact of general economic conditions on our business;

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

•                  thelimited number of potential customers for our products;

•                  thevariability in gross margins on our products;

•                  ourability to design and market new products successfully;

•                  ourfailure to acquire new customers in the future;

•                  deteriorationof business and economic conditions in our markets;

•                  intenselycompetitive industry conditions with increasing price competition; and

•                  therate of growth in the defense markets.

 

**Overview**

 

We arebased in southern California and design, manufacture, and market radiofrequency and microwave low noise and power amplifiers for a variety offrequency ranges and transmission protocols serving the defense microwave andwireless communications markets. Our defense industry products, whichrepresents approximately 90% of our sales, are used in radar and electronicwarfare equipment integrated into electronic systems for tactical aircraft,ships, ground systems, and missile systems. Our wireless products consist of anarray of low noise and power amplifiers serving the wireless, PCS, and two-waymessaging market, as well as Cellular Coverage Enhancement amplifiers.  These products, representing approximately10% of our sales, are sold to cellular operators and to original equipmentmanufactures. The demand for products manufactured by us and used in thedefense industry has been growing at a fast pace during the last 2 years and isexpected to continue to grow. This growth is attributable to an increase indemand for our products by government prime contractors, as well as to ourstrategy to acquire market share by offering leading edge products.  The demand for wireless products has seen arecent increase due to the competition among cellular operators and originalequipment manufactures to provide improved products and services. Our recentacquisition of Microwave Power, Inc. was part of a strategic move to complementour existing product line and expand our technology base. Our business iscurrently comprised of two reportable segments: amplifiers and related productsmanufactured and marketed through our operations in Camarillo, California, andhigh power microwave amplifiers manufactured and marketed through ouroperations in Santa Clara, California.

 

**Resultsof Operations**

** **

**ThreeMonths Ended December 31, 2004 Compared to Three Months Ended December 31,2003**

** **

*Net sales. *Net sales for the threemonths ended December 31, 2004 were $2.3 million, as compared to net salesof $2.0 million for the three months ended December 31, 2003, an increaseof 14.0%.  The increase in net sales isattributed to the higher volume of shipments in the defense related MIC(Microwave Integrated Circuits) products. MIC sales accounted for $2.1 million, or 89.9% of net sales for thethree months ended December 31, 2004, as compared to $1.7 million, or86.9% of net sales for the three months ended December 31, 2003.Additionally, the cellular wireless market produced $230,000 or 10.1% of netsales for the three months ended December 31, 2004, as compared to$263,000, or 13.2% of net sales for the three months ended December 31,2003.

 

*Gross profit. *Gross profit for the threemonths ended December 31, 2004 was $1,138,000 or 49.8% of net sales,compared to a gross profit of $956,000, or 47.7% of net sales for the threemonths ended December 31, 2003. Gross profit increased, as a percentage of net sales, as a result of thereturn of some high margin jobs from the wireless sector.

 

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*Selling, general andadministrative costs. *Selling,general, and administrative costs were $521,000, or 22.8% of net sales, for thethree months ended December 31, 2004, as compared to $349,000, or 17.4% ofnet sales, for the three months ended December 31, 2003.  The increase is mainly attributed toadministrative cost in connection with maintaining our Santa Clara facility,which we recently acquired.  We alsoreinstated board member fees, which, in previous years, had been waived due tolimited cash flows.

 

*Research and developmentcosts. *Research anddevelopment costs were $226,000, or 9.8% of net sales, for the three monthsended December 31, 2004, as compared to $177,000 or 8.8% of net sales, forthe three months ended December 31, 2003. The increase is attributed tothe growing engineering staff as we expand our development capabilities.

 

*Other expense, net. *Other expense was $12,000for the three months ended December 31, 2004, as compared to other expenseof $40,000, for the three months ended December 31, 2003.  This is attributed to the reduction ofinterest expense in direct correlation with the termination of our ReceivablesFinancing Agreement and switching to a standard line of credit coupled withinterest income realized from long-term cash investments that reached maturity.

 

*Provision for income taxes.*For the three months ended December 31, 2004, we recorded no provision forstate income taxes due to the utilization of loss carry forwards.  However, for the three months ended December 31,2003, we recorded a provision of $34,000 in state income taxes due to theCalifornia Franchise Tax Board suspending the utilization of loss carryforwards during that period.

 

*Net Income. *For the reasons set forthabove, we generated a net income of $379,000 for the three months ended December 31,2004, as compare to a net income of $356,000 for the three months ended December 31,2003.

 

**NineMonths Ended December 31, 2004 Compared to Nine Months Ended December 31,2003**

** **

*Net sales. *Net sales were $6.3 millionfor the nine months ended December 31, 2004, as compared to net sales of$5.3 million for the nine months ended December 31, 2003, an increase of20.0%. The increase in net sales is largely attributed to the higher volume ofshipments in the defense related MIC products. MIC sales accounted for $5.7 million, or 89.5% of net sales for the ninemonths ended December 31, 2004, as compared to $4.9 million, or 92.6% ofnet sales for the nine months ended December 31, 2003. The cellularwireless market produced $666,000, or 10.5% of net sales for the nine monthsended December 31, 2004, as compared to $392,000, or 7.4% of net sales forthe nine months ended December 31, 2003.

 

*Gross profit. *Gross profit was $2.9million, or 45.0% of net sales, for the nine months ended December 31,2004, as compared to $2.6 million, or 49.1% of net sales, for the nine monthsended December 31, 2003. Gross profit decreased, as a percentage of netsales, as a result of lower margins due to the Company’s aggressive pricingstructure in efforts to obtain a larger market share.

 

*Selling, general, andadministrative costs. *Selling,general and administrative costs were $1,467,000, or 23.1% of net sales, forthe nine months ended December 31, 2004, as compared to $993,000, or 18.8%of net sales, for the nine months ended December 31, 2003. The increase ismainly attributed to administrative cost in connection with maintaining ourSanta Clara facility, which we recently acquired.  We also reinstated board member fees, which,in previous years, had been waived due to limited cash flows. Additionally, weincurred an early termination fee upon canceling our Receivables FinancingAgreement with Silicon Valley Bank.

 

*Research and developmentcosts. *Research anddevelopment costs were $609,000, or 9.6% of net sales, for the nine monthsended December 31, 2004, as compared to $550,000, or 10.4% of net sales,for the nine months ended December 31, 2003.  The increase is attributed to the growingengineering staff as we expand our development capabilities.

 

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*Otherexpense, net. *Otherexpense was $59,000 for the nine months ended December 31, 2004, ascompared to other expense of $105,000 for the nine months ended December 31,2003. This is attributed to the reduction of interest expense in directcorrelation with the termination of our Receivables Financing Agreement andswitching to a standard line of credit coupled with interest income realizedfrom long-term cash investments that reached maturity.  Interest expense is $84,000 off-set by $25,000in interest income for the nine months ended December 31, 2004, as compareto interest expense of $105,000 for the nine months ended December 31,2003.

 

*Provision for income taxes. *For the nine months ended December 31,2004, we recorded no provision for state income taxes due to the utilization ofloss carry forwards.  However, for thenine months ended December 31, 2003, we recorded a provision of $88,000 instate income taxes due to the California Franchise Tax Board suspending theutilization of loss carry forwards during that period.

 

*Net Income. *For the reasons set forthabove, we generated a net income of $722,000 for the nine months ended December 31,2004, as compare to a net income of $910,000 for the nine months ended December 31,2003.

 

**Liquidityand Capital Resources**

** **

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

 

Between July 1,2000 and December 31, 2001, we entered into capital leases for the purposeof acquiring production and test equipment valued in aggregate at$740,000.  The terms of the leases rangefrom 36 months to 60 months and the interest charges range from 8.6% to 15.6%.The total amount remaining on the leases at December 31, 2004 is $64,000.

 

In December 2001,we received a loan of $50,000 from Dr. Tiberiu Mazilu, PhD, our officer anddirector.  The promissory note calls forquarterly interest payments to Dr. Mazilu commencing on September 30,2002, with the interest payment calculated quarterly and based on the primeinterest rate plus 1.25%.  The principalamount of the note is due on January 2, 2005 but would become due andpayable by us immediately upon the consolidation or merger of our Company intoanother entity, the death of Dr. Mazilu, or our termination of Dr. Mazilu’semployment with us. On November 2, 2004, the Board of Directors approvedthe early payoff of this note payable and the note was paid in full on November 9,2004.

 

In December 2002,we entered into a non-cancelable capital lease to acquire test equipment valuedin aggregate at approximately $50,000. The terms of the lease call for 36 equalmonthly payments of $1,699 commencing in December 2002 and at an annualinterest rate of 13.7%.

 

In July 2003,we raised $245,000 ($100,000 of which was a conversion from an advance receivedin June 2003) from current officers and directors and $43,000 from otherinvestors in the form of notes payable with warrants attached. The funds wereused for working capital. The promissory notes bear interest at the rate of 8%and have a two-year maturity. Warrants to purchase a total of 240,000 shares ofour common stock were issued in connection with the funding.  The per share exercise price of the warrantsis $0.24.  The warrants expire five yearsfrom the date of issuance.  We havevalued these warrants at $35,000 and are expensing this value over the term ofthe notes payable.  For the nine monthsended December 31, 2004, a total of $22,000 was charged to theconsolidated statement of operations. On November 2, 2004, the Board ofDirectors approved the early payoff of these notes payable and these notes werepaid in full on November 9, 2004.

 

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

 

At December 31,2004, we had a line of credit agreement with Bridge Bank with credit limit of$1,500,000, of which $1,000,000 may be used for cash advances against accountsreceivables and $500,000 may be used for equipment advances. At December 31,2004 we had an outstanding balance of $85,000 under this agreement.  Our ability to borrow under this agreementvaries based upon eligible accounts receivable and eligible equipmentpurchases.  We are obligated to pay thebank a finance charge at a rate per year equal to the prime rate, which in noevent shall be less than 4.00%, plus 2.0% with respect to cash advances and arate of such prime rate plus 3.5% with respect to equipment advances. We mustmaintain certain financial requirements, including net profit after tax, on aquarterly basis, of at least $0.01, and a debt service coverage ratio of atleast 1.25 to 1.00 with respect to equipment advances. We were in compliancewith these requirements at December 31, 2004; however, there is noassurance that we will be in compliance at future dates. This agreementterminates on July 7, 2005 or upon a date that the bank chooses toterminate the agreement.  Any unpaidbalance is due and payable pursuant to the agreement on the terminationdate.  If the agreement is terminatedwithin the first 12 months following its execution on July 6, 2004, wegenerally are required to pay a $15,000 fee to the bank.  At December 31, 2004, our remainingavailable borrowing capacity under this agreement was approximately $342,000.

 

At December 31,2004, we had $1,738,000 in cash and cash equivalents, as compared to cash andcash equivalents of $1,432,000 at December 31, 2003. Our operatingactivities provided cash of approximately $412,000, a result of increasedprofits due to higher revenues. Cash provided from investing activitiesamounted to $780,000, primarily as a result of the MPI acquisition, in whichcash received in the acquisition was $1,150,000 offset by $370,000 for the netpurchases of property and equipment. Cash used in financing activities was$431,000, which was a direct result of paying off $338,000 in outstanding notespayable and paying down on our lease obligations by $107,000 offset by $9,000in proceeds from warrants and $5,000 in proceeds for the line of credit. At December 31,2003, cash from operating activities was $786,000, a direct result of increasedsales during the first three quarters of the 2004 fiscal year, coupled withdecreased production and material costs in the nine months ending December 31,2003.

 

Ourprimary need for capital during the next twelve months, subject to change, isto fund anticipated capital expenditures of approximately $602,000 as well asour operations, which consist of our sales, marketing and administrativeactivities, working capital associated with increased product sales, andcontinued product design and development efforts. Our future liquidity willdepend on numerous factors, including the extent to which our present andfuture products gain market acceptance, the costs of sales, marketing and manufacturingactivities, the cost, timing and business management of current and potentialacquisitions and contingent liabilities associated with such acquisitions, andthe extent to which products under development are successfully developed.

 

Ourcurrent financial plan indicates that our available cash and cash equivalents,together with cash expected to be generated from future operations andborrowings expected to be available under our line of credit, which are subjectto our compliance with existing financial requirements, should be sufficient tofund our operations through 2005. If necessary, we may be required to raiseadditional capital in the future through one or more of the following: (1) saleof equity or debt securities; (2) obtaining new loans; or (3) sale of assets,products or marketing rights. There is no guarantee that additional capitalwill be available from these sources on acceptable terms, if at all, andcertain of these sources may require approval by existing lenders. If we cannotraise the additional funds through these options on acceptable terms or withthe necessary timing, management could also reduce discretionary spending todecrease our cash burn rate through actions such as delaying or cancelingproduct development projects or marketing plans. These actions would likelyextend the then available cash and cash equivalents, and then availableborrowings.

 

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**CriticalAccounting 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.

 

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

 

•             *Persuasive evidence of an arrangement exists;*

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

•             *Price is fixed or determinable; and*

•             *Collectibility is reasonably assured*

 

Revenuefrom the sale of products is generally recognized after both the goods areshipped to the customer and acceptance has been received, if required. Ourproducts are custom made for our customers, who primarily consist of originalengineer manufacturers (OEMs), and we do not accept returns. Our products areshipped complete and ready to be incorporated into higher level assemblies byour customers. The terms of the customer arrangements generally pass title andrisk of ownership to the customer at the time of shipment.

 

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

 

*Allowancefor Doubtful Accounts*. We maintain an allowance for doubtful accounts receivable based oncustomer-specific allowances, as well as a general allowance. Specificallowances are maintained for customers which are determined to have a highdegree of collectibility risk based on such factors, among others, as: (i) theaging of the accounts receivable balance; (ii) the customer’s past paymentexperience; or (iii) a deterioration in the customer’s financial condition,evidenced by weak financial condition and/or continued poor operating results,reduced credit ratings, and/or a bankruptcy filing. In addition to the specificallowance, the Company maintains a general allowance for all its accountsreceivables which are not covered by a specific allowance. The generalallowance is established based on such factors, among others, as: (i) the totalbalance of the outstanding accounts receivable, including considerations of theaging categories of those accounts receivable; (ii) past history ofuncollectible accounts receivable write-offs; and (iii) the overallcreditworthiness of the customer base. A considerable amount of judgment isrequired in assessing the realizability of accounts receivables. Should any ofthe factors considered in determining the adequacy of the overall allowancechange, an adjustment to the provision for doubtful accounts receivable may benecessary.

 

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

 

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

 

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

 

**AdditionalFactors That May Affect Future Results**

** **

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

 

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

 

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

 

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

 

•                                          ourability to accurately anticipate customer demand;

 

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

 

•                                          theavailability and cost of components;

 

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

 

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

 

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

 

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

 

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Weexperience significant price competition and expect price competition in thesale 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 to offer new and existingproducts at prices necessary to gain or retain market share. Several of ourcompetitors have substantial financial resources, which may enable them towithstand sustained price competition or a downturn in the pricing of theirproducts in the future. Substantially all of our competitors have, andpotential future competitors could have, substantially greater technical,marketing, distribution and other resources than we do and have, or could have,greater name recognition and market acceptance of their products andtechnologies.

 

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

 

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

 

**Item3.**           Controls andProcedures

** **

(a)  *Evaluation of disclosurecontrols and procedures*. As of the end of the period covered by thisreport (the Evaluation Date), we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Director of Finance, of the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rule13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, theChief Executive Officer and Director of Finance concluded that as of theEvaluation Date, our disclosure controls and procedures were effective intimely alerting them to material information relating to us required to beincluded in our periodic SEC filings.

 

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

 

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#### **PART II – OTHER INFORMATION**

#### ** **

**Item 1.  Legal Proceedings**

** **

**NotApplicable**

** **

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

** **

**On August 20,2004, we filed a quarterly report on Form 10-QSB disclosing that we had issued2,117,362 shares of our common stock to shareholders of MPI for a totalconsideration of $3,028,000, and 20,090 shares to a business broker inconnection with the acquisition of MPI. In that report, the number of sharesand the date of the issuance of the shares was incorrectly reported. Pursuantto the acquisition agreement, 2,117,108 shares as consideration for theacquisition and 21,174 shares to be issued to the broker were committed, orauthorized for issuance by our board of directors, as of June 18, 2004.The closing of the acquisition of MPI occurred on June 18, 2004. See Note9 to the Financial Statements under Part I, Item 1 for a more detaileddescription of the acquisition.**

** **

BetweenJuly 19, 2004 and August 3, 2004, we issued 2,117,108 shares of ourcommon stock to shareholders of MPI as consideration for the acquisition, and21,174 shares of our common stock to Reuven Sadeh as finder’s fees pursuant tothe acquisition agreement. These transactions were effected under Section 4(2)of the Securities Act of 1933, as amended. There were no other shares ofunregistered common stock issued by us for the three month period ended September 30,2004 and there were no shares of unregistered common stock issued by us for thethree month period ended December 31, 2004.

 

Therecipients of securities in the above-described transactions represented theirintention to acquire the securities for investment only and not with a view toor for sale in connection with any distribution thereof and appropriate legendswere affixed to the share certificates and other instruments issued in suchtransaction. The recipients either received adequate information about us orhad access, through other relationships, to such information.

 

**Item 3. Defaults Upon Senior Securities**

** **

**NotApplicable**

** **

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

** **

NotApplicable

 

**Item 5.****           OtherInformation**

 

**Notapplicable**

** **

**Item 6.**           Exhibits

** **

(a)                                            Exhibits

 
| 2.1  | Merger Agreement  entered into as of May 25, 2004 by and among AML Communications, Inc., a  Delaware corporation, AML Holdings, LLC, a California limited liability  company and 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                                                                                                                                         |

 

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|   | Inc.(6)                                                                                                                                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9   | Accounts  Receivable Purchase Modifications Agreement dated September 24, 2003  between Silicon Valley Bank and AML Communications (7)                                                         |
| 10.10  | Form of  Promissory Note date July 16, 2003 between the Company and the  following: Jacob Inbar, Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M.  Hawkins, and The Oliver Family Trust (7) |
| 10.11  | Form of Warrant  dated July 16, 2003 between the Company and the following: Jacob Inbar,  Tiberiu Mazilu, Edwin McAvoy, Gerald Starek, Bob M. Hawkins, and The Oliver  Family Trust (7)        |
| 10.12  | Fourth Amended  and Restated 1995 Stock Option Agreement at June 10, 2002 (8)                                                                                                                  |
| 10.14  | Parr-Bohn  Properties First Amendment to lease of 1000 Avenida Acaso, Camarillo, CA. (8)                                                                                                            |
| 10.15  | Employment  Agreement with Dr. Marina Bujatti, of MPI, dated June 18, 2004. (8)                                                                                                                |
| 10.16  | Employment  Agreement with Dr. Franco Sechi, of MPI, dated June 18, 2004.(8)                                                                                                                   |
| 10.17  | Interim Lease  and Proposed Lease Terms (9)                                                                                                                                                         |
| 10.18  | Financing  Agreement dated July 8, 2004 with Bridge Bank.(10)                                                                                                                                  |
| 10.19  | Enterprise  Agreement Number 4627 dated August 26, 2004 (11) *                                                                                                                                 |
| 31.1   | Certification of  Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                   |
| 31.2   | Certification of  Director of Finance Pursuant to 302 of the Sarbanes-Oxley Act of 2002 (12)                                                                                                        |
| 32.1   | Certification of  Chief Executive Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002  (12)                                                                                                   |
| 32.2   | Certification of  Director of Finance Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (12)                                                                                                        |

 

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| *      | Confidential  treatment requested as to certain portions, which portions were omitted and  filed separately with the Securities and Exchange Commission.                                            |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                |
| (1)    | Previously filed  with the Securities and Exchange Commission as Exhibit 10.13 to the Company’s  Form 10-KSB for the fiscal year ended March 31, 2004.                                    |
| (2)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Registration  Statement on Form SB-2 No. 33-99102-LA and incorporated herein by reference.                       |
| (3)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-KSB for fiscal year ended March 31, 1996 and incorporated herein  by reference.     |
| (4)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 1999 and incorporated  herein by reference.  |
| (5)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended September 30, 2000 and incorporated  herein by reference. |
| (6)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 2001 and incorporated  herein by reference.  |
| (7)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended December 31, 2002 and incorporated  herein by reference.  |
| (8)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-KSB for the fiscal year ended March 31, 2004.                                       |
| (9)    | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 8-K dated July 6, 2004.                                                                |
| (10)   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 10-QSB for the quarter ended June 30, 2004.                                            |
| (11)   | Previously filed  with the Securities and Exchange Commission as an exhibit to the Company’s  Form 8-K dated September 1, 2004.                                                           |
| (12)   | Filed herewith.                                                                                                                                                                                     |

 

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#### **SIGNATURES**

#### ** **

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

 
|   |                    | AML Communications,  Inc.                                     |
|--------|-------------------------|---------------------------------------------------------------|
|   |                    |                                                          |
|   |                    |                                                          |
| Date:  | February 14,  2005 | /s/ Jacob Inbar                                               |   |
|   |                    | Jacob Inbar                                                   |
|   |                    | Chairman of the Board, President  and Chief Executive Officer |
|   |                    |                                                          |
|   |                    |                                                          |
| Date:  | February 14,  2005 | /s/ Susan J.  Fite                                            |   |
|   |                    | Susan J. Fite                                                 |
|   |                    | Director of Finance and  Principal Accounting Officer         |
|        |                         |                                                               |  |  |

 

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