10KSB/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB/A

Amendment No. 2

x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES ACT OF 1934

For the fiscal year ended December 31, 2004

o     TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ to _____

Commission file number 0-19944
M~WAVE, Inc.
(Name of small business issuer in its charter)
Delaware	36-3809819
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)
475 Industrial Drive, West Chicago, Illinois	60185
(Address of principal executive office)	(Zip Code)
Registrant's telephone number, including area code	(630) 562-5550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.005 par value)
(Title of class)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter 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 x No o.

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Our revenue for the year ended December 31, 2004 was $17,461,858.

The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of April 13, 2005 was approximately $7,683,000, computed on the basis of the last reported sale price per share ($1.29) of such stock on the NASDAQ Small Cap Market.

The Registrant has 5,956,180 common shares outstanding at April 15, 2005.

EXPLANATORY NOTE

            On May 25, 2005, M-Wave, Inc. filed Amendment No. 1 to our Annual Report on Form 10-KSB fo the year ended December 31, 2004 to amend and restate the certifications filed as Exhibits 31 and 32 in response to comments of the Staff of the Securities and Exchange Commission in connection with its review of such report.  In response to a follow-up request from the Staff of the Securities and Exchange Commission, we are now filing this Amendment No. 2 to our Annual Report on Form 10-KSB for the year ended December 31, 2004, to file the entire Annual Report in one amendment, together with the revised certifications filed as Exhibits 31 and 32 in Amendment No. 1.

            This Amendment No. 2 does not affect the original financial statements or footnotes as originally filed.  This Amendment No. 2 does not reflect events that have occurred after the original filing of the Annual Report on Form 10-KSB filed on April 15, 2005 or Amendment No.1 filed on May 25, 2005 and does not modify or update the disclosures in the Annual Report on Form 10-KSB as filed in any way except with regard to the specific modifications described in this Explanatory Note.

            This Amendment No. 2 should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the original Annual Report on Form 10-KSB.  

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

M~WAVE, Inc.

By:  /s/  Jim Mayer

Jim Mayer

Chief Executive Officer

July 28, 2005

DOCUMENTS INCORPORATED BY REFERENCE

Applicable portions of the Proxy Statement for the Annual Meeting are incorporated by reference in Part III of this Form.

Transitional Small Business Disclosure Format (check one):

Yes o No x

	M~WAVE, INC.
	FORM 10-KSB
	TABLE OF CONTENTS
Part I		Page
Item 1.	Description of Business.................................................................	7
Item 2	Description of Property..................................................................	13
Item 3.	Legal Proceedings..........................................................................	14
Item 4	Submission of Matters to a Vote of Security Holders...................	14
Part II
Item 5.	Market for Common Equity and Related Stockholder Matters and   Small Business Issuer Purchases of Equity Securities.............	15
Item 6.	Managements Discussion and Analysis of Financial Condition   and Results Of Operations...........................................................	16
Item 7.	Financial Statements....................................................................	21
Item 8.	Changes in and Disagreements with Accountants on Accounting   and Financial Disclosure............................................................	42
Item 8A.	Controls and Procedures................................................................	42
Item 8B.	Other Information..........................................................................	42
Part III
Item 9.	Directors and Executive Officers of the Registrant......................	43
Item 10.	Executive Compensation...............................................................	43
Item 11.	Security Ownership of Certain Beneficial Owners and   Management and Related Stockholder Matters.........................	43
Item 12.	Certain Relationships and Related Transactions........................	43
Item 13.	Exhibits..........................................................................................	44
Item 14.	Principal Accountant Fees and Services......................................	45
Signatures................................................................................................................................		46

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.  All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report are forward looking.  We use words such as “anticipates,” “believes,” “expects,” “future,” and “intends” and similar expressions to identify forward-looking statements.  Forward-lo oking statements reflect management’s current expectations, plans or projections and are inherently uncertain.  Actual results could differ materially from management’s expectations, plans or projections.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations are described in the section entitled “Risk Factors.”  This section, along with other sections of this Annual Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations.  We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated even ts.  Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.

6

PART I

In this report, the terms “M~Wave,” “Company,” “we,” “us,” and “our” refer to M~Wave, Inc. and its subsidiary M-Wave DBS, Inc.

Item 1. Description of Business

M~Wave, Inc. was incorporated in Delaware in January 1992. Our executive offices are located at 475 Industrial Drive, West Chicago, Illinois, 60185, and our telephone number is (630) 562-5550; our website is http://www.mwav.com. Presently, SEC filings are not available on our website but, if requested, we will provide electronic or paper copies of SEC filings free of charge.

On July 22, 2004 we officially merged our subsidiary, Poly Circuits, Inc. into M-Wave, Inc., under the name of M-Wave, Inc., with M~Wave, Inc. surviving the merger.

Current Events

On February 25, 2005 M-Wave, Inc. through its wholly owned subsidiary, M-Wave DBS, Inc., an Illinois corporation purchased substantially all of the assets of Jayco Ventures Inc. (JVI), for approximately $1,360,000.    

M-Wave DBS, Inc. D/B/A JVI Technologies (JVI) is a virtual manufacturer and global supplier to the Digital Broadcasting Satellite (DBS) industry that includes a growing number of proprietary product lines including the TrunkLine Millenium® commercial SMATV head end gear, JVI L-Band passive splitters and multi-switches, Treadclip plastic fasteners, Signaloc® meters used in DBS installations and the Kompressor® universal RF connector line.

JVI holds patents on the Treadclip products; a patent pending on a quad port ground block and the Kompressor line for the open and closed configurations.  Since the inception of DBS in 1991, JVI has been providing quality products to the DBS industry and has responded to the continual technological evolution of it and has met the specifications required by DIRECTV®, DISH NETWORK®, SKY®, STAR CHOICE®, and other global satellite providers.

JVI serves the home service providers for DIRECTV such as Ironwood Communications which represents approximately 20% of forecasted sales for JVI, Mastec/Advanced Technologies at 16% of forecasted sales and Direct Tech at 10% of forecasted sales. National distributors such as DSI Systems are forecasted at about 4% of sales and commercial installations such as Muzak about 3% of sales.

Direct competitors to JVI in the DBS market include Pro Brand International, Applied Telecom and Blonder Tongue.  JVI distinguished itself from competitors by proprietary products and commitment to value added services. Currently JVI has 15 employees based out of Fort Lauderdale, FL.

Concurrently with the acquisition, M-Wave will split into two operating units.  The Company's existing printed circuit board and related custom component business will become known as M-Wave EMG [Electro-Mechanical Group].   Concurrently, Robert Duke, Vice President of Corporate Sales, was named President-EMG division.  Jason Cohen, former CEP of JVI, was hired as President-DBS division.

We financed the transaction with a portion of $1,550,000 in proceeds from the issuance on February 23, 2005 of $1,550,000 aggregate principal amount of promissory notes and warrants to purchase as aggregate of 434,783 shares of common stock. The issuances were made to Mercator Momentum Fund, L.P., Monarch Pointe, Ltd., and M.A.G. Capital, LLC (formerly Mercator Advisory Group, LLC), all of which are related entities. We paid fees totaling $35,000 to M.A.G. Capital, LLC in connection with the financing.  The warrants have a term of three years with an exercise price of $1.15 per share.

The promissory notes accrue interest at 10% per annum and have a term of 18 months. Upon sale of our real property at 215 Park Street, Bensenville, Illinois, we are required to prepay an aggregate of $325,000 under the promissory notes.

To provide working capital to support the acquisition of JVI, M-Wave has additionally reached an agreement in principle with its primary lender, Silicon Valley Bank.  This agreement with Silicon Valley Bank will allow M-Wave to finance additional accounts receivable, and improve its advance rates on inventory funding, thereby increasing M-Wave's borrowing capacity by $1.5 million under its existing credit agreement, increasing the total credit limit to $6 million.  

7

Business

The Company

We are a value added service provider of high performance printed circuit boards used in a variety of digital and high frequency communications applications for a variety of telecommunications and industrial electronics applications. We satisfy our customers’ requirements for telecommunications and industrial electronics printed circuit boards, either rigid, flexible or bonded, by directly booking orders, supervising and inspecting outsourced manufacture of such boards through its global base of production partners located in China and Southeast Asia, and domestically, through American Standard Circuits, Inc. (ASC) or other pre-screened production partners.

Our business model is referred to as Virtual Manufacturing. Through Virtual Manufacturing we contractually supply a wide range of printed circuit board needs of our customers, creating a “pipeline” between those customers and production that covers early prototypes and pilot production, directly into mass production, offering one seamless source. We deliver products when our customers need them through consignment inventory control, demand pull, just in time, in plant storehouses, supplier or vendor managed inventory and other supply-chain programs.

We began Virtual Manufacturing during 2000 by developing subcontracting relationships with predominately Asian global manufacturers, from our base in Singapore. The relationship with ASC extends this approach domestically to replace our former actual manufacturing activities. In virtual manufacturing, we assume many of the pre and post-production services of a manufacturer, while outsourcing the physical processes either adjunct to our personnel or in relatively close proximity to assure the highest quality fulfillment.

Our manufacturing partners maintain most certificates for quality, environmental and safety, including ISO, QS, UL, CE and others. We and our manufacturing partners have a reputation for timely fulfillment of orders that are competitively priced, shipped from modern plants operating with the highest standards of worker and environmental safety both within and outside of the United States.

We market our products through regional sales managers supported by independent sales organizations.  Our base of approximately 100 customers represents a highly sophisticated group of purchasers.   

In the fourth quarter of 2004, we started to solicit new orders and extend our product lines to include custom or engineered electronic products sourced from Asia on behalf of existing accounts. These products are sourced and imported on a pan-Asian basis and cover a broad range of components that include LED’s, wire bonding services, harnesses, extruded housing products, and other customer specific products.  This effort has been geared toward diversifying and increasing our overall margins. Initially, we solicited existing customers, but we also intend to solicit new accounts.

8

Industry and Market

There is a concentrated and significant market for “radio frequency”, or RF-related printed circuit boards and bonded assemblies associated primarily with wireless communications. In addition, there is a very large and varied market for lower to high technology digital circuit boards. The technology ranges between dual-sided circuit boards associated with applications like signaling or lighting devices to 20-plus layer boards with complex circuitry requirements associated with medical or military applications.

Within both customer types there has been an “outsourcing” trend whereby many end users have reduced their internal assembly of printed circuit boards and bonded assemblies and moved to buying these products from “contract manufacturing” shops. But within outsourcing, the domestic U.S. market has evolved to associate itself with pre-production short runs, prototypes, and niches while mass production has largely migrated to Asia.  The total domestic market for printed circuit boards has shrunk dramatically since 1999, and is now about $2 billion according to our estimates.

As described above, we started offering custom and engineered electronic products near the end of 2004. The global sourcing of other custom and engineered products allied with printed circuit boards is a growing niche as many small and middle market contract manufacturers or original equipment manufacturers seek alternative sourcing to U.S. production only.

Customers and Marketing

Our customers are highly varied and include both contract manufacturers (CM’s) and original equipment manufacturers (OEM’s) of specific products, both within the telecom sector and in a wide range of other diverse industries including electronic warning devices, irrigation equipment and automotive consumer components. We market our products through regional sales managers supported by 20 independent sales organizations. We currently service approximately 100 customers.

The sale of microwave printed circuit boards is technical in nature.  We work with customer personnel who are frequently experts in microwave design and theory with added expertise in fabrication and design techniques for printed circuit boards. Typically, microwave system manufacturers provide us with fabrication details and guidelines. We have the products fabricated to customer specifications.  

We have adopted a program of early supplier involvement as part of its sales strategy.  We have the opportunity to design-in our manufacturing processes as a means of reducing the cost of microwave systems.  The emphasis upon a partnership underlies our relationship with our customers.

In 2004, sales within our RF product line was attributable to five main customers, which represented approximately 90% of sales in this product line in 2004.  Sales within our digital product line are attributable to five key customers, which represented approximately 58% of yearly sales in this product line in 2004.  The loss of, or a substantial reduction in or change in the mix of orders would have a material adverse effect on our results of operations and financial condition.  We continue to vigorously pursue a strategy of being a source to a broader base of customers and intend to seek to be one of a few key suppliers rather than the sole supplier.

As of December 31, 2004, we had an order backlog of approximately $2,413,000 compared to $1,763,000 at December 31, 2003.  Most of our backlog is subject to cancellation or postponement without significant penalty.  This backlog is not necessarily indicative of our future results of operations or prospects.

Products and Production

We have exited direct domestic manufacturing by using operating and strategic partnerships with ASC and Asian printed circuit board manufacturers.  ASC and our Asian partners manufacture to our specifications and under our review from management based in Chicago and Singapore.

On February 3, 2004 we entered into a Strategic Operating Alliance (SOA) agreement with ASC. Under the SOA agreement, within the West Chicago facility, production will transition from M~Wave to ASC.   The result of the SOA agreement is that both production and domestic sales will be carried out within the same facility with joint tenants M-Wave and ASC.  This agreement is the basis for Virtual Manufacturing described below.  On December 31, 2004, we amended the SOA agreement, effectively dissolving the LLC.  Terms of the amendment provided us approximately $340,000 in purchase credits to be amortized over the remaining life of the SOA, and approximately $50,000 in cash which was received in February 2005.  In addition, the parties each exchanged a piece of equipment and we also provided ASC with raw materials to be used in the manufacturing process that we no longer required.  Th e SOA remains in effect until August 31, 2006.

As a result of the execution of the SOA agreement, we transferred most of the risks of manufacturing including raw material acquisition, process controls, scrap, quality control, warranty expenses, human resources productivity, working asset absorption and plant failure to ASC. This allows us to move with greater flexibility as a marketing and service firm. We gear ourself to market conditions to gain sales otherwise imprudent and outsource these using the VM approach. We believe the SOA will offset some of the risks associated with both decline of domestic markets and prices.  Internationally, we are positioned to derive sales increasingly from its Asian VM activities, assisting U.S.  companies in identifying and entering into offshore mass production activities. We may not be successful under our new business model as we compete increasingly with brokers, distributors, and some manufacturers who adopt similar strategies.

9

Virtual Manufacturing

We out-source the manufacture of printed circuit boards as part of our Virtual Manufacturing process to unaffiliated manufacturers.  Many of these suppliers are ISO 9000 certified.  We believe that we maintain good business relationships with our unaffiliated manufacturers.

Our purchase orders are executed in United States dollars in order to maintain continuity in our pricing structure and to limit exposure to currency fluctuations.

Quality assurance is particularly important to our strategy and our product shipments are required to satisfy quality control tests established by our internal product design and engineering department.  We typically perform quality control inspections prior to shipment of printed circuit boards to our customers. We warrant most printed circuit boards to our customers with a money-back guarantee for printed circuit boards and components.  We also pass back the costs of the printed circuit boards to our suppliers and share in the cost of components with them.

Competition

The market for our services is highly competitive. We compete for customers primarily on the basis of quality and on time delivery of products and our technical support. We face substantial competition from many companies, including many that have greater financial and other resources, broader product lines, greater customer service capabilities and larger and more established customer bases. Alternative methods of manufacturing microwave-related boards exist, including ceramic and thick-film technologies.  Also, new materials are being introduced that are not Teflon™-based and are easier to manufacture.  These materials fit within existing manufacturing capabilities of other board shops.  Increased competition could cause us to lose market share and/or accel erate the decline in the prices of our services.  These factors could have a material adverse effect on our results of operations and financial condition.

Dependence on Domestic and Overseas Manufactures

We are dependent upon unaffiliated domestic and foreign companies for the manufacture of printed circuit boards as part of our Virtual Manufacturing process.  Our arrangements with manufacturers are subject to the risks of doing business, such as import duties, trade restrictions, production delays due to unavailability of parts or components, transportation delays, work stoppages, foreign currency fluctuations, political instability and other factors, such as satisfaction of our delinquent liabilities with certain overseas vendors, which could have an adverse effect on our business, financial condition and results of operations.  We believe that the loss of any one or more of our suppliers would not have a long term material adverse effect on our business, financial condition and results of operations because other manufacturers would be able to increase production to fulfill its requirements.  However, the loss of ce rtain suppliers, could adversely affect our business in the short term, until alternative supply arrangements were secured.  

Environmental Regulations

The industry in which we operate is subject to environmental laws and regulations concerning, among other things, emissions into the air, discharges into waterways, the generation, handling and disposal of waste materials and certain record-keeping requirements.  Our former manufacturing operations periodically generated and handled materials that are considered hazardous waste under applicable law and contracted for the off-site disposal of these materials.  During the ordinary course of our former manufacturing operations, we received citations or notices from regulatory authorities that such operations may not be in compliance with applicable environmental regulations.  Upon such receipt, we worked with authorities to resolve the issues raised by such citations or notices.  Our past expenditures relating to environmental compliance have not had a material effect on our financial position or results of oper ations.  We believe that the overall impact of compliance with regulations and legislation protecting the environment will not have a material effect on our future financial position or results of operations, particularly since we no longer manufacture products, although we can provide no assurance that any environmental laws and regulations will not have such a material effect.

10

Patents

Due to rapidly changing technology, we believe our success depends in part upon the engineering, marketing, manufacturing and support skills of its personnel, rather than upon patent protection.  We developed the Flexlink™ process, the bonding of materials with dissimilar coefficients of thermal expansion, and the fusion bonding of Teflon-based laminate for multi-layer circuit fabrication.  We developed an enhanced version called Flexlink II™ in 1995.  We received patent grants for Flexlink ™ and Flexlink II™ in 1993, 1994, and 1995.  We currently use Flexlink II™ in our bonding process associated with RF applications.

We were granted three patents in 1998.  Two patents were granted for a printed circuit board process using plasma spraying of conductive metal.  The plasma spraying process eliminates a significant portion of the wet process currently used to produce printed circuit boards.  

Employees

On December 31, 2004, we had approximately 23 full-time employees, compared to 57 on December 31, 2003.  The significant decrease from 2003 reflects the termination and subsequent hiring by American Standard Circuits under the terms of the Strategic Operating Alliance.

None of our employees are represented by a labor union and we have never experienced a work stoppage, slowdown or strike.  We consider our labor relations to be very good.

Risk Factors

You should carefully consider the following factors that may affect our business, future operating results and financial condition, as well as other information included in this prospectus. The risk and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

We have experienced fluctuations in quarterly operating results which have resulted in losses the past two fiscal years.

Our quarterly results of operations are subject to significant variation for a variety of reasons, including the following:

·        The timing and volume of our customers' orders;

·        Price and competition;

·        Changes in mix of products we sell, between higher-margin, lower-volume products for digital applications and lower-margin, higher-volume products for RF applications; and

·        Demand for the products or the procurement and supply-chain services that we provide.

Each of these factors has had in the past, and may have in the future, an adverse effect on our quarterly operating results. In fact, we have sustained operating losses in fiscal years 2003 and 2004, as reflected in our financial statements included herein. Any inability to adjust spending quickly enough to compensate for any revenue shortfalls may magnify the adverse impact of such revenue shortfalls on our results of operations. As a result, our operating results may vary significantly from one quarter to the next.

For 2004, our sales were approximately $17.5 million, an increase of 23% over $14.2 million in sales for 2003. Net loss attributable to common shareholders in 2004 was $2.2 million, or $(0.49) per share, compared with a net loss attributable to common shareholders of $12.0 million, or ($2.71) per share, in 2003. We can not assure that these results will continue in future periods.

11

OUR LIQUIDITY AND CAPITAL RESOURCES ARE LIMITED.

Our ability to fund working capital and anticipated capital expenditures will depend on our future performance, which is subject to general economic conditions, financial conditions, our customers, actions of our domestic and international competitors, and other factors that are beyond our control. Our ability to fund operating activities is also dependent upon our ability to effectively manage our expenses in relation to revenues, and our ability to access external sources of financing. Based upon the current level of operations and anticipated growth, we believe that the net proceeds received from our July 2004 sale of Series A Preferred Stock and warrants, our proceeds received from the $1.5 million in debt financing subsequently used to purchase the assets of Jayco Ventures, Inc., the $6.0 million secured, asset-based credit line with Silicon Valley Bank, together with future cash flow from operations,  proceeds from a potential sale of the Bensenville facility and funds from external sources of debt financing, will be adequate to meet our anticipated liquidity requirements over the next 12 months. There can be no assurances that our operations and access to external sources of financing will continue to provide resources sufficient to service our indebtedness after satisfying liabilities arising in the ordinary course of business.

As a result of our restructuring and our credit history, we have limited credit terms available to us from our suppliers, which increases our reliance on bank financing and other financing and internal working capital to fund our operations.

WE RECENTLY CONVERTED FROM A MANUFACTURING BUSINESS TO A SERVICE PROVIDER.

In 2003 and 2004, we restructured our operations to move out of direct manufacturing and sold our assets related to manufacturing, including our plant and equipment located in West Chicago, Illinois. We changed our business model, becoming a value-added intermediary and service provider of high-performance printed circuit boards used in a variety of digital and RF applications for telecommunications and industrial electronics applications. We satisfy our customers' requirements for telecommunications and industrial electronics application by outsourcing and coordinating the manufacture of such boards through a base of suppliers located domestically and in the Far East. If our services and new business model do not gain sufficient positive market acceptance, we may not achieve anticipated revenue, profits or continued viability. We are now fully dependent on third-party manufacturers and have no manufacturing capability of our own.

IN THE PRINTED CIRCUIT BOARD MARKET, WE ARE SUBJECT TO INTENSE COMPETITION.

We provide our services strictly to customers that are seeking to purchase high-quality printed circuit boards. The market for printed circuit boards is extremely competitive, particularly with respect to price, and we expect such competition to increase. The market for such products is sensitive to new product introductions or enhancements and marketing efforts by our competitors. We expect to experience increasing levels of competition in the future. We may not be able to establish and maintain our competitive position against current or potential competitors, which could cause our sales and profitability to fail to meet expectations.

WE ARE DEPENDENT ON A SMALL NUMBER OF MAJOR CUSTOMERS.

Our five largest customers in the RF product line accounted for 90% of our net sales in 2004 and our top five customers in our digital product line accounted for 58% of our net sales in 2004. We expect that a small number of customers will continue to account for a substantial majority of our sales and that the relative dollar amount and mix of products sold to any of these customers can change significantly from year to year. There can be no assurance that our major customers will continue to purchase products from us at current levels, or that the mix of products purchased will be in the same ratio. The loss of our largest customer or a change in the mix of product sales would have a material adverse effect on our business and financial condition.

12

WE ARE DEPENDENT ON A SMALL NUMBER OF DOMESTIC AND OVERSEAS MANUFACTURERS.

We are dependent upon unaffiliated domestic and foreign companies for the manufacture of printed circuit boards as part of our Virtual Manufacturing process. Our arrangements with manufacturers are subject to the risks of doing business, such as import duties, trade restrictions, production delays due to unavailability of parts or components, transportation delays, work stoppages, foreign currency fluctuations, political instability and other factors, such as satisfaction of our delinquent liabilities with certain overseas vendors, which could have an adverse effect on our business, financial condition and results of operations. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on our business, financial condition and results of operations because other manufacturers would be able to increase production to fulfill our requirements. However, the loss of certain suppliers, could, in the sh ort-term, adversely affect our business until alternative supply arrangements were secured.

OUR SUCCESS DEPENDS ON THE EFFORTS OF KEY MANAGEMENT.

We believe our success depends to a great degree upon the continued contributions of our key management, many of whom would be difficult to replace. In particular, we believe that our future success depends on Jim Mayer, our Chief Executive Officer, and Joseph A. Turek, our President and Chief Operating Officer. Mr. Mayer was the "architect" of our restructuring in 2003 and 2004, which continues to be implemented. Mr. Turek provides significant sales and engineering expertise. We presently do not maintain key person life insurance on Messrs. Mayer or Turek. If we experience the loss of the services of any of our key personnel, we may be unable to identify, attract or retain qualified personnel in the future, making it difficult to manage our business and meet key objectives, or achieve or sustain profits.

SINCE OUR COMMON STOCK IS THINLY TRADED, IT CAN BE SUBJECT TO EXTREME RISES OR DECLINES IN PRICE, AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID.

You may have difficulty reselling shares of our common stock. You may not be able to resell your shares at or above the price you paid, or at a fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company.

Item 2. Description of Property 

On February 3, 2004 we sold our West Chicago facility to an affiliate of ASC for a cash price of $2,000,000.  We lease a portion of the West Chicago facility to maintain the offices from which we operate our domestic and international Virtual Manufacturing, supply chain management, and consulting business in close proximity to the domestic manufacturing being performed for our customers by ASC.

We continue our efforts to sell the plant and improvements located in Bensenville, Illinois. The assets being held for sale include separate parcels of land and buildings, both located in Bensenville, and are carried at a fair market value of approximately $746,000.

13

Facilities

The following table lists our facilities at December 31, 2004:

Location	Function	Square Feet	Lease Expiration Date
West Chicago, Illinois	Administrative	5,000	Leased-August 31, 2006
West Chicago, Illinois	Warehouse	8,000	Leased-August 31, 2006
Bensenville, Illinois	For Sale	14,000	Owned

Item 3. Legal Proceedings

We are not party to any litigation which is material to our business or financial condition.

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

No Annual or Special Meeting of Stockholder’s was held during the fourth quarter of 2004.

14

Part II

Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Small Cap Market (trading symbol MWAV).  The following table sets forth, for the calendar periods indicated, the range of the high and low sales prices (for 2003, the last reported sales prices) of the common stock from January 1, 2003 through December 31, 2004 as reported by the NASDAQ.

	Year Ended December 31
	2004		2003
	Low	High	Low	High
First Quarter	$ 0.51	$ 5.00	$  0.78	$1.49
Second Quarter	1.10	4.15	0.43	1.00
Third Quarter	0.85	1.86	0.60	1.10
Fourth Quarter	1.01	2.78	0.45	1.00

As of March 31, 2005, there were approximately 700 shareholders of record owning our common stock.  We did not pay any dividends on our common stock in 2003 or 2004 and we intend not to pay dividends in the foreseeable future in order to reinvest future earnings in the business.

Disclosure Regarding the Company’s Equity Compensation Plans

The following table summarizes information about equity awards under the 1992 Stock Option Plan and the 2003 Stock Incentive Plan as of December 31, 2004.

Plan Category	Number of shares of Common Stock to be Issued upon exercise of Outstanding Options	Weighted Average Exercise Price  of Outstanding Options	Number of Shares of Common Stock Available for Future Issuances
Equity compensation   plans approved by   security holders	1,295,050	$2.07	152,600
Equity compensation   plan not approved   by security holders	104,167	$1.35	0
Total	1,399,217	$2.00	152,600

On December 31, 2004 we issued 104,167 options to the owner of ASC, with an exercise price of $1.35 per share, which were fully vested upon issuance and expire on December 31, 2008. The options are valued at $136,753 under the Black-Scholes Option Pricing Model, and were recorded as an increase to additional paid-in capital and recognized as stock compensation expense immediately upon issuance.

15

Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operation

A.    Plan of Operation

B. RESULTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 2003

Significant Events in 2004

In July 2004 we hired Jim Mayer as Chief Financial Officer and subsequently terminated the consulting agreement with Credit Support International, LLC (CSI) based in Dallas, Texas.  Mr. Mayer had been the Managing Member of CSI at the time he was hired as CFO.  In September, Mr. Mayer was promoted from Chief Financial Officer to Chief Executive Officer.

On September 12, 2004 we elected Carl Klein to the position of Non Executive Chairman of the Board to fill the vacancy created by the resignation of Lavern Kramer.

On June 5, 2004 Jeff Figlewicz was hired as the Corporate Controller and Principal Accounting Officer.

On October 25, 2004 our board of directors appointed James A. Skelton as a Class I Director. Mr. Skelton will serve until the 2005 annual meeting of stockholders.

On February 15, 2005 our board of directors appointed Thomas Cox as a Class I Director. Mr. Cox will serve until the 2005 annual meeting of stockholders.

On February 3, 2004, we announced a major restructuring of our balance sheet and our operating model that included the sale of our West Chicago plant and equipment to firms associated with the signing of a Strategic Operating Alliance (SOA) agreement with Franklin Park, IL based American Standard Circuits, Inc. (ASC) for a cash price of approximately $2,800,000.  As part of the sale, along with ASC, we formed an LLC named Am-Wave, LLC,  through which we retained an equity interest in the equipment of 20%.   As part of the amendment to the SOA signed on December 31, 2004, Am-Wave, LLC was dissolved.

In connection with the asset sales and signing of the SOA agreement, we also repaid $2.422  million in debt to Bank One, NA. We also announced that delinquent balances to our trade creditors would be reduced approximately $200,000 in line with our previously negotiated terms.

Under the SOA agreement, within the West Chicago facility, production transitioned from M~Wave to ASC.   The result of the SOA agreement is that both production and domestic sales will be carried out within the same facility with joint tenants M-Wave and ASC.    On December 31, 2004, we amended the SOA agreement.  Terms of the amendment provided us approximately $340,000 in purchase credits to be amortized over the remaining life of the SOA, and approximately $50,000 in cash which was received in February 2005.  In addition, the parties each exchanged a piece of equipment and we also provided ASC with raw materials to be used in the manufacturing process that we no longer required.  The SOA remains in effect until August 31, 2006.

16

The Company also rescinded the 500,000 warrants issued to Gordhan Patel, owner of ASC, and issued 104,167 options that are fully vested, have a four year life, have an exercise price of $1.35 per share, and are valued at $136,753 under the Black-Scholes Option Pricing Model, and were recorded as an increase to additional paid-in capital and recognized as stock compensation expense immediately upon issuance.  The amendment also revised the Company’s monthly obligations to ASC to a fixed amount of approximately $56,000 per month.

We also recorded impairment of building, plant and equipment charges in 2004 of approximately $591,000, related to our interest in Am-Wave, LLC.  The charges were recorded to comply with FASB statement No. 144, which requires the Company to (a) recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure the impairment losses as the difference between the carrying amount and the fair value of the asset.  

On May 14, 2004 we received a NASDAQ Staff Determination indicating that we failed to satisfy the stockholder's equity, earnings or market value of publicly held shares requirements for continued listing on the NASDAQ Small Cap Market under NASDAQ Marketplace Rule 4310(c)(2)(B), and that our common stock was therefore subject to de-listing from that Market unless the Company is able to comply with one of those requirements. We appealed the Staff's Determination and requested that a NASDAQ Listing Qualifications Panel reverse that Determination, in accordance with NASDAQ rules. A hearing was held in June 18, 2004 and we presented evidence that, subject to shareholder approval  (as required by NASDAQ rules) the Company would complete a private equity offering, and would maintain the required net worth, that would place us in compliance with the listing requirements for stockholder’s equity in excess of $2.5 million.  On Augu st 26, 2004 we received formal notice from the NASDAQ Listing Qualifications Panel that we have “evidenced requirements for continued listing on the NASDAQ Small Cap Market.”

17

Comparison of 2004 vs 2003

Net Sales

Net sales were approximately $17,462,000 for the twelve months ended December 31, 2004, an increase of approximately $3,275,000, or 23% versus 2003.  The increase in sales is directly related to “RF” wireless telecommunications sales that increased approximately $4,000,000 for the twelve months of 2004 while the Company’s digital business decreased approximately $800,000 for the year.

Sales within our RF product line were approximately $9,100,000 during 2004, an increase of 80%, or approximately $4,000,000, above 2003.  Sales within the RF product line are attributable to five main customers, which represented approximately 90% of sales in this product line in 2004. Within the RF product line, the Company has one customer that represents approximately 28% of its revenues for 2004 and 12% of its revenues for 2003.  This customer represents approximately 38% and 4% of accounts receivable at December 31, 2004 and 2003, respectively.

In 2003, the Company had one other customer that represented approximately 28% of its revenues.  Sales to this customer were not considered significant in 2004.

Sales within our digital product line were approximately $8,400,000 during 2004, a decrease of 9%, or approximately $800,000 below 2003.   Sales within the digital product line are attributable to five key customers, which represented approximately 58% of yearly sales in this product line in 2004.

Gross Profit (Loss) and Cost of Goods Sold

Our gross profit for the twelve months of 2004 was approximately $3,209,000, or 18%, compared to a gross loss of approximately $1,763,000, or 12% for 2003.    The shift in mix from RF to digital improved our gross profit during the last half of the year, as RF typically has lower margins when compared to digital product.  In addition, exiting the manufacturing business also had a positive impact on margins.

Operating Expenses

General and administrative expenses were approximately $2,394,000 or 14% of net sales for 2004 compared to approximately $2,394,000 or 17% of net sales for 2003. Expenses related to our agreement with ASC and Am-Wave, LLC were approximately $602,000 during 2004, and were $0 in 2003.  These costs related to expenses on the building and equipment, including maintenance of equipment owned by ASC and Am-Wave LLC, which we agreed to incur to secure exclusivity in the production process by M-Wave.  As a result to the amendment to the SOA agreement on December 31, 2004, we will continue to experience these costs throughout the remainder of the SOA.

General and administrative expenses consist primarily of salaries and benefits, professional services, depreciation of office, equipment and computer systems and occupancy expenses.  Payroll related expenses decreased approximately $149,000.  Included in this figure is a one-time expense of approximately $106,000 related to a separation agreement between us and our former CFO.  Professional services, which include legal, auditing, and consulting fees, decreased approximately $57,000.  Included in this figure is a reduction of our legal expense by approximately $247,000, and a one-time consulting expense of approximately $61,000 related to CSI’s negotiation of a new bank financing agreement.   Depreciation expense decreased approximately $27,000 in 2004 versus 2003.

Selling and marketing expenses were approximately $1,341,000 or 8% of net sales in 2004 compared to approximately $1,345,000 or 9% of net sales for 2003. Selling and marketing expenses include the cost of salaries, advertising and promotion of our products, and commissions paid to independent sales organizations. In comparison to 2003, commissions paid to independent sales organizations increased approximately $11,000 due to increased sales.  Payroll-related expenses decreased approximately $115,000 with the reduction of regional sales managers in the third quarter of 2004.  Travel expenses decreased approximately $22,000 for 2004 versus 2003.

We also recorded an impairment loss of approximately $591,000 for in 2004.  The charge was recorded to adjust the carrying value of the investment in Am-Wave, LLC to its estimated net realizable value.  On December 31, 2004, the amendment to the SOA dissolved the LLC, and the investment is no longer carried on our books at year end.  During 2003, we recorded impairment losses on real estate and equipment of approximately $7,452,000.

We recorded stock compensation expense for 2004 of approximately $228,000 related to options issued to both CSI and Gordhan Patel.  We recorded no stock compensation expense in 2003.

18

Operating Loss  

Operating loss was approximately $1,345,000 for 2004 compared to an operating loss of approximately $12,954,000 for 2003. The changes in operating loss reflect primarily the changes in gross profit, impairment losses, stock compensation, and other operating expenses as discussed above, which can be summarized as follows:

Increase in gross margin	4,972,000
Decrease in impairment losses	6,861,000
Increase in stock compensation	(228,000)
Decrease in other operating expenses	4,000
Decrease in operating loss	$11,609,000

Interest Income

Interest income from short-term investments was approximately $47,000 in 2004 compared to approximately $164,000 for 2003.

Interest Expense

We recorded interest expense of approximately $163,000 for 2004 related to our financing agreement with Silicon Valley Bank.  Interest expense, primarily related to the subsequently retired Industrial Revenue Bond involving Bank One, N.A. was approximately $176,000 for 2003.  

Other Income

Other income of approximately $1,238,000 for 2004 primarily relates to forgiveness of trade debt as we entered into settlement agreements with certain vendors.  We recorded approximately $265,000 of trade debt forgiveness for 2003. 

Income Taxes

In 2004, we recorded an income tax provision of approximately $113,000, caused by an adjustment to Net Operating Loss on our 2001 tax return.  We recorded a tax benefit of approximately $619,000 during 2003.

19

Liquidity and Capital Resources

Net cash used by operations was approximately $2,650,000 for 2004 compared to approximately $1,315,000 provided by operations for 2003.

Accounts receivable decreased approximately $310,000 due to reduced sales in the fourth quarter.  Inventories increased approximately $329,000.  Accounts payable decreased approximately $2,189,000 due to payments to vendors.  

Net cash provided by investing activities was approximately $2,480,000 for 2004, compared to approximately $19,000 used by investing activities for 2003.  Proceeds from the sale of assets to ASC contributed approximately $2,739,000 in 2004.  We also increased our investment in Am-Wave, LLC by approximately $128,000 during the year.  Capital expenditures were approximately $130,000 in 2004 compared to approximately $54,000 in 2003.  Included in 2004 expenses was the purchase of a new software package, Great Plains that was developed as a distribution package.  The software was fully implement ed in early 2005 with annual maintenance fees expensed on an ongoing basis.  As part of the amended SOA, we received equipment valued at approximately $120,000.

Net cash provided by financing activities was approximately $1,241,000 for 2004, compared to approximately $2,561,000 used by financing activities for 2003.  Proceeds from the Mercator transaction provided approximately $2,425,000, and our current revolving line of credit was approximately $1,262,000 as of December 31, 2004.   Funds from the sale of assets to ASC were used to pay off long term debt of approximately $2,457,000, resulting in no long term debt outstanding on December 31, 2004.

On April 11 2005, the Company completed a new lending facility with Silicon Valley Bank which provided a total credit limit expansion from $4.5 million to $6.0 million.  This new facility will finance the DBS operations through a factoring facility for an initial period of up to 90 days, while continue to provide funds for the EMG division under the asset based line of credit.  Receivables under the factoring agreement will be factored at 80% availability while we will continue to have 85% availability on receivables under the ABL.  After 90 days, the Bank will review the performance of the newly acquired division, and we expect to be able to transition these receivables from factoring to our traditional asset based line of credit which will minimize our borrowing costs and provide added flexibility.  Other provisions of the ABL provide borrowing capabilities on inventories of both divisions of 50% of their n et value, with a limit of $1,000,000, which is $250,000 above our current borrowing capacity on inventories.  Another added benefit of the new facility is the ability to issue up to $1,000,000 in letters of credit to Asian suppliers.  We expect this feature will provide additional flexibility in finding Asian vendors for new products as well as developing tertiary suppliers of existing products.  The combined borrowing from letters of credit, inventory, factoring, and receivables under the ABL cannot exceed $6 million.  The effective rate of interest under this agreement, including fees, is approximately 8%.  It is anticipated that this credit facility will provide us with sufficient excess availability throughout the next fiscal year.

Currently the Company is committed to growing the business, but if the Company is unable to secure adequate financing, the Company may be forced to modify its strategic growth plan.

Based upon the current level of operations and anticipated growth, equity and debt financing received during the past year, and the expansion of our credit facility subsequent to the acquisition of Jayco Ventures Inc., we believe that future cash flows from operations will be adequate to meet our anticipated liquidity requirements through the next fiscal year.

20

Inflation

We believe inflation has not had a material effect on our operation or on its financial position.  However, expected supplier price increases that average approximately 8% may have a material effect on the Company’s operations and financial position in 2005, if we are unable to pass through those increases under our present contracts.

Foreign Currency Transactions

All of our foreign transactions are negotiated, invoiced and paid in United States dollars.

Risk Factors Affecting Business and Results of Operations

This report, as well as our other reports filed with the SEC, our press releases, and other communications contain forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Forward-looking statements include all statements regarding our expected financial position, results of operations, cash flows, dividends, financing plans, strategy, budgets, capital and other expenditures, competitive positions, growth opportunities, benefits from new technology, plans and objectives of management, and markets for stock. These forward-looking statements are based largely on our expectations and, like any other business, are subject to a number of risks and uncertainties, many of which are beyond our control. The risks include those stated in the section entitled “Risk Factors” in Item 1 of our Annual Report on Form 10-KSB and the other documents we have filed with the Securities and Exchange Commission.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will in fact prove accurate, and our actual results may differ materially from the forward-looking statements. 

Item 7. Financial Statements

Consolidated financial statements, related notes and exhibits for the two years ended December 31, 2004 are filed as part of this report.

The exhibits filed herewith are set forth on the Index to Exhibits filed as part of this report.

21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     To the Board of Directors

     M~Wave, Inc. and Subsidiaries

     West Chicago, Illinois

     We have audited the consolidated balance sheet of M~Wave, Inc. and Subsidiaries as of December 31, 2004 and the related consolidated statement of operations, stockholders' equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  

     We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of M~Wave, Inc. and Subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

     MCGLADREY & PULLEN LLP         

     Schaumburg, Illinois

     January 14, 2005, except for the

     acquisition discussed in Note 13

     as to which the date is February 25, 2005

     and the financing also discussed in

     Note 13 as to which the date is

     April 11, 2005

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     Board of Directors

     M~Wave, Inc.

     We have audited the accompanying consolidated balance sheet of M~Wave, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended.  These financial statements are the responsibility of the management of M~Wave, Inc.  Our responsibility is to express an opinion on these financial statements based on our audit.  

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of M~Wave, Inc. and Subsidiaries as of December 31, 2003 and the consolidated results of their operations and their cash flows for the period then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As presented in the financial statements, the Company incurred a loss during year ended December 31, 2003, and as of that date, the Company’s current liabilities exceeded its current assets. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     GRANT THORTON LLP

     Chicago, Illinois

     March 26, 2004, except for footnotes 8 and 17, which is dated March 31, 2004

23

Annual Financial Statements

M~WAVE, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS	2004	2003
CURRENT ASSETS:
Cash and cash equivalents	$   1,321,445	$          249,343
Accounts receivable, net of allowance for doubtful   accounts 2004: $75,000 2003: $100,000	2,040,768	2,351,027
Inventories, net	785,979	587,179
Refundable income taxes	0	685,418
Prepaid product credits	340,000	0
Prepaid expenses and other assets	136,865	21,499
Total current assets	4,625,057	3,894,466
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements	0	2,745,939
Machinery and equipment	346,665	1,928,600
Total property, plant and equipment	346,665	4,674,539
Less accumulated depreciation	23,736	85,715
Property, plant and equipment, net	322,929	4,588,824
Land, Building and improvements held for sale and idle	745,821	0
Investment in equity securities	225,000	0
TOTAL	$  5,918,807	$  8,483,290
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$  1,163,013	$  4,364,888
Accrued expenses	518,484	1,039,282
Note payable, bank, net of unamortized   discount of $72,824	1,189,192	0
Current portion of long-term debt	0	2,457,073
Total current liabilities	2,870,689	7,861,243
COMMITMENTS AND CONTINGENCIES (see note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value; authorized 30,000   shares; issued and outstanding 2004, 24,000   shares;  2003, 0 shares	1,261,010	0
Common stock, $.005 par value; authorized,   20,000,000 shares;  issued and outstanding   2004: 6,794,843 shares; 2003,  6,179,112   shares	33,974	30,895
Additional paid-in capital	11,840,351	8,439,072
Accumulated deficit	(7,802,047)	(5,562,750)
Treasury stock, at cost, 2004 and 2003   1,735,815 Shares	(2,285,170)	(2,285,170)
Total stockholders' equity	3,048,118	622,047
TOTAL	$  5,918,807	$8,483,290
See notes to consolidated financial statements

24

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
	2004	2003
NET SALES	$17,461,858	$14,187,290
COST OF GOODS SOLD	14,252,656	15,949,946
Gross profit (loss)	3,209,202	(1,762,656)
OPERATING EXPENSES:
General and administrative	2,394,255	2,394,422
Selling and marketing	1,340,823	1,345,022
Impairment of building and equipment	0	7,452,235
Impairment of investment in Am-Wave, LLC	591,359	0
Stock compensation	227,948	0
Total operating expenses	4,554,385	11,191,679
Operating loss	(1,345,183)	(12,954,335)
OTHER INCOME (EXPENSE):
Interest income	46,729	164,477
Interest expense	(162,742)	(176,149)
Trade debt forgiveness	1,013,377	265,000
Recovery and settlement of note receivable	225,000	0
Gain on disposal of equipment	0	34,272
Total other income	1,122,364	287,600
LOSS BEFORE INCOME TAXES	(222,819)	(12,666,735)
Income tax expense (benefit)	112,678	(619,460)
Net LOSS	$   (335,497)	$ (12,047,275)
Preferred stock beneficial conversion feature	(1,903,800)	0
Net Loss attributable to common stockholders	$ (2,239,297)	$ (12,047,275)
BASIC AND DILUTED LOSS PER SHARE	$          (0.49)	$                  (2.71)
Weighted average common shares outstanding	4,587,351	4,443,294
See notes to consolidated financial statements

25

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
	2004	2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$(335,497)	$(12,047,275)
Loss(Gain) on disposal of equipment	119,996	(34,272)
Depreciation and amortization	46,736	592,315
Amortization on discount of note payable, bank	24,276	0
Debt forgiveness	(1,013,377)	265,000
Impairment of buildings and equipment	0	7,452,235
Impairment in Am-Wave, LLC	591,359	0
Gain on disposal of investment in Am-Wave, LLC	(3,360)	0
Stock compensation recognized on options   and warrants	227,948	0
Recovery of customer receivable written off	(225,000)	0
Deferred income taxes	0	131,672
Adjustment to refundable income taxes	112,678	0
Changes in assets and liabilities:
Accounts receivable	310,259	(449,028)
Inventory	(328,660)	1,169,462
Prepaid expenses and other assets	(40,366)	10,083
Restricted cash	0	348,731
Accounts payable	(2,188,498)	392,561
Accrued expenses	(520,798)	(277,297)
Income taxes	572,740	3,760,592
Net cash flows (used in) provided by   operating activities	(2,649,564)	1,314,779
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment	(130,265)	(53,661)
Increase to investment in Am-Wave, LLC	(128,439)	0
Proceeds on sale of property, plant and equipment	2,738,907	34,272
Net cash flows provided by (used in) investing activities	2,480,203	(19,389)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	11,520	0
Net borrowings on note payable, bank	1,262,016	0
Proceeds from Preferred Stock Issuance	2,425,000	0
Payments on long term debt	(2,457,073)	(2,560,556)
Net cash flows provided by (used in) financing activities	1,241,463	(2,560,556)
NET INCREASE (DECREASE) IN CASH AND   CASH EQUIVALENTS	1,072,102	(1,265,166)
CASH AND CASH EQUIVALENTS:
Beginning of year	249,343	1,514,509
End of year	$  1,321,445	$     249,343
SUPPLEMENTAL DISCLOSURES OF CASH FLOW   INFORMATION:
	2004	2003
Cash paid during the year for:
Interest	$187,018	$176,149
Income tax refunds (payments)	572,731	4,511,723
SCHEDULE OF NONCASH FINANCING AND   INVESTING ACTIVITIES
Contribution of equipment for investment in   Am-Wave, LLC	$777,200	$0
Stock options issued in connection with   consulting agreement	91,195	0
Stock options issued in connection with SOA agreement	136,753	0
Stock warrants issued as discount on note payable, bank	97,100	0
Stock warrants issued in connection with preferred stock	848,750	0
Equity securities received for settlement of note   receivable	225,000	0
Other assets received in exchange for investment in Am   Wave, LLC and amendment of SOA agreement	390,000	0
Net exchange of equipment for investment in Am-Wave,   LLC and amendment of SOA agreement	52,500	0
Exchange of inventories for investment in Am-Wave, LLC   and amendment of SOA agreement	124,860	0
Other assets received for sale of equipment	20,000	0
See Notes to Consolidated Financial Statements

26

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
	Common Stock	Preferred Stock	Additional Paid-in Capital	Retained Earnings/ (Deficit)	Treasury Stock	Total Stockholders’ Equity
BALANCE
DECEMBER 31, 2002	$30,895	0	$8,439,072	$ 6,484,525	$(2,285,170)	$12,669,322
Net loss	0	0	0	(12,047,275)	0	(12,047,275)
BALANCE
DECEMBER 31, 2003	$30,895	0	$8,439,072	$(5,562,750)	$(2,285,170)	$622,047
Issuance of 21,150   shares of common   stock upon   exercise of stock   options	106	0	11,414	0	0	11,520
Issuance 30,000   shares of   Preferred stock	0	1,576,250	2,752,550	(1,903,800)	0	2,425,000
Conversion of   6,000 shares   of preferred   stock into   594,584   shares of common   stock	2,973	(315,240)	312,267	0	0	0
Stock compensation   relating to stock   options and warrants	0	0	227,948	0	0	227,948
Issuance of warrants   with note payable,   bank	0	0	97,100	0	0	97,100
Net loss	0	0	0	(335,497)	0	(335,497)
BALANCE
DECEMBER 31, 2004	$33,974	$1,261,010	$11,840,351	$ (7,802,047)	$(2,285,170)	$3,048,118
See notes to consolidated financial statements

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2004 AND 2003                                                                  &n bsp;  

1.   ORGANIZATION AND OPERATIONS

M~Wave, Inc. ("M~Wave" or the “Company”), a Delaware corporation, was formed on January 31, 1992.  

Poly Circuits, Inc. was officially merged into M-Wave, Inc. effective July 22, 2004, with M~Wave, Inc. surviving the merger. The Company is a value-added service provider of high performance printed circuit boards used in a variety of applications.  M~Wave satisfies its customers needs for high performance printed circuit boards by outsourcing and coordinating the manufacture of such boards by unaffiliated manufacturers.  (“Virtual Manufacturing”)

2.   SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Principles of Consolidation - The consolidated financial statements include the accounts of M~Wave and its wholly owned subsidiaries.  Significant intercompany transactions and account balances have been eliminated.

Revenue Recognition - The Company recognizes revenue from product sales when each of the following conditions has been met: an arrangement exists, delivery has occurred, there is a fixed price, and collectability is reasonably assured, which is generally upon shipment.

Cash and cash equivalents - Cash and cash equivalents comprise cash in banks and highly liquid investments that are both readily convertible to known amounts of cash or purchased with maturity of three months or less.  All cash is currently invested with Silicon Valley Bank.

Accounts Receivable  - The majority of the Company's accounts receivable are due from companies in the telecommunications industries.  Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required.  Accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.  The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole.  The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables ar e credited to the allowance for doubtful accounts.

	Allowance for Doubtful Accounts
	2004	2003
Beginning Balance	$100,000	$100,000
Charged to Costs and Expense	0	22,872
Deductions	(25,000)	(22,872)
Ending Balance	$75,000	$100,000

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Product Returns – Product sales include a right-of-return privilege.  A liability for anticipated sales returns has been provided based on historical experience and management’s customer and product knowledge.  At December 31, 2004, the allowance for sales returns was approximately $75,000 and is included in accounts receivable in the accompanying balance sheet.  At December 31, 2003, the allowance for sales returns was approximately $300,000 and is included in accrued expenses in the accompanying balance sheet.

Inventory - Inventories are valued at the lower of cost (first-in, first-out method) or market value.  The Company writes down inventory for estimated obsolescence or non-marketability equal to the difference between the cost of the inventory and its estimated market value based on assumptions about future demand and market conditions.  Write downs of inventories establish a new cost basis which is not increased for future increases in the market value of inventories or changes in estimated obsolescence. If actual future demand or market conditions were to be less favorable than projected, additional inventory write-downs may be required.

	Allowance for Obsolete Inventories
	2004	2003
Beginning Balance	$434,955	$874,466
Charged to Costs and Expense	0	452,284
Deductions	(247,717)	(891,795)
Ending Balance	$187,238	$434,955

Prepaid Product Credits - In connection with the amendment to the SOA agreement discussed in Note 3, the Company received prepaid product credits as partial consideration for its interest in Am-Wave, LLC.  The credits will be applied to the purchase price of inventories purchased from ASC and will be utilized ratably over the contractual life of the amended SOA agreement which expires in August 2006.

        Property, Plant and Equipment - Property, plant and equipment are recorded at cost. The Company calculates depreciation using the straight-line method at annual rates as follows:

Machinery and equipment	New	7 years
	Used	5 years

       Assets Held for Sale - The Company continues its effort to sell its plant and improvements located in Bensenville, Illinois. The assets being held for sale include separate parcels of land and buildings, both located in Bensenville, and are carried at the net book value of the assets which approximates fair market value less costs to sell. The property has an appraised value of approximately $800,000 and is carried at approximately $746,000.

Long Lived Assets - The Company accounts for long-lived assets in accordance with the provisions of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144).  This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized of the amount by which the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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      Provision for Warranty Expenses

The Company handles warranty issues on a customer specific basis. However, the Company generally handles the majority of warranty related returns from customers by simultaneously charging back the supplier for any returned material, minimizing its warranty exposure to the value of components stuffed onto boards by customers. In most cases these costs are also shared between the Company and its suppliers. Due to the Company’s change in business model from a manufacturer to a distributor, the history of this policy is limited to activity that has occurred since the company changed its business model. There was no warranty expense for the years ended December 31, 2004 and 2003.

Fair Value of Financial Instruments – The Company has no financial instruments for which the carrying value materially differs from fair value.

Income Taxes – Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also provided for carry forwards for income tax purposes. In addition, the amount of any future tax benefit is reduced by a valuation allowance to the extent such benefits are not expected to be realized.

Stock based compensation – The value of stock options awarded to employees is measured using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25(APB 25), “Accounting for Stock Issued to Employees,” and related interpretations.  Accordingly, no compensation cost is recognized for stock option grants as all options granted under the Company’s plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.  The following table illustrates the effect of net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation.  

	For the Years Ended December 31,
	2004	2003
Net (loss) attributable to common stockholders, as reported	$(2,239,297)	$(12,047,275)
Deduct:  Total stock-based employee compensation expense               determined under the fair value based method for               all awards	801,299	291,943
Pro forma net (loss) attributable to common stockholders	$(3,040,596)	$(12,339,218)
Loss per share, basic and diluted:
As reported	$(0.49)	$(2.71)
Pro forma	(0.66)	(2.78)

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Net Earnings (Loss) Per Share - The Company’s basic net earnings (loss) per share amounts have been computed by dividing net earnings (loss) by the weighted average number of outstanding common shares.  Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon conversion of convertible preferred shares and the exercise of stock options and warrants for all periods. Fully diluted (loss) per share is not presented since the effect would be anti-dilutive.

New accounting pronouncements: The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 (revised), Share Based Payment. SFAS 123(R) is a replacement of SFAS 123, Accounting for Stock Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretive guidance.

SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The cost will be measured based on the fair value of the equity or liability instruments unissued. The effect of the standard will be to require entities to measure the cost of employee services received in exchange for stock options based on the grant date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award.

The Company will be required to apply Statement 123(R) as of the beginning of its interim reporting period that begins January 1, 2006.

SFAS 123(R) allows two methods for determining the effects of the transition: the modified prospective transition method and the modified retrospective method of transition. Under the modified prospective transition method, an entity would use the fair value-based accounting method for all employee awards granted, modified, or settled after the effective date. As of the effective date, compensation cost related to the non-vested portion of awards outstanding as of that date would be based on the grant-date fair value of those awards as calculated under the original provisions of Statement No. 123; that is, an entity would not re-measure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date of the final Statement. Under the modified retrospective method of transition, an entity would recognize employee com pensation cost for prior periods presented in accordance with the original provisions of Statement 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro-forma disclosures provided in accordance with Statement No. 123.

Although it has not yet completed its study of the transition methods, the Company believes it will elect the modified prospective transition method. Under this method, the Company estimates that the adoption of FAS 123(R) will require the Company to record approximately $7,000 of stock compensation expense in the year ending December 31, 2006, related to employee options issued and outstanding at December 31, 2004.

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3.   STRATEGIC OPERATING ALLIANCE

In connection with the Company’s implementation of its “virtual manufacturing” model, on February 3, 2004, and American Standard Circuits (ASC) entered into a Strategic Operating Alliance (SOA) agreement.  Simultaneously, the Company sold its West Chicago facility to an affiliate of ASC for a cash price of $2,000,000, and. also sold a major portion of its manufacturing equipment at the West Chicago facility to a newly formed limited liability company, Am-Wave, LLC (LLC), for a cash price of $800,000 and a 20% preferred and secured interest in that entity.  ASC is the other member of the LLC and has leased the use of the equipment from it.

During 2004, the Company recorded approximately $591,000 in impairment charges to adjust the equity interest in Am-Wave, LLC to its net realizable value.

On December 31, 2004 the Company and ASC amended the SOA agreement.  Under terms of the amendment, the Company exchanged pieces of equipment, transferred raw materials used in the manufacturing process, and dissolved its equity interest in Am-Wave, LLC.  In consideration, the Company received approximately $50,000 in cash and $340,000 in prepaid product credits, to be amortized over the remaining life of the SOA, which is scheduled to end on August 31, 2006.  The Company also rescinded the 500,000 warrants issued to Gordhan Patel, owner of ASC, and issued 104,167 options that are fully vested, have a four year life, have an exercise price of $1.35 per share, and are valued at $136,753 under the Black-Scholes Option Pricing Model, and were recorded as an increase to additional paid-in capital and recognized as stock compensation expense immediately upon issuance.  The amendment also revised the Company’s monthly obligations to ASC to a fixed amount of approximately $56,000 per month.

4.   BUSINESS PRODUCT LINES

Sales by product line consisted of the following:
	2004	2003
Digital	$8,430,000	$9,121,000
RF	9,059,000	5,066,000
Total	$17,462,000	$14,187,000

Sales within the RF product line include five main customers, which represented approximately 90% of sales in this product line in 2004.  Sales within the digital product line include five key customers, which represented approximately 58% of yearly sales in this product line in 2004.  Within the RF product line, the Company has one customer that represents approximately 28% of its revenues for 2004 and 12% of its revenues for 2003.  This customer represents approximately 38% and 4% of accounts receivable at December 31, 2004 and 2003, respectively.

In 2003, the Company had one other customer that represented approximately 28% of its revenues.  Sales to this customer were not considered significant in 2004.

The loss of, or a substantial reduction in the orders from, the Company’s major customers could have a material effect on the financial statements.

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5.   INVENTORY

Inventories consisted of the following:
	2004	2003
Raw Materials	$           0	$    229,422
Work in Process	0	0
Finished Goods	937,217	792,712
Total Inventory	973,217	1,022,134
Less reserve for obsolete inventory	(187,238)	(434,955)
Net Inventory	$785,979	$   587,179

6.   INVESTMENT IN EQUITY SECURITES

On October 1, 2004 the Company received 1,500,000 common shares of Integrated Performance Systems, Inc. (IPFSE.OB) in settlement of an outstanding promissory note the Company held related to its sale of the PC Dynamics facility in 1999.   These shares are restricted, and the Company has a demand registration right.  This note had been fully reserved for in a prior year, and was recorded as miscellaneous income in the fourth quarter of 2004.  These shares are classified as available-for-sale and were valued by taking an estimate of net realizable proceeds if the shares were sold on the open market.  Based on the market price of the stock at the time of receipt combined with a review of the average trading volume in this security, it was estimated that these shares had a market value of approximately $225,000.

7.   ACCRUED EXPENSES

Accrued expenses at December 31, 2004 and 2003 were comprised of:
	2004	2003
Reserve for Sales Returns	0	300,000
Salary Related	138,724	109,095
Commissions	81,215	103,931
Professional fees	104,498	177,753
Property and other taxes	38,567	128,505
Warranty	63,000	73,000
Bensenville	49,500	0
Other	42,980	146,998
Total accrued expenses	$518,484	$ 1,039,282

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8.   DEBT

On October 1, 2003, M-Wave entered into a $2,413,533 loan with Bank One, N.A. that was to mature on December 31, 2003, and required monthly payments of interest at the bank’s prime rate. This loan replaced the unpaid portion of the Industrial Revenue Bonds (IRB) that were used to fund the acquisition of the land and construction of the Company’s manufacturing plant located in West Chicago, Illinois, and a related forbearance agreement with the bank. Upon signing the loan with Bank One, the Company was no longer in default of its obligations to the bank arising pursuant to the IRB. Concurrent with the loan, M-Wave paid $350,000 toward then-outstanding principal obligations, and Bank One released liens covering the Company’s accounts receivable and inventory.  Additional terms of the loan include assigning Bank One a lien on the Company’s real estate and improvements located in Bensenville, IL, site of its former operations.  

On December 22, 2003, Bank One, N.A. extended the maturity on the loan to January 31, 2004.

In February 2004, the Company sold the West Chicago facility and Equipment and used a portion of the proceeds to retire the entire debt of approximately $2,457,000 with Bank One, N.A. The amount realized on the sale of the facility and equipment approximated the recorded amounts at December 31, 2003.  Concurrently, the Company retired an installment note which accrued interest at the prime rate and was collateralized by certain fixed assets.  At December 31, 2003, $43,450 of principal was outstanding on the installment note.

On March 31, 2004 Silicon Valley Bank, N.A. (SVB) and the Company entered into the first of a two-step financing known as “Mini ABL” that commenced with an accounts receivable purchase facility. Under the facility, the Company could sell to the SVB, subject to SVB approval, up to 85% of the face value of approved invoices to a maximum of $2.5 million. The cost of the facility included a 1/2% one-time discount, plus interest at the prime rate plus 2.5%. The initial proceeds to the Company were $1.27 million.  This arrangement was accounted for as a financing transaction during the period it was outstanding.

On June 28, 2004 the Company and the SVB entered into a Loan and Security Agreement, replacing the prior credit facility with a $4.5 million revolving credit facility. The effective rate of interest under this agreement, including fees, is approximately 8%.  The Company may borrow up to $4.5 million, or a lesser amount depending on the Company’s borrowing base from time to time.  The borrowing base consists of eligible receivables and finished goods inventory, as further described in the agreement.  

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On December 17, 2004 the Company and the SVB entered into an Amendment to Loan and Security Agreement.  The amendment revised the Company’s borrowing base by allowing the Company to include a portion of certain accounts receivables from customers who are not residents of the United States or Canada.

As part of the loan and security agreement with SVB, SVB was issued warrants to purchase 85,000 shares of the Company’s stock an exercise price of $1.51 per share. The warrants vest ratably over 24 months and have a 7 year life. The warrants were valued at $97,100 under the Black-Scholes Option Pricing Model, and will be recorded ratably as an increase to additional paid-in-capital and recognized as interest expense over the vesting period.

The agreement between the Company and SVB contains certain covenants, which among other things, requires the Company to maintain a certain level of tangible net worth.  

9.   LEASE COMMITMENTS

The Company rents administrative and warehouse space under operating leases.  The terms of the agreement expire on August 31, 2006.  Rent expense under these leases for the years ended December 31, 2004 and 2003 was $610,000 and $60,000 respectively.

Future minimum annual lease commitments at December 31, 2004 are as follows:
Year
2005	$ 672,000
2006	$ 448,000
Total	$1,120,000

10.       INCOME TAXES

The provision (benefit) for income taxes consists of:
	2004	2003
Current	$112,678	$(751,132)
Deferred	0	131,672
Total	$112,678	$(619,460)
The primary components comprising the net deferred tax assets (liabilities) are as follows:
	2004	2003
Deferred tax assets
Receivable reserves	$58,505	$39,000
Inventory reserves	91,268	169,632
Accrued expenses and other	64,235	284,158
Net operating loss	3,448,185	522,500
Impairment reserve	4,157,125	4,157,125
Deferred tax assets	7,819,318	5,172,415
Valuation Allowance	(3,851,582)	(4,195,552)
Deferred tax liabilities
Depreciation	(3,967,736)	(976,863)
Prepaid bond costs	(0)	(0)
Deferred tax	(3,967,736)	(976,863)
Net deferred tax asset	$               0	$               0

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The valuation allowance decreased by $343,970, and increased by $4,195,552, for the years ended December 31, 2004 and 2003, respectively.

As of December 31, 2004, we had federal and state net operating loss carryforwards of approximately $8,841,500 for income tax purposes expiring in years 2023 to 2024.

The effective tax (benefit) rate differs from the Federal statutory tax rate for the following reasons:

	2004	2003
Federal statutory rate	(34.0)%	(34.0)%
State income taxes, net of Federal benefit	(4.7)	(2.5)
Non deductible expenses	105.4	0.0
Valuation allowance	(154.4)	32.6
Adjustments for AMT	50.6	0.0
Other adjustments	87.7	(2.1)
Effective rate	50.6%	(6.0)%

11. COMMON STOCK

Stock Options Plans

The Company has two stock option plans that authorize the granting of options to officers, key employees and directors to purchase the Company’s common stock at prices equal to the market value of the stock at the date of grant. Under these plans, the Company has 152,600 shares available for future grants as of December 31, 2004.  The exercise price of all employee and director options granted in 2004 were at fair market value.

On January 1, 2004, July 23, 2004, September 13, 2004, and October 25, 2004, the Company issued options to purchase 60,000, 6,000, 210,000, and 50,000 shares of common stock at exercise prices of $0.53, $1.18, $1.08, and $1.32, respectively, to four directors as compensation for their services in their roles as directors.  Under the Company’s stock option plans, awards to directors vest immediately at the date of grant.  These awards have been accounted for as employee awards in accordance with the accounting guidance under APB 25 and related interpretations.  

Also in January 2004, the Company issued options to purchase 100,000 and 25,000 shares of common stock at exercise prices of $0.55 and $0.80, respectively, to employees.  On July 23, 2004, the Company issued options to an employee to purchase 25,000 shares of common stock at an exercise price of $1.18.  These employee awards vest ratably over five years.

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On July 28, 2004, the Company issued options to purchase 400,000 shares of common stock at an exercise price of $1.16 to the chief executive officer in connection with the Company’s filing of a registration statement with the SEC.  This employee award vested immediately at the date of grant.

As discussed in Note 3, the Company issued 104,167 options to the owner of ASC to purchase common stock at an exercise price of $1.35.  This nonemployee award vested immediately at the date of grant.  A summary of the status of the Company’s stock option plans and changes are presented in the following table:

For the Year Ended December 31,
	2004		2003
		Weighted Average Exercise		Weighted Average Exercise
	Shares	Price	Shares	Price
Options outstanding   at beginning of year	450,025	$4.06	412,575	$7.20
Granted	980,167	$0.74	250,200	$0.86
Exercised	(21,150)	$0.54	0	0
Forfeited	(9,825)	$4.60	(212,750)	$6.41
Options outstanding   at End of year	1,399,217	$2.00	450,025	$4.06
Exercisable at end of   year	1,318,867	$2.10	269,913	$5.29

The weighted average fair value of options granted in 2004 and 2003 was $1.04 and $0.87, respectively, and was estimated at the grant date using the Black-Scholes options pricing model with the following weighted average assumptions: Expected volatility of 169.37% and 97.68%; risk-free interest rate of 4.25% and 2.8%; expected life of 4.89 and 10.00 years; and no dividend yield, respectively.

Options outstanding and exercisable at December 31, 2004, by price range:

	Outstanding		Exercisable
Range of exercise prices	Shares	Weighted average Remaining contractual life	Weighted average exercise price	Shares	Weighted average exercise price
$0.53 to 0.67	284,000	3.80	$0.61	234,000	$0.62
0.80 to 1.18	687,400	2.69	1.11	657,050	1.12
1.25 to 1.35	230,167	9.57	1.31	230,167	1.31
6.74 to 8.38	177,650	0.46	7.39	177,650	7.39
13.78	20,000	0.75	13.78	20,000	13.78
	1,399,217	3.74	2.00	1,318,867	2.10

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The Company recorded stock compensation expense in 2004 of $91,195 relating to 144,000 options issued to Jim Mayer in connection with a consulting agreement between the Company, Jim Mayer, and Credit Support International LLC.  The options have an exercise price of $.67 per share, are valued at $91,195 under the Black-Scholes Option Pricing Model, and vest ratably over a period of 12 months.  The options are recorded ratably as an increase to additional paid-in capital and recognized as stock compensation expense over the vesting period.

Series A Preferred Stock

The Series A Preferred Stock contains a beneficial conversion feature, since the conversion price of the common stock is to be 85% of the fair value of the stock at the time of conversion.  The fair value of the beneficial conversion feature was designated to be approximately $1,903,800 under the Black-Scholes Option Pricing Model and was recorded as a preferred stock dividend in the statement of income and an equivalent increase to the accumulated deficit during the third quarter.  This was valued in accordance with EITF 00-27 (Application of Issue No. 98-5 to Certain Convertible Instruments).  This expense recognition is a one-time charge, and resulted in a decrease to basic and diluted earnings per common share in the third quarter, but will have no effect on total Stockholders’ Equity. 

Common Stock Purchase Warrants

The Company issued three year warrants to purchase an aggregate of 1,530,000 shares of Common Stock at an exercise price of $1.28 per share to the three purchasers of the Series A Preferred Stock and to Mercator Advisory Group, LLC, on the closing date of the sale of the Series A Preferred Stock. The fair value of the warrants was designated to be $848,750 under the Black-Scholes Option Pricing Model and is reflected in the statement of stockholders’ equity as an increase to additional paid in capital.

The Company issued seven year warrants to purchase an aggregate of 85,000 shares of Common Stock to Silicon Valley Bank. The warrants have an exercise price of $1.51 per share, vest ratably over 24 months and have a 7 year life.  The warrants are valued at $97,100 under the Black-Scholes Option Pricing Model.

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Warrants outstanding and exercisable are as follows:

Exercise Price	Number Outstanding at 12/31/04	Weighted Ave. Remaining Life	Weighted Ave. Exercise Price	Number Exercisable at 12/31/04	Weighted Ave. Exercise Price
$1.28	1,530,000	2.6	$1.28	212,500	$1.28
1.51	85,000	6.5	1.51	21,250	1.51
	1,615,000			233,750

12. PREFERRED STOCK

On July 28, 2004, M-Wave closed an equity financing agreement with the Mercator Advisory Group.  The Company issued 30,000 shares of the Company’s newly designated Series A Preferred Stock to Mercator Momentum Fund LP, Mercator Momentum Fund III, LP, and Monarch Pointe Fund Ltd. through Mercator Advisory Group LLC (“Mercator”) for $100 per share, or an aggregate of $3 million. The transaction provided M-Wave approximately $2.425 million, net of fees and expenses.  The Preferred Stock is convertible into approximately 3,061,000 shares of Common Stock. The conversion price is equal to 85% of the market price of our common stock at the time of the c onversion; provided that in no event shall the conversion price be less than $0.98 per share or greater than $1.15 per share.  The numbers of Conversion Shares and Warrant Shares that any Purchaser may acquire at any time are subject to limitation in the Certificate of Designations and in the Warrants, respectively, so that the aggregate number of shares of Common Stock of which such Purchaser and all persons affiliated with such Purchaser have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any time exceed 9.99% of the Company's then outstanding Common Stock.< /em>

The Preferred Stock is nonvoting, bears no dividend, and has a sole preference of priority at par in liquidation over our common stock and any prior or subsequent series of preferred stock.

The Mercator entities have converted 6,000 shares of the Company’s preferred stock into 594,000 shares of Common Stock as of December 31, 2004.

13. SUBSEQUENT EVENTS

On February 25, 2005, the Company acquired Jayco Ventures Inc. assets for approximately $1,360,000 in cash. The Company financed the transaction with a portion of $1,550,000 in proceeds from the issuance on February 23, 2005 of $1,550,000 aggregate principal amount of promissory notes and warrants to purchase an aggregate of 434,783 shares of common stock. The issuances were made to Mercator Momentum Fund, L.P., Monarch Pointe, Ltd., and M.A.G. Capital, LLC (formerly Mercator Advisory Group, LLC), all of which are related entities. The Company paid fees totaling $35,000 to M.A.G. Capital, LLC in connection with the financing.

The promissory notes accrue interest at 10% per annum and have a term of 18 months. Upon sale of the Company’s real property at 215 Park Street, Bensenville, Illinois, the Company is required to prepay an aggregate of $325,000 under the promissory notes.

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On April 11, 2005, the Company completed a new lending facility with Silicon Valley Bank which provided a total credit limit expansion from $4.5 million to $6.0 million.  This new facility will finance the DBS operations through a factoring facility for an initial period of up to 90 days, while continue to provide funds for the EMG division under the asset based line of credit.  Receivables under the factoring agreement will be factored at 80% availability while we will continue to have 85% availability on receivables under the ABL.  After 90 days, the Bank will review the performance of the newly acquired division, and the Company expects to be able to transition these receivables from factoring to the Company’s traditional asset based line of credit which will minimize our borrowing costs and provide added flexibility.  Other provisions of the ABL provide borrowing capabilities on inventories of both divisions of 50% of their net value, with a limit of $1,000,000, which is $250,000 above our current borrowing capacity on inventories.  Another added benefit of the new facility is the ability to issue up to $1,000,000 in letters of credit to Asian suppliers.  The Company expects this feature will provide additional flexibility in finding Asian vendors for new products as well as developing tertiary suppliers of existing products.  The combined borrowing from letters of credit, inventory, factoring, and receivables under the ABL cannot exceed $6 million.  The effective rate of interest under this agreement, including fees, is approximately 8%.  

14. RELATED PARTY TRANSACTIONS

In April 2003, Credit Support International, LLC (CSI) based in Dallas, Texas; specifically, Jim Mayer its Managing Member, was retained by the Company, initially serving as a consultant and then Chief Restructuring Advisor to determine the Company’s viability and then facilitate a restructuring of M-Wave’s operations and financial position.  The Consulting Agreement was amended in September 2003.  As part of the agreement, Mayer was granted 144,000 options to acquire the Company’s common stock at a price of $0.67 per share.  The options vest ratably over a one year period commencing in September 2003 and expire on April 15, 2008.

Subsequent to Mr. Mayer’s employment with the Company on July 28, 2004, the consulting agreement was terminated and the options granted in the consulting agreement immediately vested.

15. EMPLOYEE BENEFIT PLAN

The Company terminated its defined contribution plan in 2004, and made no contributions during the year.  

In 2003, the Company maintained a defined contribution retirement plan covering substantially all full-time employees.  The plan allowed for employees to defer up to 15% of their pretax annual compensation, as defined in the plan.  The Company matched up to 25% of the first 4% of base compensation that a participant contributed.  The Company matching contributions were $7,543 in 2003.  Additionally, the Company could have contributed discretionary amounts.   There were no discretionary contributions for 2003.

16. RESTRUCTURING CHARGES

As of December 31, 2004, the Company no longer maintained a restructuring reserve related to the Bensenville facility.

In September 2002, the Company moved its operations, including its headquarters, from its Bensenville, Illinois location to West Chicago, Illinois. In September, 2002 the Company recorded restructuring expenses of $1,752,000.  Restructuring expenses include costs associated with the closing, cleanup and disposition of the Bensenville facilities. These expenses include (1) the net write-down and disposal of approximately $986,000 of specific assets that were not required at the West Chicago facility, (2) cleanup, sale and related expenses of $680 ,000 for the Bensenville facilities and (3) severance payments of $86,000.  As of December 31, 2003, the Company had a remaining reserve of approximately $145,000 relating to the clean-up and disposition of the Bensenville facilities.

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	Balance	Cash		Balance
Restructuring Charges 2003	Dec. 31, 2002	Paid	Non-Cash	Dec. 31, 2003
Bensenville	367,000	222,000	0	$145,000
	Balance	Cash		Balance
Restructuring Charges 2004	Dec. 31, 2003	Paid	Non-Cash	Dec. 31, 2004
Bensenville	145,000	145,000	0	$0

17. MANAGEMENT PLAN FOR CONTINUING OPERATIONS

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  However, the Company has experienced significant improvement from the losses we recorded from operations in 2003 due to the decline in the telecom industry and substantial impairment losses on assets recorded in 2003.  

Based upon the current level of operations and anticipated growth, management believes that the Company’s current cash plus future cash flow from operations, proceeds from the sale of certain fixed assets, funds obtained from Silicon Valley Bank (SVB), and debt financing received from Mercator on February 23, 2005 are adequate to cover the Company’s needs during the upcoming year.

The Company is continuing its efforts to sell its prior plant and improvements located in Bensenville, Illinois as soon as practicable.  

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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

            None

Item 8A.  Controls and Procedures

(a) Disclosure controls and procedures.  As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Principal Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended).

Based on this evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective, in timely alerting them to material information relating to the Company required to be included in our periodic filings with the Securities and Exchange Commission. We note that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving desired control objectives and, based on the evaluation described above, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

(b) Changes in internal controls. There was no change in our internal control over financial reporting during the twelve months ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Item 8B.  Other Information

As described in Item 1 above, on December 31, 2004, we entered into an amendment of the SOA agreement described above.  The amendment is filed as an exhibit to the report.

42

Part III

Item 9. Directors and Executive Officers of the Registrant

Information required by this Item will be contained in the 2005 Proxy Statement or an amendment to this report and is incorporated herein by this reference.

Item 10.  Executive Compensation

Information required by this Item will be contained in the 2005 Proxy Statement or an amendment to this report and is incorporated herein by this reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this Item will be contained in the 2005 Proxy Statement or an amendment to this report and is incorporated herein by this reference.

Item 12.  Certain Relationships and Related Transactions

Information required by this Item will be contained in the 2005 Proxy Statement or an amendment to this report and is incorporated herein by this reference.

43

Item 13. Exhibits
	EXHIBIT INDEX
Exhibit No.	Description	Location
3.1	Certificate of Incorporation of the Company	1
3.2	Bylaws of the Company	1
3.3	Certificate of Designations for Series A Preferred Stock	5
4.1	Specimen Common Stock Certificate	4
10.1	Credit Agreement dated October 1, 2003 between Bank One, NA, the Company and Poly Circuits, Inc.	2
10.2	Consulting Agreement dated September 1, 2003 by and between the Company and Credit Support International, LLC.	2
10.3	2003 Stock Incentive Plan	2
10.4	Asset Purchase and Sale Agreement dated February 3, 2004 by and between the Company, Poly Circuits and Am-Wave, L.L.C.	2
10.5	Agreement for Strategic Operating Alliance dated February 3, 2004 by and between the Company and American Standard Circuits, Inc	2
10.6	Bill of Sale dated February 3, 2004 by and between Poly Circuits and Am-Wave, L.L.C.	2
10.7	Real Estate Sales Contract dated February 3, 2004 by and between the Company and AMI Partners, L.L.C.	2
10.8	Limited Liability Company Operating Agreement of Am-Wave, L.L.C. dated February 3, 2004 by and between Poly Circuits and American Standard Circuits, Inc.	2
10.9	Warranty Deed dated February 3, 2004 by and between the Company And AMI Partners, L.L.C.	2
10.10	Industrial Lease Agreement dated February 3, 2004 by and between the Company  AMI Partners, L.L.C	2
10.11	Warrant to Purchase Stock dated March 31, 2004 by and between the Company and Silicon Valley Bank	2
10.12	Accounts Receivable Financing Agreement dated March 31, 2004 by and between the Company and Silicon Valley Bank	2
10.13	Intellectual Property Security Agreement dated March 31, 2004 by and between the Company and Silicon Valley Bank	2
10.14	Amendment to Consulting Agreement, dated May 1, 2004, between the Company and Credit Support International, LLC	3
10.15	Letter Agreement with Paul Schmitt dated May 1, 2004	3
10.16	Employment Agreement dated July 28, 2004 between the Company and Jim Mayer	4
10.17	Employment Agreement dated July 28, 2004 between the Company and Joseph A. Turek	4
10.18	Employment Agreement dated May 1, 2004 between the Company and Robert Duke	4
10.19	Subscription Agreement dated June 28, 2004 between Company and Mercator Advisory Group	4
10.20	Stock Registration Rights Agreement dated June 28, 2004 between Company and Mercator Advisory Group	4
10.21	Nonstatutory Stock Option Agreement dated July 28, 2004 between Company and Jim Mayer	4
10.22	Amendment to Loan Documents, dated December 17, 2004 between M-Wave, Inc. and Silicon Valley Bank	6
10.23	Loan and Security Agreement, dated June 28, 2004, between M-Wave, Inc. and Silicon Valley Bank	6
10.24	Asset Purchase Agreement, dated February 25, 2005 by and between Jayco Ventures, Inc. and M-Wave DBS, Inc.	7
10.25	Employment Agreement, dated February 25, 2005 between M-Wave DBS, Inc. and Jason Cohen	7
10.26	Employment Agreement, dated February 25, 2005 between M-Wave DBS, Inc. and Joshua Blake	7
10.27	Promissory Note, dated February 23, 2005, issued by M-Wave, Inc. to Mercator Momentum Fund, L.P.	7
10.28	Promissory Note, dated February 23, 2005, issued by M-Wave, Inc. to Monarch Pointe Fund, Ltd.	7
10.29	Warrant, dated February 23, 2005, issued by M-Wave, Inc. to Mercator Momentum Fund, L.P.	7
10.30	Warrant, dated February 23, 2005, issued by M-Wave, Inc. to Monarch Pointe Fund, Ltd.	7
10.31	Warrant, dated February 23, 2005, issued by M-Wave, Inc. to M.A.G. Capital, LLC	7
10.32	SOA Amendment dated December 31, 2004	Filed Herewith
10.33	Purchase Agreement between M-Wave and American Standard dated December 31, 2004	Filed Herewith
10.34	Nonstatutory Stock Option Agreement dated December 31, 2004 between Company and Gordhan Patel	Filed Herewith
10.35	Loan and Security Agreement, dated April 11, 2005, between M-Wave, Inc. and Silicon Valley Bank	Filed Herewith
10.36	Assumption Agreement and Amendment to Loan Documents, dated April 11, 2005, between M-Wave, Inc. and Silicon Valley Bank	Filed Herewith
21	Subsidiaries	Filed Herewith
23.1	Consent of McGladrey and Pullen, LLP	Filed Herewith
23.1	Consent of Grant Thornton, LLP	Filed Herewith
31.1	Certification Pursuant to 18 U.S.C. Section 135D, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.	Filed Herewith
31.2	Certification Pursuant to 18 U.S.C. Section 135D, as adopted to section 906 of the Sarbanes-Oxley Act of 2002.	Filed Herewith
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith
(1)	Incorporated herein by reference to the applicable exhibit to Registrant’s Registration Statement on Form S-1 (Registration No. 33-45499)
(2)	Incorporated herein by reference to the applicable exhibit to the Registrants quarterly report on form 10-K for the quarter ended December 31, 2003
(3)	Incorporated herein by reference to the applicable exhibit to the Registrants quarterly report on form 10-QSB for the quarter ended March 31, 2004
(4)	Incorporated herein by reference to the applicable exhibit to the Registrants quarterly report on form 10-QSB for the quarter ended June 30, 2004
(5)	Incorporated herein by reference to Appendix B to the Registrant’s Definitive Proxy Statement filed July 6, 2004
(6)	Incorporated herein by reference to the applicable exhibit to the Registrants form 8-K dated December 30, 2004
(7)	Incorporated herein by reference to the applicable exhibit to the Registrants form 8-K dated March 2, 2005

44

Item 14. Principal Accountant Fees and Services

During the year 2004 we retained McGladrey and Pullen to provide services in the following categories and paid the following approximate amounts.  (Fees for 2003 were paid to Grant Thornton):

	2004	2003
Audit fees	$132,000	$  73,119
Audit–related fees	17,864	1,836
Tax fees	33,776	62,515
All other	0	0
Total fees	$ 183,640	$  137,470

Audit fees are those fees for professional services rendered in connection with the audit of our annual consolidated financial included in our Annual Report on Form 10-KSB and the review of our quarterly consolidated financial statements included in our Quarterly Report on Form 10-QSB and SEC registration statements that are customary under auditing standards of the Public Company Accounting Oversight Board (United States).

Audit-related fees consist primarily of services rendered in connection with due diligence assistance and consultation on financial accounting and reporting standards.

Tax fees are primarily for preparation of tax returns, assistance with tax audits and appeals, advice on acquisitions and technical assistance.  

All of the non-audit services disclosed above for 2003 and 2004 were pre-approved by the Audit Committee in accordance with the procedures described below.  The Audit Committee considered whether the non-audit consulting services provided by the auditors' firm could impair the auditors' independence and concluded that such services have not impaired the auditors' independence.

All services to be provided by McGladrey & Pullen, LLP are subject to pre-approval by the Audit Committee. The Chairman of the Audit Committee informally pre-approves audit and non-audit services, up to $5,000, with such pre-approvals subsequently ratified by the full Audit Committee. Typically, however, the Audit Committee itself reviews the matters to be approved. The Audit Committee periodically monitors the services rendered by and actual fees paid to the independent auditors to ensure that such services are within the parameters approved by the Audit Committee. The Sarbanes-Oxley Act prohibits an issuer from obtaining certain non-audit services from its auditing firm so as to avoid certai n potential conflicts of interest; the Company will not obtain any of these prohibited services from McGladrey & Pullen, LLP, and the Company is able to obtain such services from other service providers at competitive rates.

45

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

M~WAVE, Inc.

By:  /s/  Jim Mayer

Jim Mayer

Chief Executive Officer

July 28, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/  Jim Mayer	/s/  Carl Klein
Jim Mayer	Carl Klein
Chief Executive Officer	Chairman of the Board
July 28, 2005	July 28, 2005
/s/  Joseph A. Turek	/s/  Gregory E. Meyer
Joseph A. Turek	Gregory E. Meyer
President and COO	Director
July 28, 2005	July 28, 2005
/s/ Jeff Figlewicz	/s/ James A. Skelton
Jeff Figlewicz	James A. Skelton
Corporate Controller	Director
(Principal Accounting and Financial Officer)	July 28, 2005
July 28, 2005
/s/ Gary Castagna
Gary Gastagna
Director
July 28, 2005

46

EXHIBIT 21

SUBSIDIARY	JURISDICTION OF ORGANIZATION
M-Wave DBS, Inc.	Illinois

47

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated January 14, 2005, except for the acquisition discussed in Note 13 as to which the date is February 25, 2005 and the financing also discussed in Note 13 as to which the date is April 11, 2005, on the consolidated financial statements of M-Wave, Inc. and Subsidiaries which are included in the Annual Report of M~Wave, Inc. and Subsidiaries on Form 10-KSB for the year ended December 31, 2004.  We hereby consent to the incorporation by reference of our report in the Registration Statements of M~Wave, Inc. and Subsidiaries on Form S-8 (No. 333-119269 and No. 33-72650) and Form S-3 (File No. 33-98712).

/s/ MCGLADREY & PULLEN LLP

Schaumburg, Illinois

April 15, 2005

48

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 33-98712) and Form S-8 (Nos. 33-72650 and 333-119269) of M~Wave, Inc. of our report dated March 26, 2004, except for footnotes 8 and 17 which is dated March 31, 2004, relating to the consolidated balance sheet of M~Wave, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, which reports appear in the December 31, 2004 annual report on Form 10-KSB of M~Wave, Inc.

/s/ GRANT THORNTON LLP

Chicago, Illinois 

April 15, 2005  

49

EXHIBIT 31.1

Certifications

I, Jim Mayer, Chief Executive Officer of M-Wave, Inc., certify that:

1.     I have reviewed this 10-KSB of M-Wave, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.     The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.     The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:  July 28, 2005

By:/s/ Jim Mayer

Jim Mayer

Chief Executive Officer

EXHIBIT 31.2

Certifications

I, Jeff Figlewicz, Corporate Controller and Principal Financial Officer of M-Wave, Inc., certify that:

1.     I have reviewed this 10-KSB of M-Wave, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.     The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.     The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:  July 28, 2005

By:/s/ Jeff Figlewicz

Jeff Figlewicz

Corporate Controller

and Principal Financial Officer

EXHIBIT 32.1

CERTIFICATION UNDER SECTION 906 of the SARBANES-OXLEY ACT OF 2002

We, Jim Mayer, Chief Executive Officer of M-Wave, Inc. (the “Company”), and Jeff Figlewicz, Corporate Controller and Principal Financial Officer, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)        the Annual Report on Form 10-KSB of the Company for the period ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2)        the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  July 28, 2005   

    /s/ Jim Mayer        

       Jim Mayer

Chief Executive Officer

Dated:  July 28, 2005  

    /s/ Jeff Figlewicz   

       Jeff Figlewicz

Corporate Controller and

Principal Financial Officer

EX-1

AMENDED AND RESTATED

AGREEMENT FOR STRATEGIC OPERATING ALLIANCE

THIS AMENDED AND RESTATED AGREEMENT FOR STRATEGIC OPERATING ALLIANCE, dated as of December 31, 2004 (“Agreement”), is entered into by and among M-WAVE, INC., a Delaware corporation (“M-Wave”), and AMERICAN STANDARD CIRCUITS, INC., an Illinois Corporation (“American Standard”), and for purposes of Section 13 only, GORDHAN PATEL&nb sp;(“Patel”).

RECITALS:

M-Wave and American Standard are parties to that certain Agreement for Strategic Operating Alliance, dated as of January 28, 2004 (“Original Agreement”);

M-Wave claims that American Standard failed to perform certain of its duties under the Original Agreement, including the merging of the parties’ sales departments;

M-Wave and American Standard desire to amend and restate the Original Agreement in its entirety, as set forth herein;

Patel has performed consulting services for M-Wave and M-Wave desires that Patel continue to perform such consulting services for at least (3) months; and

Patel desires to continue to perform such consulting services, in exchange for the options to be issued pursuant to this Agreement.

NOW, THEREFORE, Poly Circuits, Inc, a wholly owned subsidiary of M-Wave, Inc. merged into M-Wave, which succeeded Poly Circuits’ business, assets and interest in Am-Wave  LLC, the Original Agreement is hereby amended and restated in its entirety, effective as of the day and year first above written, as set forth below:

1.         Effectiveness of this Agreement.  This Agreement shall become effective upon the completion of all of the following: (a) execution by M-Wave and American Standard of this Agreement, (b) execution by M-Wave and AMI Partners of an amendment to M-Wave’s lease of a portion of the Manufacturing Facility (as defined below), and (c) execution by M-Wave and American Standard of an agreement (the “LLC Transfer Agreement”) transferring M-Wave’s interest in Am-Wave, LLC to American Standard and releasing M-Wave from all continuing liability regarding Am-Wave, LLC.

2.         Manufacturing.  American Standard shall manufacture high-performance circuit boards (“Products”) for M-Wave customers, as directed by M-Wave, at their manufacturing facilities located in Franklin Park and West Chicago, Illinois (the “Manufacturing Facility”) in accordance with the terms of this Agreement.  M‑Wave in its sole discretion may place any orders for the manufacture of Products with Asian third party vendors.

3.         Purchase Orders.  M-Wave will obtain written purchase orders from its customers for the purchase and delivery of Products hereunder, which shall specify all Work to be completed, and deliver the same to American Standard.  For the purposes of this Agreement, “Work” shall mean to procure labor, components, raw materials, equipment and other supplies, and to manufacture, bond, test, and deliver the Products to M-Wave.  Each purchase order shall specify the quantity of all Products ordered, the part number, the requested delivery date, price, and shall reference the applicable writ ten Specifications.  As used herein, “Specifications” shall include, without limitation, manufacturing plans, test data, quality control data, compositions, bills of material, samples, schematics, process documentation, and test specifications.  Purchase orders shall normally be deemed approved by American Standard upon receipt; provided, however that American Standard may in good faith reject any order for products not listed on Annex 1 that American Standard does not have the technological capacity to manufacture, that does not substantially conform to the terms and conditions of this Agreement, or does not provide a price that is reasonably acceptable to American Standard, or would exceed the amount outstanding credit limits under paragraph 4(c) unless waived by American Standard for any particular order.  American Standard shall notify M-Wave of its disapproval of any purchase order within three (3) business days of receipt of such order.  M-Wave and Am erican Standard will use reasonable efforts to satisfy any order changes made by a customer and will respond to the customer regarding meeting the requested change within seven (7) business days of receipt of a written order requesting such change.  The Parties agree that the terms and conditions contained in this Agreement shall prevail over any terms and conditions of any purchase order, acknowledgment form or other instrument.

4.         Price and Payment Terms.

(a) Unit Price.  For each Product manufactured for M-Wave customers, M-Wave shall pay to American Standard the “Unit Price,” which shall mean the standard cost of such Product as set forth in the pricing matrix spreadsheet attached hereto as Annex 1, as may be changed hereafter from time to time by mutual agreement of the Parties.  The standard cost on such pricing matrix spreadsheet generally equals the difference between (i) the price of such Product to the customer and (ii) an agreed-upon discount (“Discount”).  M-Wave shall retain the excess of the amount paid by its customer for the Product over the Unit Price due from M-Wave to American Standard.

(b) Monthly Charge.  In lieu of the allocation of expenses previously provided in Section 7 of the Original Agreement and in addition to the Unit Price set forth above, by the 20th day of each calendar month beginning November 1, 2004, M-Wave shall be charged an amount ("Monthly Charge") equal to the difference between (x) the greater of 6% of the aggregate Unit Price of all purchases by M-Wave from AMI Partners in the immediately preceding calendar month or $56,000 less (y) the monthly rent payment made pursuant to the Industrial Loft Lease dated January 28, 2004, as amended, in respect of the second floor of an industrial building known as 475 Industrial Way, West Chicago, Illinois; provided that :

(i)   M-Wave shall no longer be charged the Monthly Charge if American Standard (A) is no longer able to manufacture the Products for M-Wave at the Manufacturing Facility, (B) ceases to exist, (C) undergoes a Fundamental Change (as defined below), or (D) materially breaches this Agreement and fails to cure such breach within ten calendar days following M-Wave’s delivery of notice of such breach.

(ii)  If American Standard to manufacture pursuant to paragraph 3, at least 50% of the orders for Products that M-Wave places with American Standard in any month, then the Monthly Charge shall equal the lesser of $56,000 or 6% of the aggregate Unit Price of all purchases less the monthly rent payment by M-Wave from American Standard in the immediately preceding calendar month.

(c) Terms.  Payment for each Product by M-Wave to American Standard hereunder is due within ten (10) business days of the date of delivery by American Standard to M-Wave pursuant to Section 6 below; provided that American Standard shall not be obligated to provide M-Wave with outstanding credit in excess of $500,000.

(d) Purchase Credits.  The parties acknowledge that, pursuant to the LLC Transfer and Lease Agreement, M-Wave is entitled to $340,000 in purchase credits from American Standard.  M‑Wave shall be entitled to apply $15,000 of such purchase credits each calendar month as an offset against the Unit Price of Products purchased hereunder and/or against the Monthly Charge and/or against any other amounts due hereunder.  In the event American Standard (i) is no longer able to manufacture the Pro ducts for M-Wave at the Manufacturing Facility, (ii) ceases to exist, (iii) undergoes a Fundamental Change (as defined below), or (iv) materially breaches this Agreement and fails to cure such breach within ten calendar days following M-Wave’s delivery of notice of such breach and provided M-Wave is not in default, then (A) M-Wave shall be entitled to apply all such remaining purchase credits as an offset against the Unit Price of Products purchased hereunder and/or against the Monthly Charge and/or against any other amounts due hereunder, with no limits on the amount of the remaining purchase credits that may be applied and offset and (B) American Standard shall  within sixty (60) business days pay to M-Wave in immediately available funds the amount of any remaining purchase credits that have not been so applied by M-Wave.

(e) Other.  The Unit Price is exclusive of federal, state and local excise, sales, use and similar taxes, and any duties; and M-Wave shall be responsible for the collection of all such amounts from customers and the remission of such amounts to the appropriate authorities.  The Unit Price is also exclusive of freight, insurance and other shipping expenses which are the responsibilities of M-Wave.

(f) Fundamental Change.  A “Fundamental Change” means consummation by American Standard of: (A) a merger or consolidation; (B) a complete liquidation or dissolution of American Standard; (C) the sale or other disposition of all or substantially all of the assets of American Standard; or (D) a similar transaction not described above that has an effect substantially similar to that of a transaction described above.

5.         Packaging and Labeling.  M-Wave, at its own expense, will package and include Labels on or with all M-Wave Products and packaging to be supplied in accordance with the applicable Specifications.  As used herein, “Label(s)” shall mean all (a) labels and other written, printed or graphic matter placed upon the Products, (b) containers and/or wrappers utilized with the Products including, without limitation, Product inserts which bear the trademarks or trade dr ess of M-Wave, and (c) other matters designated in the Specifications or on approved prototypes/samples.

6.         Shipments.  M-Wave, at its own expense, shall ship all Products to the customer in accordance with the applicable Specifications.

7.         Acceptances and Rejection.  If a customer (a) rejects in whole or in part any shipment of Products because such Products were determined not to be in accordance with the applicable Specifications (the “Nonconforming Products”) or (b) informs M-Wave of any shortage in quantity of any shipment of Products, M-Wave shall promptly provide American Standard written notice of such rejection or shortage and American Standard shall use reasonable efforts to replace the Nonconformin g Products or make up the shortage, at no additional cost to the customer and as quickly as possible, but in any event within ten (10) business days of receiving notice of such rejection or shortage.  At American Standard’s option and expense, shipments of Nonconforming Products shall be returned to American Standard via M-Wave or destroyed by the customer.  The remedy of replacement or refund will not be available for Nonconforming Products if such nonconformance was caused by the customer’s misuse, unauthorized modifications, neglect, improper testing or improper storage of such Nonconforming Products.

8.         Customer Complaints.  If M-Wave receives a consumer complaint relating to a defect in any Product, M-Wave may seek, in a prompt and reasonable manner, the resolution of such complaint by American Standard in accordance with the terms of this Agreement.

9.         Hazardous or Unsafe Condition of Products.  In the event American Standard or M-Wave learns of any condition relating to a potential safety hazard or unsafe condition in any of the Products, or is advised of such by any state or federal regulatory authorities having jurisdiction over such Products, such Party shall immediately advise the other Party and provide all relevant information, and the Parties shall exert all reasonable efforts to promptly resolve the situation.

10.       Transition Issues.  

(a) Phone System.  M-Wave shall manage the phone system at the Manufacturing Facility, and provide American Standard with access to and use of same, at M-Wave's sole expense, through January 31, 2005.  After February 1, 2005, American Standard shall have no further right to use the phone system managed and paid for by M-Wave, and American Standard shall install its own phone system and pay its own phone and internet expenses.

(b) Reception; IT.  M-Wave and American Standard shall each pay 50% of the salary of the receptionist, until such time as American Standard determines that such receptionist is no longer needed.  M-Wave and American Standard shall each pay 50% of the salary of the information technology manager through December 31, 2004; thereafter, American Standard shall pay M-Wave $40 per hour for information technology services requested by American Standard and provided by M-Wave's employees.

(c) Deliveries.  For use of American Standard's driver, M-Wave will pay American Standard $100 per week to make one delivery per week to University Park and $250 per week to make daily deliveries from American Standard's facility in Franklin Park, until such time as M-Wave notifies American Standard that either or both of such delivery services are no longer needed.

(d) Engineering.  M-Wave will pay American Standard $40 per hour for engineering services requested by M-Wave and provided by American Standard's employees."

(e) Orbotec Equipment.  M-Wave will transfer ownership and possession of the Orbotec Model DP-100 UV Laser Direct Imaging System, S/N DP 1202 to American Standard without recourse.  All responsibilities in regards to licensing fees, transfer fees, maintenance of equipment, etc. are the sole responsibility of American Standard. M-Wave will co-operate with ASC to get Orbotec licenses for equipment and software including the LDI machine, transferred to ASC for no cost.

11.       Term.

(a) Stated Term.  This Agreement shall be effective as of October 1, 2004 and shall continue in effect until August 31, 2006 (the “Term”).

(b) Early Termination.

(i)   Notwithstanding the above, the non-breaching Party shall have the right to terminate this Agreement immediately, if the other Party materially breaches this Agreement at any time and such breach is not cured (x) within seven (7) days of written notice if the breach was caused by the failure of the other Party to make any payment required under this Agreement or (y) within thirty (30) days of written notice thereof for any other material breach of this Agreement.  In either case, such notice shall specify in detail the nature of the breach.

(ii)  Either Party may terminate this Agreement, effective immediately upon the giving of written notice, if the other Party shall file a petition for bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall take advantage of the insolvency laws of any state of the United States, or shall make an assignment for the benefit of creditors, or shall have a receiver appointed, whether by private instrument or by court officer, for its property, or become subject to an involuntary petition for bankruptcy, or have a major portion of its assets become subject to attachment that is not rescinded within forty-five (45) days.

(iii) This Agreement may be terminated by either Party upon sixty (60) days written notice to the other if any conditions constituting a Force Majeure as described in Section 24(b) herein exist for a period in excess of forty-five (45) days in any twelve-month period.

(c) Effect of Termination.  Termination or expiration of this Agreement shall not (i) affect any other rights of either Party which may have accrued up to the date of such termination or expiration, or (ii) relieve either Party of its obligation to pay to the other Party sums due in respect of Products delivered and accepted prior to termination or expiration of this Agreement.  The provisions of Sections 15 (Intellectual Property), 18 (Product Warranty), 19 (Records and Audit), 20 (Confidentiality), 21 (Non-Solicitation of Customers and Employees), 23 (Indemnification), and 24 (Miscellaneous) of this Agreement shall survive termination or expiration of this Agreement.

12.       Sales.  M-Wave will no longer pursue merging the sales departments as described in the Original Agreement. However, M-Wave will be the sole sales agent for all microwave and RF products produced at the Manufacturing Facility, except however American Standard may manufacture small orders of microwave and RF products at the Manufacturing Facility with M-Wave’s approval for American Standard’s customer. M-Wave agrees to provide ASC with a “right of refusal” on all digital Products ordered by M-Wave.  M-Wave agrees that it will not establish a relationship with an alternative domestic manufa cturing source solely to provide improved credit terms over those provided in this agreement.

13.       M-Wave Warrant and Options.

(a) Warrant.  Pursuant to the Original Agreement, M-Wave granted Gordhan Patel a warrant to purchase 500,000 shares of M-Wave common stock at an exercise price of $1.35 per share for a term of five years (the “Warrant”).  The parties hereby agree that the Warrant is hereby canceled and terminated in its entirety, without the exercise of any portion thereof.

            (b) Options.  In full consideration for the consulting services that Patel has previously provided to M-Wave and for future consulting services to be provided by Patel to M-Wave (as further described in the recitals hereto), M-Wave hereby grants Patel options to purchase 104,167 shares of M-Wave’s common stock (the “Options”) at an exercise price of $1.35 per share for a term of four years from the date of this Agreement.  The Options shall be fully vested on the date of this Agreement and are exercisable in full; provided that Patel shall not exercise any portion thereof until M-Wave has filed the registration statement on Form S-8 described in Section 13(c) below.

            (c) Registration.  Within 60 days following the date hereof, M-Wave shall prepare and file with the U.S. Securities and Exchange Commission a registration statement on Form S-8, at M-Wave’s expense, covering the shares of common stock issuable upon exercise of the Options.

            (d) Certificates.  M‑Wave shall issue Mr. Patel the Options in the form of Exhibit A attached hereto.

            14.       Equity Interest in American Standard.  M-Wave’s equity interest in American Standard, as defined in Section 24 of the Original Agreement, is hereby terminated in its entirety and extinguished.

            15.       Intellectual Property.  Unless specifically and expressly granted herein and notwithstanding a Party’s use thereof, no licenses or rights under either Party’s intellectual property rights including, without limitation, copyrights, trademarks, trade names, trade secrets, patents or any other proprietary rights issued, honored and/or enforceable under any applicable laws, are implied or granted in this Agreement.  Each Party shall retain full ownership of all of its intellectual property.

16.       Regulatory Matters.

(a) American Standard represents and warrants that it currently has all material licenses and permits necessary for the operation of its business as currently conducted.

(b) American Standard will be responsible for any reporting of matters regarding the manufacture of Products, as applicable, to relevant regulatory authorities, in accordance with pertinent laws and regulations and shall notify M-Wave of any occurrence or information that arises out of its manufacturing activities that has adverse regulatory compliance and/or reporting consequences concerning a Product.

(c) American Standard shall be responsible for handling and responding to any governmental agency inspections with respect to manufacturing of Products during the Term and shall provide to M-Wave copies of any information requested by any governmental agency in connection with any governmental inspection related to the Products.

(d) Each Party shall comply with all applicable laws, rules and regulations in fulfilling their obligations under this Agreement.

17.       Manufacturing Certifications.  American Standard represents and warrants that it currently has UL and ISO certifications appropriate to the manufacture and sale of Products.

18.       Product Warranty.  M-Wave warrants to its customers that all Products shall substantially conform to the applicable Specifications and will be free from defects in workmanship.  Third-party materials used to manufacture the Products are warranted by M-Wave to the same extent that the original manufacturer warrants the materials.  These warranties do not apply to (a) Products that have been abused, damaged, altered or misused by any person or entity after title passes from or (b) any work done to a Product or material added to a Product after shipment of the Product to the customer.  American Standard will bear all costs of repairing any defective Product within the above warranties in a manner consistent with its obligations under Section 7.

19.       Records and Audit.

(a) During the Term and for five (5) years thereafter, each Party shall keep complete and accurate accounts, notes, data and records of the Work performed under this Agreement (collectively the “Records”).  American Standard shall maintain complete and adequate records pertaining to the methods and facilities used by it for the manufacture, processing, testing, packing, labeling, pricing and distribution of the Products in accordance with the applicable regulations in the United States and other countries, if applicable.

(b) During the Term and for five (5) years thereafter, each Party shall be permitted, at the expense of the requesting Party, to audit and make copies of the Records of the other Party to verify the proper allocation and payment of revenue and expenses under this Agreement.  Any Confidential Information (as defined below) provided pursuant to this Section shall be subject to the provisions of Section 20 below, provided that a Party may disclose such Confidential Information to its advisors and attorneys, as necessary to complete the audit described in this Section.  Each such audit will be conducted only during normal business hours of the audited Party.

20.       Confidentiality.

(a) Each Party acknowledges that any and all Confidential Information disclosed or submitted by one Party (the “Disclosing Party”) to the other (the “Receiving Party”) hereunder (i) shall be received and maintained by the Receiving Party with at least the same degree of care to avoid disclosure of such Confidential Information as it uses with respect to its own Confidential Information, and (ii) shall not be used for any purposes other than those expressly permitted under this Agreement and shall not be disclosed to any third party without the prior written consent of th e Disclosing Party.

(b) For the purposes of this Agreement, “Confidential Information” shall mean any information or material that is special, unique, proprietary, or gives such Party or its affiliates a competitive advantage and/or enhances such Party’s or its affiliates’ good will, whether such information or material is designated “confidential” or not, and whether such information or material is written or oral, or obtained by viewing such Party’s premises, data or files, including, but not limited to, formulae or revisions thereto, processes and methods, business plans, financial data, customers, product development plans, marketing plans or strategies, distributor or representative lists, manufact uring methodologies, and research data, except to the extent that it can be established by the Receiving Party by competent proof that such Confidential Information: (i) was already known to the Receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the Disclosing Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party; (iii) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the Receiving Party in breach of this Agreement; or (iv) was disclosed to the Receiving Party, other than under an obligation of confidentiality, by a third party who had no obligation to the Disclosing Party not to disclose such information to others.

(c) Each Party may disclose the other’s Confidential Information to the extent such disclosure is reasonably necessary in complying with applicable governmental regulations or, with respect to M-Wave, by rules of the NASDAQ Stock Market, provided that if a Party is required to make any such disclosure of the other Party’s Confidential Information it will give reasonable advance notice to the other Party of such disclosure requirement, and will use its best efforts to secure confidential treatment of such Confidential Information required to be disclosed.

(d) All Confidential Information disclosed by a Disclosing Party to a Receiving Party shall be and shall remain the property of the Disclosing Party, regardless of such disclosure and regardless of the use of such Confidential Information by the Receiving Party.

(e) It is further understood and agreed that money damages would not be sufficient remedy for any breach of this Section 20 and that the Disclosing Party shall be entitled to injunctive relief, including specific performance, as a remedy for any such breach by the Receiving Party.  Such remedy shall not be deemed to be the exclusive remedy for breach of this Section 20 but shall be in addition to all other remedies available at law or equity.

21.       Non-Solicitation of Customers and Employees.

(a) Customers.  Each Party agrees that, during the Term, such Party shall not directly or indirectly induce or attempt to induce any customer of the other Party to cease doing business with the other Party, or in any way interfere with the relationship between any such customer and the other Party, except as necessary to fulfill a Party’s specific rights, obligations and duties hereunder.

(b) Employees.  During the Term and for six (6) months thereafter; provided the other Party has not ceased business operations, each Party shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of the other Party to leave the employ of the other Party, or in any way interfere with the relationship between the other Party and any employee thereof, or (ii) hire any person who was an employee of the other Party at any time during the Contract Term (unless such employee was terminated by the other Party).

(c) Blue Pencil Doctrine.  If, at the time of enforcement of this Section 21, a court shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law.  Each Party agrees that the restrictions contained in this Section 21 are reasonable.

(d) Breach.  In the event of the breach or a threatened breach by a Party of any of the provisions of this Section 21, the other Party, in addition and supplementary to other rights and remedies existing in its favor, may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof (without posting a bond or other security).

22.       Press Releases.  Except as and to the extent required by law, rule or regulation or, with respect to M-Wave, by rules of the NASDAQ Stock Market, neither Party shall permit its representatives to make any public communication or press release regarding the proposed transaction without the prior written consent of the other Party.  If M-Wave determines that a public press release is appropriate, the Parties shall first agree on the text of such release, such approval not to be unreasonably withheld.  Notwithstanding the foregoing, M-Wave may make any and all communications, releases and disclosures tha t it reasonably determines to be required or desirable under any securities laws, rules or regulations or rules and regulations of the NASDAQ Stock Market.  Either Party shall provide the other Party with a complete copy of any press release it issued, within 24 hours of issuance.

23.       Indemnification.

(a) Indemnification by American Standard.  American Standard agrees to indemnify, defend and hold harmless M-Wave and its officers, directors, shareholders, representatives, agents and employees (the “M-Wave Indemnities”), from and against any and all losses, liabilities, damages, costs, fees and expenses, including reasonable legal costs and attorneys’ fees (“Losses”) resulting from (i) American Standard’s breach of a ny representation, warranty, covenant or agreement contained in this Agreement; (ii) any third-party claim, suit or action based upon, attributable to or caused by the acts or omissions of American Standard; or (iii) the negligent or intentional wrongful act or omission of American Standard.

(b) Indemnification by M-Wave.  M-Wave agrees to indemnify, defend and hold harmless American Standard and its officers, directors, shareholders, representatives, agents and employees (the “American Standard Indemnities”), from and against any and all Losses (as defined above) resulting from (i) M-Wave’s breach of any representation, warranty, covenant or agreement contained in this Agreement; (ii) any third-party claim, suit or action based upon, attributable to or caused by the acts or omissions of M-Wave; or (iii) the negligent or intentional wrongful act or omiss ion of M-Wave.

c) Indemnification for Bank Relationship.  In connection with the transactions contemplated hereby, the parties hereto and other affiliated parties are entering into the LLC Transfer Agreement, an amendment to the lease described in Section 4(b) hereof, and other agreements. The property which includes the space subject to such lease is subject to a mortgage and an assignment of rents granted by the landlord in favor of American Chartered Bank to secure indebtedness, and certain equipment is subject to a first lien security interest granted by AM Wave, LLC in favor of American Chartered Bank to secure indebtedness (and there is an intercreditor agreement in respect thereof between Poly Circuits, Inc (as predecessor in interest to M-Wave) and American Chartered Bank. The foregoing agreements and documents are referred to collectively in this paragraph as the "Loan-Related Documents". As a result of the LLC Transfer Agreement, American Standard is the sole owner of all interests in Am-Wave, LLC.  American Standard represents, warrants, covenants and agrees that M-Wave is in no way responsible for the obligations of AMI Partners, LLC, Am-Wave, LLC and/or American Standard to American Chartered Bank and that solely American Standard, Ami Partners, LLC and /or Am-Wave, LLC are responsible therefore and for procuring any consent required from American Chartered Bank to the execution and performance of this Agreement and the documents being executed concurrent herewith, and that American Standard has procured any such necessary consent.  American Standard agrees that it shall indemnif y and hold harmless M-Wave, its owners (direct and remote), their respective directors, officers, agents and employees, and the legal representatives and assigns of each and all of them (collectively, the "M-Wave Protected Parties") of and from any and all liabilities, losses, suits, actions, judgments, costs, expenses (including without limitation reasonable attorneys' fees), claims and demands whatsoever made against or incurred or suffered by any one or more of the M-Wave Protected Parties by or on behalf of American Chartered Bank in respect of any one or more of the Loan-Related Documents and/or this SOA.

(d) Indemnity Procedure.  In the event that a Party (the “Indemnified Party”) is seeking indemnification under this Section 23, it shall provide prompt written notice to the other Party (the “Indemnifying Party”) as soon as reasonably practicable after it receives notice of the claim, provided that the failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the ex tent such failure shall have materially prejudiced the Indemnifying Party.  The Indemnified Party shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and, at the Indemnifying Party’s expense, shall cooperate as reasonably requested in the defense of the claim; provided that the Indemnifying Party may not assume direction and control of the defense of the claim if (i) the claim seeks non-monetary relief against the Indemnified Party, (ii) the claim involves criminal allegations against the Indemnified Party, or (iii) the Indemnified Party reasonably determines that the Indemnifying Party has failed or is failing to vigorously defend against such claim.  The Indemnified Party shall have the right to retain its own counsel, and the fees and expenses of the Indemnified Party’s counsel will be paid by the Indemnifying Party if representation of the Indemnified Pa rty by the counsel retained by Indemnifying Party would be inappropriate due to an actual or potential conflict of interest.  The Indemnifying Party may not settle such action or claim, or otherwise consent to an adverse judgment in such action or claim, without the express written consent of the Indemnified Party if such settlement or adverse judgment diminishes the rights or interests of the Indemnified Party.

24.       Miscellaneous.

(a) Assignment and Succession.  This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, assigns and representatives.  Neither Party shall have the right to assign or otherwise transfer its rights or obligations under this Agreement except with the prior written consent of the other Party, not to be unreasonably withheld.

(b) Force Majeure.  In the event that either Party is prevented from performing or is unable to perform any of its obligations under this Agreement due to any act of God, fire, casualty, flood, earthquake, war, strike, lockout, epidemic, destruction of production facilities, riot, insurrection, material unavailability, or any other cause beyond the reasonable control of the Party invoking this Section 24(b) (“Force Majeure”), and if such Party shall have used its commercially reasonable efforts to mitigate its effects, such Party shall give prompt written notice to the oth er Party, its performance shall be excused, and the time for the performance shall be extended for the period of delay or inability to perform due to such occurrences.

(c) Notices.  All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent via overnight courier, sent by facsimile, or mailed by first class certified or registered mail, return receipt requested, postage prepaid:

If to American Standard:

American Standard Circuits, Inc.

3615 Wolf Road

Franklin Park, IL 60131-1425

Attention: Gordhan Patel

Fax: (847) 455-1518

With a copy to:

Marvin W. Temple, Esq.

555 N. Skokie Blvd.

Northbrook, Illinois

Fax: (847) 480-1414

If to M-Wave:

M-Wave, Inc.

475 Industrial Drive

West Chicago, IL 60185

Attention: Joseph Turek

Fax: (630) 562-2430

With a copy to:

Jeff Mattson

Freeborn and Peters, LLP

311 S. Wacker Dr., Suite 3000

Chicago, IL 60606

Fax: (312) 360-6571

or to such other person or entity or at such other address as any Party shall designate by notice to the other in accordance with this Section 24(c).  Notices provided in accordance with this Section 24(c) shall be deemed delivered (i) upon personal delivery with signature required; (ii) one (1) business day after they have been sent to the recipient by reputable overnight courier service (charges prepaid and signature required); (iii) upon confirmation, answer back received, of successful transmission of a facsimile message containing such notice if sent between 9 a.m. and 5 p.m., local time of the recipient, on any Business Day, and as of 9 a.m. local time of the recipient on the next business day if sent at any other time; or (iv) three (3) business days after deposit in t he mail.

(d) Waiver.  Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party’s rights or remedies provided in this Agreement.

(e) Severability.  If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law.

(f) Entire Agreement.  This Agreement and the documents executed in connection herewith set forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto with regard to the subject matter discussed herein and supersede and terminate all prior agreements and understanding between the Parties with regard to the subject matter discussed herein (including the Original Agreement, which shall have no further force or effect after the date of this Agreement).  There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the Parties with regard to the subject matter dis cussed herein other than as set forth in this Agreement.  Notwithstanding the foregoing sentence, nothing in this Agreement shall limit the rights and obligations of the respective parties to the lease of a portion of the Manufacturing Facility by M-Wave from an affiliate of American Standard.

(g) Independent Contractor.  Neither Party shall, for any purpose, be deemed to be an agent or partner of the other Party and the relationship between the Parties shall only be that of independent contractors.  Neither Party shall have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of the other Party, whether express or implied, or to bind the other Party in any respect whatsoever.

(h) Governing Law and Venue.  This Agreement shall be governed by and construed under the laws of the State of Illinois, excluding its choice of law principles.  For any claim or proceeding arising under or out of this Agreement (“Proceeding”), each Party agrees to submit to the exclusive jurisdiction of the state and federal courts located in the State of Illinois and hereby waives any objection it may now or hereafter have to venue or to convenience of forum, a grees that all claims in respect of the Proceeding shall be heard and determined only in any such court and agrees not to bring any Proceeding arising out of or relating to this Agreement or any contemplated transaction in any other court.  The Parties agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the Parties irrevocably to waive any objections to venue or to convenience of forum.

(i) Injunctive Relief.  Notwithstanding the foregoing, the Parties acknowledge and agree that money damages may not be an adequate remedy for any breach or threatened breach of this Agreement, and that, in such event, any Party may, in addition to any other rights and remedies existing in its favor, bring an action in any court of competent jurisdiction situated in Cook, County, Illinois for specific performance or injunctive relief or for other provisional relief to compel another Party hereto to comply with its obligations under this Agreement whether or not any arbitration proceedings have been initiated.  

(j) Counterparts.  This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by on the day and year first above written.

M-WAVE, INC.

By:

Name:

Title:

AMERICAN STANDARD CIRCUITS, INC.

By:

Name:

Title:

GORDHAN PATEL (for purposes only of agreeing to Section 13 above)

ANNEX 1

PRICING MATRIX

[TO BE ATTACHED.]

EXHIBIT A

OPTIONS

[TO COME.]

EX-2

PURCHASE AGREEMENT

            This Purchase Agreement (this “Agreement”) is made as of the 31st day of December, 2004, by and among M-Wave, Inc., a Delaware corporation (“Seller”), and American Standard Circuits, Inc., an Illinois corporation (“Purchaser”).

            WHEREAS, Purchaser and Seller are members of Am-Wave, LLC, an Illinois limited liability company (the “Company”), and are parties to the Limited Liability Company Operating Agreement of the Company, dated as of January 28, 2004 (the “Operating Agreement”);

            WHEREAS, on the date hereof, Purchaser and Seller have entered into an Amended and Restated Agreement for Strategic Operating Alliance (the “Restated SOA”);

            WHEREAS, Seller proposes to sell to Purchaser all of Seller’s ownership interest in the Company (the “Ownership Interest”);

            WHEREAS, Seller proposes to sell to Purchaser certain microwave laminate currently owned by Seller (the “Laminate”) and the Orbotec LDI machine;

            WHEREAS, Seller proposes to sell to Purchaser all of Seller’s ownership interest in the Company, the Laminate and the Orbotec LDI machine; and

            WHEREAS, Purchaser desires to purchase the Ownership Interests and Laminate on the terms and conditions set forth herein.

            NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows:

WITNESSETH:

            1.         Sale of Ownership Interests.  Seller hereby sells, and Purchaser hereby buys, the Ownership Interests in consideration for the Purchase Price (as defined in Section 3).  The effect of such sale is that Seller hereby irrevocably assigns and delivers to Purchaser all of such Seller’s right, title and interest in such Seller’s Ownership Interest, including all rights to any distributions, profits or dividends thereon, free of liens or encumbrances.

            2.         Sale of Laminate.  Seller hereby sells, and Purchaser hereby buys, the Laminate, free and clear of any encumbrances, in consideration for the Purchase Price.

            3.         Purchase Price. In consideration for the Ownership Interests and the Laminate, Purchaser shall pay Seller $390,000 (the “Purchase Price”) by wire transfer of  $50,000 in immediately available funds (the “Cash Consideration”) and a $340,000 credit against future purchases made by the Seller from the Purchaser (the “Credit Consideration”).  The C redit Consideration shall permit the Seller to receive a reduction against invoiced purchases made by the Seller from the Purchaser in accordance with the terms of the Restated SOA.  The allocation of the Cash Consideration and Credit Consideration between the Ownership Interests and the Laminate shall be as described in Exhibit A hereto.

            4.         Payment.  Contemporaneously with the execution of this Agreement, Purchaser shall deliver to Seller the Purchase Price as payment for the Ownership Interests and Laminate.

            5.         Closing.  The closing (the “Closing”) of the transactions contemplated by this Agreement shall be deemed to be effective immediately upon the latest to occur of (i) the execution of this Agreement by the parties, (ii) the occurrence of the Distribution (hereinafter defined), and (iii) the delivery by Purchaser to Seller of the Purchase Price.  Seller’s obligation to perform its obligations under this Agreement, including the delivery of the Ownership Interests and Laminate, is contingent upon Purchaser causing the Company, co ntemporaneously with the execution of this Agreement, to distribute to the Seller, the property known as the second floor flying probe (the “Flying Probe”), free and clear of any encumbrances, pursuant to the Consent Resolution of the Manager and Members of the Company dated  as of the date hereof (the “Distribution”).

            6.         Representations and Warranties of Seller. Seller hereby represents and warrants to the Company that:

(a)        Seller is the record owner and holder of the Ownership Interest set forth in the Operating Agreement and Seller has not previously assigned, transferred, hypothecated, or in any other manner disposed of or encumbered all or any part of such Ownership Interest or any rights relating thereto.

(b)        Seller owns the Ownership Interest free and clear of all liens, encumbrances, security agreements, security interests, options, claims, charges, or restrictions of any other person or entity.

(c)              Seller owns the Laminate and the Orbotec LDI machine free and clear of all liens, encumbrances, security agreements, security interests, options, claims, charges, or restrictions of any other person or entity.

(d)              Seller has full power and authority to transfer the Ownership Interest, the Laminate and the Orbotec LDI machine to Purchaser without obtaining the further consent or approval of any person, entity or governmental authority.

7.         Representations and Warranties of Purchaser.  Purchaser represents and warrants to Seller that:

(a)        Purchaser has full power, authority and legal right to enter into this agreement and to consummate and finance the transactions contemplated hereunder.

(b)        Company is the owner of the Flying Probe and the Company has not previously assigned, transferred, hypothecated, or in any other manner disposed of or encumbered any part of the Flying Probe or any rights relating thereto.

(c)        The Company owns the Flying Probe free and clear of all liens, encumbrances, security agreements, security interests, options, claims, charges, or restrictions of any other person or entity.

(d)        The Purchaser, as Manager of the Company, and pursuant to the Consent Resolution of the Company dated December 31, 2004, has full power and authority to transfer the Flying Probe to Seller without obtaining the further or additional consent or approval of any person, entity or governmental authority, and contemporaneously with or prior to the execution of this Agreement has transferred the Flying Probe to Seller.

8.         Indemnification.

(a)        Survival of Representations and Warranties.  The representations and warranties set forth in Sections 6 and 7 of this Agreement shall survive the Closing.

(b)        Indemnification by Seller. Seller shall indemnify, defend and hold Purchaser harmless from and against any and all claims, actions, suits, demands, assessments, judgments, losses, liabilities, damages, costs and expenses (including, without limitation, reasonable attorneys’ fees to the extent permitte d by law, and accounting fees and investigation costs) that may be incurred by Purchaser or arising out of, or relating to any breach of any representation or warranty or any covenant, obligation or agreement of Seller contained herein.

(c)        Indemnification by Purchaser.  Purchaser shall indemnify, defend and hold Seller harmless from and against any and all claims, actions, suits, demands, assessments, judgments, losses, liabilities, damages, costs and expenses (including, without limitation, reasonable attorneys’ fees to the extent permitted by law, and accounting fees and investigation costs) that may be incurred by Seller or arising out of, or relating to any breach of any representation or warranty or any covenant, obligation or agreement of Purchaser contained herein.

(d)        Common Law Remedies.  The indemnification provided in this Section 9 is in addition to, and in no way shall be construed to limit or replace, any other rights which the parties may have at common law or otherwise.

9.         Waiver of Distributions.  As of the Closing, Seller hereby waives any right, interest or title it may have to any distributions, profits or dividends, whether or not declared or otherwise accrued, on the Ownership Interests.

10.       Miscellaneous.

(a)        Governing Law; Situs of Litigation.  This Agreement will be governed by the laws of the State of Illinois.  The parties hereto irrevocably agree that all actions or proceedings in any way, manner, or respect arising out of or from or related to this Agreement shall be litigated only in courts having situs within Chicago, Illinois.  Each party hereby consents and submits to the exclusive jurisdiction of any local, state or federal court located within Chicago, Illinois and waives any right such party may have to transfer the venue of any such litigation.  The prevailing party in any litigation in connection with this Agreement shall be entitled to recover from the non-prevailing party all costs and expenses including, without limitation, reasonable attorneys’ and paraleg als’ fees and costs incurred by such party in connection with any such litigation.

(b)        Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto.

(c)        Notices. Any notice provided or permitted to be given under this Agreement shall be made in the manner provided in the Restated SOA. 

(d)        Severability.  In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, it is agreed that said invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions or portions thereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable.

(e)        Revocation of Earlier Agreements.  Any and all prior agreements relating to the transfer of Ownership Interests and the Laminate made and entered into by the parties herein, whether individually or collectively, are hereby revoked and terminated.  This Agreement supersedes any prior agreements between the parties on this subject.

(f)         Amendment.  This Agreement may be amended, modified, superseded or cancelled only by a written instrument executed by all of the parties hereto.

(g)        Waiver.  The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same.  No waiver by any party of any breach of any term contained in this Agreement, whether by conduct or otherwise in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such breach or a waiver of any other term contained in this Agreement.

(h)        Binding Effect.  This Agreement shall be binding upon and be enforceable by the parties hereto, and their respective personal representatives, administrators, heirs, successors and assigns.

(i)                Counterparts.  This Agreement may be executed through the use of separate signature pages or in any number of counterparts, and each such counterpart shall for all purposes be an original and constitute one agreement binding on all parties, notwithstanding that all parties are not signatories to the same counterpart.

            IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date and year first written above.

PURCHASER:

AMERICAN STANDARD CIRCUITS, INC.

By:

Its:

SELLER:

M-Wave, Inc

By:

Its:

EXHIBIT A

PURCHASE PRICE

	Cash Consideration	Credit Consideration
Ownership Interest	None	[$266,000.00]
Laminate	$50,000.00	[$74,000.00]

EX-3

NONSTATUTORY

STOCK OPTION AGREEMENT

            This Nonstatutory Stock Option Agreement (the “Agreement”), made as of this 31st  day of December, 2004 (the “Grant Date”), by and between M-Wave, Inc. (the “Company”) and Gordhan Patel (the “Optionee”) evidences the grant, by the Company, of a Nonstatutory Stock Option (the “Option”) to the Optionee on the Grant Date.  The Company and the Optionee agree as follows:

1.         Shares Optioned and Option Price.  The Optionee shall have an Option to purchase 104,167 shares of the Company’s common stock, par value $.005 per share (the “Common Stock”), at an exercise price of $1.35 per share, subject to the terms and conditions of this Agreement.  This Option evidences the grant of Options provided to Optionee pursuant to Section 13(b) of the Amended and Restated Strategic Operating Alliance, dated as of the Grant Date, among th e Company, Optionee and American Standard Circuits, Inc.

2.         Option Status.  The Option is intended to be a nonstatutory option and shall not be deemed to meet the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended (the “Code”).

3.         Vesting of Option.  Subject to the conditions and limitations of this Agreement, the Option is vested in full as of the Grant Date and shall become exercisable in full upon the Company’s filing with the U.S. Securities and Exchange Commission of a registration statement, on Form S-8 or otherwise, covering the shares of Common Stock issuable upon exercise of this Option.

4.         Exercise Period.  Subject to the conditions and limitations of this Agreement, the Option may be exercised, from time to time, with respect to all or any number of the then vested, unexercised shares of Common Stock remaining subject to the Option during the period beginning on the Grant Date and ending on the last day of the four-year period beginning on the Grant Date.  The Option may not be exercised to any extent and shall terminate after the end of such four-year period.

5.         Exercise of Option.  During the period that the Option is exercisable, it may be exercised in full or in part by (a) the Optionee; or (b) in the event of the Optionee’s death, by the person or persons to whom the Option was transferred by will or the laws of descent and distribution, by delivering or mailing written notice of the exercise to the Company, attn: President, along with full payment of the exercise price.  Payment of the exercise price shall be made in cash (including personal check).  The written notice shall be signed by each person entitled to exercise the Option and sh all specify the address and social security number of each such person.  If any person other than the Optionee purports to be entitled to exercise all or any portion of the Option, the written notice shall be accompanied by proof, satisfactory to the Company, of that entitlement.  The written notice will be effective and the Option shall be deemed exercised to the extent specified in the notice on the date that the written notice (together with required accompaniments) is received by the Company.

6.         Transfer of Shares on Exercise.  As soon as practicable after receipt of an effective written notice of exercise, full payment of the purchase price, the Company shall, subject to the conditions and limitations of this Agreement, cause ownership of the appropriate number of shares of the Common Stock to be transferred to the person or persons exercising the Option by having a certificate or certificates for those shares registered in the name of such person or persons and shall have each certificate delivered to the appropriate person.

7.         Tax Withholding.  The Company shall require payment of any tax required by law to be withheld by the Company with respect to exercise of the Option prior to transfer of the shares.  To the extent permitted by the Company, the amount required to be withheld may be paid by surrender of shares of Common Stock or by the Company’s retention of shares of Common Stock otherwise deliverable on exercise, valued in each case at their Fair Market Value on the date of exercise. For purposes of this Agreement, the “Fair Market Value” of a share of Common Stock means, as of any date: (a) if listed on a national securities exchange or authorized for quotation on the National Association of Securities Dealers Inc.’s NASDAQ National Market (“NASDAQ/NMS”), the regular session closing price of a share on such exchange or NASDAQ/NMS, as the case may be, or if no such reported sale of a share has occurred on that date, on the next preceding date on which there was such a reported sale; or (b) if not listed for trading on a national securities exchange and not authorized for quotation on NASDAQ/NMS, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System (“NASDAQ ”) Pink Sheets LLC, NASD Bulletin Board, or similar organization, or, if no such prices shall have been so reported for that date, on the next preceding date for which such prices were so reported; or (c) if not listed for trading on a national securities exchange and not authorized for quotation on NASDAQ/NMS or NASDAQ Pink Sheets LLC, NASD Bulletin Board, or similar organization, the fair market value of a share as determined in good faith by the Company.

8.         Restrictions on Transfers of Rights.  The rights of the Optionee under this Agreement may not be transferred except by will or the laws of descent and distribution and the rights under this Agreement may be exercised during the lifetime of the Optionee only by the Optionee.

9.         No Shareholder Rights before Exercise.  No person shall have any of the rights of a shareholder of the Company with respect to any Common Stock subject to the Option unless and until such shares are issued to that person on exercise of the Option.

10.       Entire Agreement.  This Agreement represents the entire agreement between the Company and the Optionee in connection with the Option.  To the extent contemplated in this Agreement, the provisions of this Agreement shall survive any exercise or lapse of the Option and shall remain in full force and effect.

11.       Adjustment.  The number of shares of Common Stock to which the Option relates and the Exercise Price shall be subject to appropriate adjustment (as reasonably determined by the Company) in the event of a stock dividend, stock split, reverse stock split, share combination, recapitalization, merger, consolidation, asset spin-off, reorganization or similar event, of or by the Company.

            IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee have signed this Agreement as of the day and year first above written.

M-WAVE, INC.

By:

Its:

GORDHAN PATEL

EX-4

SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of April ___, 2005, between SILICON VALLEY BANK, a California chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 (Facsimile Number 408-654-6212) (“Bank”), on the one side, and M-Wave, Inc., a Delaware corporation, and M-Wave DBS, Inc., an Illinois corporation, each with offices at 475 Industrial Drive, West Chicago, Illinois  60185 (Facsimile Number 630-562-2431) (jointly and severally referred to herein as the “Borrower”), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The parties agree as follows:

1              ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP.  Calculations and determinations must be made following GAAP.  The term “financial statements” includes the notes and schedules.  The terms “including” and “includes” always mean “including (or includes) without limitation,” in this or any Loan Document.  Capitalized terms in this Agreement shall have the meanings set forth in Section 13.  All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

2              LOAN AND TERMS OF PAYMENT

2.1          Promise to Pay.  Borrower hereby unconditionally promises to pay Bank the unpaid principal amount of all Advances hereunder with all interest, fees and finance charges due thereon as and when due in accordance with this Agreement.

2.1.1       Financing of Accounts.

(a)           Availability.  Subject to the terms of this Agreement, Borrower may request that Bank finance specific Eligible Accounts.  Bank may, in its good faith business judgment, finance such Eligible Accounts by extending credit to Borrower in an amount equal to the result of the Advance Rate multiplied by the face amount of the Eligible Account  (the “Advance” ).   Bank may, in its sole discretion, change the percentage of the Advance Rate for a particular Eligible Account on a case by case basis.  When Bank makes an Advance, the Eligible Account becomes a “Financed Receivable.”

(b)           Maximum Advances.   The aggregate face amount of all Financed Receivables outstanding at any time may not exceed the Facility Amount, which shall be determined on a joint basis, and not on a several basis, for both Borrowers, provided that (1) the maximum amount of Advances relating to Foreign Accounts shall not exceed $500,000 at any time and (2) the maximum amount of Advances hereunder together with the principal amount of the Loans (as defined in the CFD Loan Agreement) plus all reserves from loan availability under the CFD Agreement relating to Letters of Credit (as defined in the CFD Agreement), the FX Reserve (as defined in the CFD Agreement) and Cash Management Services (as defined in the CFD Agreement) shall not at any time exceed $6,000,000 in the aggregate.

(c)           Borrowing Procedure.  Borrower will deliver an Invoice Transmittal for each Eligible Account it offers.  Bank may rely on information set forth in or provided with the Invoice Transmittal.

(d)           Credit Quality; Confirmations.  Bank may, at its option, conduct a credit check of the Account Debtor for each Account requested by Borrower for financing hereunder in order to approve any such Account Debtor’s credit before agreeing to finance such Account.  Bank may also verify directly with the respective Account Debtors the validity, amount and other matters relati ng to the Accounts (including confirmations of Borrower’s representations in Section 5.3) by means of mail, telephone or otherwise, either in the name of Borrower or Bank from time to time in its sole discretion.

(e)           Accounts Verification/Notification/Collection.  At any time, Bank may verify an Account with the applicable account debtor relating thereto.  Further, upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing Borrower money of Bank’s security interest therein and may collect the amount owing.

(f)            Maturity.  This Agreement shall terminate and all Obligations outstanding hereunder shall be immediately due and payable on the Maturity Date.

(g)           Suspension of Advances.  Borrower’s ability to request that Bank finance Eligible Accounts hereunder will terminate if, in Bank’s sole discretion, there has been a material adverse change in the general affairs, management, results of operation, condition (financial or otherwise) or the prospect of repayment of the Obligations, or there has been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank prior to the execution of this Agreement. 

2.2          Collections, Finance Charges, Remittances and Fees.   The Obligations shall be subject to the following fees and Finance Charges.  Unpaid fees and Finance Charges may, in Bank’s discretion, accrue interest and fees as described in Section 9.2 hereof.  

2.2.1       Collections. Collections will be credited to the Financed Receivable Balance for such Financed Receivable, but if there is an Event of Default, Bank may apply Collections to the Obligations in any order it chooses.   If Bank receives a payment for both a Financed Receivable and a non-Financed Receivable, the funds will first be applied to the Financed Receivable and, if there is no Event of Default then existing, the excess will be remitted to Borrower, subject to Section 2.2.7.

2.2.2       Facility Fee.  A fully earned, non‑refundable facility fee of Twelve Thousand Eight Hundred Fifty-One and 14/100 Dollars ($12,851.14) shall be due and payable on J une 28, 2005.

2.2.3       Finance Charges. In computing Finance Charges on the Obligations under this Agreement, all Collections received by Bank shall be deemed applied by Bank on account of the Obligations three (3) Business Days after receipt of the Collections.  Borrower will pay a finance charge (the “Finance Charge”) on each Financed Receivable which is equal to the Applicable Rate divided by 360 multiplied by the number of days each such Financed Receivable is outstanding multiplied by the outstanding Financed Receivable Balance for such Financed Receivable.  The Finance Charge is payable when the Advance made based on such Financed Receivable is payable in accordance with Section 2.3 hereof.  

2.2.4       Administrative Fee.   Borrower shall pay to Bank an Administrative Fee equal to 0.25% of the face amount of each Financed Receivable first financed during that Reconciliation Period (collectively such fee for all such Financed Receivables being referred to herein as the “Administrative Fee”).  The Administrative Fee is payable when the Advance made based on such Financed Receivable is payable in accordance with Section 2.3 hereof.  After an Event of D efault, the Administrative Fee will increase an additional 0.50% effective immediately upon such Event of Default.

2.2.5       Accounting.  After each Reconciliation Period, Bank will provide an accounting of the transactions for that Reconciliation Period, including the amount of all Financed Receivables, all Collections, Adjustments, Finance Charges, Administrative Fee and the Facility Fee.  If Borrower does not object to the accounting in writing within thirty (30) days it shall be considered accurate.  All Finance Charges and other interest and fees are calculated on the basis of a 360 day year and actual days elapsed.

2.2.6       Deductions.  Bank may deduct fees, Finance Charges, Advances which become due pursuant to Section 2.3, and other amounts due pursuant to this Agreement from any Advances made or Collections received by Bank.

2.2.7       Lockbox; Account Collection Services.  Upon the effectiveness hereof, and continuing at the sole and exclusive discretion of Bank (regardless of whether an Event of Default has occurred), Borrower shall direct each Account Debtor (and each depository institution where proceeds of Accounts are on deposit) to remit payments with respect to the Accounts to a lockbox account established with Bank or to wire transfer payments to a cash collateral account that Bank controls (collectively, the “Lockbox”).  It will be considered an immediate Event of Default if the Lockbox is not set-up and operational within forty-five (45) days from the date hereof.  Until such Lockbox is established, the proceeds of the Accounts shall be paid by the Account Debtors to an address consented to by Bank.  Upon receipt by Borrower of such proceeds, the Borrower shall immediately transfer and deliver same to Bank, along with a detailed cash receipts journal.  Provided no Event of Default exists or an event that with notice or lapse of time will be an Event of Default, within three (3) days of receipt of such amounts by Bank, Bank will turn over to Borrower the proceeds of the Accounts other than Collections with respect to Financed Receivables and the amount of Collections in excess of the amounts for which Bank has made an Advance to Borrower, less any amounts due to Bank, such as the Finance Charge, the Facility Fee, payments due to Bank, other fees and expenses, or otherwise; provided, however, Bank may hold such excess amount with respect to Financed Receivables as a reserve until the end of the applicable Reconciliation Period if Bank, in its discretion, determines that other Financed Receivable(s) may no longer qualify as an Eligible Account at any time prior to the end of the subject Reconciliation Period.  This Section does not impose any affirmative duty on Bank to perform any act other than as specifically set forth herein.  All Accounts and the proceeds thereof are Collateral and if an Event of Default occurs, Bank may apply the proceeds of such Accounts to the Obligations.

2.3          Repayment of Obligations; Adjustments.

2.3.1       Repayment.  Borrower will repay each Advance on the earliest of: (a) the date on which payment is received of the Financed Receivable with respect to which the Advance was made, (b) the date on which the Financed Receivable is no longer an Eligible Account, (c) the date on which any Adjustment is asserted to the Financed Receivable (but only to the extent of the Adjustment if the Financed Receivable remains otherwise an Eligible Account), (d) the date on which there is a breach of any warranty or representation set forth in Section 5.3 or a breach of any material item or provision of any covenant in this Agreement, or (e) the Maturity Date (including any early termination). Each payment will also include all accrued Finance Charges and Administrative Fees with respect to such Advance and all other amounts then due and payable hereunder.

2.3.2       Repayment on Event of Default.  When there is an Event of Default, Borrower will, if Bank demands (or, upon the occurrence of an Event of Default under Section 8.5, immediately without notice or demand from Bank) repay all of the Advances.  The demand may, at Bank’s option, include the Advance for each Financed Receivable then outstanding and all accrued Finance Charges, Administrative Fee, attorneys and professional fees, court costs and expenses, and any other Obligations.

2.3.3       Debit of Accounts.   Bank may debit any of Borrower’s deposit accounts for payments or any amounts Borrower owes Bank hereunder.  Bank shall promptly notify Borrower when it debits Borrower’s accounts.  These debits shall not constitute a set-off.

2.3.4       Adjustments.  If at any time during the term of this Agreement any Account Debtor asserts an Adjustment or if Borrower issues a credit memorandum or if any of the representations, warranties or covenants set forth in Section 5.3 are no longer true in all material respects, Borrower will promptly advise Bank.

2.4          Power of Attorney.  Borrower irrevocably appoints Bank and its successors and assigns as attorney-in-fact and authorizes Bank, to: (i) following the occurrence and during the continuance of an Event of Default, sell, assign, transfer, pledge, compromise, or discharge all or any part of the Fin anced Receivables; (ii) following the occurrence and during the continuance of an Event of Default, demand, collect, sue, and give releases to any Account Debtor for monies due and compromise, prosecute, or defend any action, claim, case or proceeding about the Financed Receivables, including filing a claim or voting a claim in any bankruptcy case in Bank’s or Borrower’s name, as Bank chooses; (iii) following the occurrence and during the continuance of an Event of Default, prepare, file and sign Borrower’s name on any notice, claim, assignment, demand, draft, or notice of or satisfaction of lien or mechanics’ lien or similar document; (iv) following the occurrence and during the continuance of an Event of Default, notify all Account Debtors to pay Bank directly; (v) regardless of whether there has been an Event of Default, receive, open, and dispose of mail addressed to Borrower; (vi) regardless of whether there has been an Event of Default,  endorse Borrower’s name o n checks or other instruments (to the extent necessary to pay amounts owed pursuant to this Agreement); and (vii) regardless of whether there has been an Event of Default, execute on Borrower’s behalf any instruments, documents, financing statements to perfect Bank’s interests in the Financed Receivables and Collateral and do all acts and things necessary or expedient, as determined solely and exclusively by Bank, to protect or  preserve, Bank’s rights and remedies under this Agreement, as directed by Bank.

3              CONDITIONS OF LOANS

3.1          Conditions Precedent to Initial Advance.  Bank’s agreement to make the initial Advance is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such  documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, withou t limitation, subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

(a)           a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

(b)           an Intellectual Property Security Agreement covering Borrower's intellectual property assets;

(c)           a debt subordination agreement by each of Mercator Momentum Fund, L.P. and Monarch Pointe Fund, Ltd., in form and substance acceptable to Bank;

(d)           Perfection Certificates by Borrower;

(e)           payment of the fees and Bank Expenses then due and payable;

(f)                 evidence of insurance in compliance herewith with respect to both Borrowers;

(g)           landlord waivers or bailee agreements, in form and substance acceptable to Bank, as Bank shall determine is necessary or advisable in connection herewith or any of the documentation and agreements relating to the Obligations;

(h)           Certificate of Foreign Qualification (if applicable);

(i)                 securities account control agreement with respect to both Borrowers regarding any securities accounts at or through Bank.

(j)            Certificate of Good Standing/Legal Existence; and

(k)           such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2          Conditions Precedent to all Advances.  Bank’s agreement to make each Advance, including the initial Advance, is subject to the following:

(a)           receipt of the Invoice Transmittal;

(b)           Bank shall have (at its option) conducted the confirmations and verifications as described in Section 2.1.1 (d); and

(c)           each of the representations and warranties in Section 5 shall be true on the date of the Invoice Transmittal and on the effective date of each Advance and no Event of Default shall have occurred and be continuing, or result from the Advance.  Each Advance is Borrower’s representation and warranty on that date that the representations and warranties in Section 5 remain true.

4              CREATION OF SECURITY INTEREST

4.1          Grant of Security Interest.  Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations and the performance of each of Borrower’s duties under the Loan Documents, a continuing security interest in, and pledges and assigns to Bank, the Collateral, wherever located, whether now owned or hereafte r acquired or arising, and all proceeds and products thereof.  Borrower warrants and represents that the security interest granted herein shall be a first priority security interest in the Collateral, except for those liens arising under clause (c) of the definition of Permitted Liens.

Except as noted on the Perfection Certificate, Borrower is not a party to, nor is bound by, any material license or other agreement with respect to which Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property.  In order for the Bank to have all requisite rights in and all pertinent and material license interests of the Borrower from time to time, without prior consent from Bank (which will not be unreasonably withheld), Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower’s business or financial condition.  Borrower shall take such steps as Bank requests, in its good faith business judgment, to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed “Collateral” (and otherwise for the Bank to have rights of usage and access) for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future.

If the Agreement is terminated, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies its Obligations.  If Borrower shall at any time acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the brief details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Bank.

4.2          Authorization to File Financing Statements.   Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions in order to perfect or protect Bank’s interest or rights hereunder, which financing statements may indicate the Collateral as “all assets of the Debtor&rd quo; or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.

5              REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1          Due Organization and Authorization.  Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so c ould not reasonably be expected to cause a Material Adverse Change.   Borrower represents and warrants to Bank that: (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; and (b) Borrower is an organization of the type, and is organized in the jurisdiction, set forth in the Perfection Certificate; and (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; and (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address if different, and (e) all other information set forth on the Perfection Certificate pertaining to Borrower is accurate and complete.  If Borrower does not now have an organizational identification number, but later obtains one, Borrower shall forthwith notify Bank of such organizational ide ntification number.

The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s organizational documents, nor constitute an event of default under any material agreement by which Borrower is bound.  Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

5.2          Collateral.  Borrower has good title to the Collateral, free of Liens except Permitted Liens.  All inventory is in all material respects of good and marketable quality, free from material defects.  Borrower has no deposit account, other than the deposit accounts with Bank and deposit accounts described in the Perfection Certificate delivered to Bank in connection herewith.  The Collateral is not in the possession of any third party bailee (such as a warehouse).  Except as hereafter disclosed to Bank in writing by Borrower, none of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate.  In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then Borrower will first receive the written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank.

5.3          Financed Receivables.  Borrower represents and warrants for each Financed Receivable:

(a)           Each Financed Receivable is an Eligible Account.

(b)           Borrower is the owner with legal right to sell, transfer, assign and encumber such Financed Receivable;

(c)           The correct amount is on the Invoice Transmittal and is not disputed;

(d)           Payment is not contingent on any obligation or contract and Borrower has fulfilled all its obligations as of the Invoice Transmittal date;

(e)           Each Financed Receivable is based on an actual sale and delivery of goods and/or services rendered, is due to Borrower, is not past due or in default, has not been previously sold, assigned, transferred, or pledged and is free of any liens, security interests and encumbrances other than Permitted Liens;

(f)            There are no defenses, offsets, counterclaims or agreements for which the Account Debtor may claim any deduction or discount;

(g)           Borrower reasonably believes no Account Debtor is insolvent or subject to any Insolvency Proceedings;

(h)           Borrower has not filed or had filed against it Insolvency Proceedings and does not anticipate any filing;

(i)            Bank has the right to endorse and/ or require Borrower to endorse all payments received on Financed Receivables and all proceeds of Collateral; and

(j)            No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained in the certificates or statement not misleading.

5.4          Litigation.  There are no actions or proceedings pending or, to the knowledge of Borrower’s Responsible Officers or legal counsel, threatened by or against Borrower or any Subsidiary in which an adverse decision could reasonably be expected to cause a Material Adverse Change.

5.5          No Material Deviation  in Financial Statements.  All consolidated financial statements for Borrower and any Subsidiary delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations.  There has not been any material deter ioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

5.6          Solvency.  Borrower is able to pay its debts (including trade debts) as they mature.

5.7          Regulatory Compliance.  Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act.  Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Res erve Board of Governors).  Borrower has complied in all material respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change.  None of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally.  Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP.  Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to co ntinue its business as currently conducted except where the failure to obtain or make such consents, declarations, notices or filings would  not reasonably be expected to cause a Material Adverse Change.

5.8          Subsidiaries.  Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments and except for the 100% ownership interest of M-Wave, Inc. with respect to M-Wave DBS, Inc.

5.9          Full Disclosure.  No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading.

6              AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

6.1          Government Compliance.  Borrower shall maintain its and all Subsidiaries’ legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations.   Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change.

6.2          Financial Statements, Reports, Certificates.

(a)           Borrower shall deliver to Bank:  (i) as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than one hundred twenty (120) days after the last day of Borrower’s fiscal year, audited  consolidated financial statements prepared under GAAP, consistently applied, together with an unqu alified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) in the event that Borrower’s stock becomes publicly held, within three (3) days of filing, copies of all statements, reports and notices made available to Borrower’s security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8‑K filed with the Securities and Exchange Commission; (iv) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000.00) or more; (v) prompt notice of any material change in the composition of the Intellectual Property Collateral, or the registration of any copyright, including any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not shown in the I P Agreement or knowledge of an event that materially adversely affects the value of the Intellectual Property Collateral; and (vi) budgets, sales projections, operating plans or other financial information reasonably requested by Bank.

(b)           Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit B attached hereto.

(c)           Borrower will allow Bank to audit Borrower’s Collateral, including, but not limited to, Borrower’s Accounts and accounts receivable, at Borrower’s expense, upon reasonable notice to Borrower and upon such frequency as Bank determines in its good faith business judgment is necessary or desirable After the occurrence of an Event of Default, Bank may audit Borrower’s Collateral, including, but not limited to, Borrower’s Accounts and accounts receivable at Borrower’s expense and at Bank’s sole and exclusive discretion and without notification to Borrower.

(d)           Upon Bank’s request, provide a written report respecting any Financed Receivable, if payment of any Financed Receivable does not occur by its due date and include the reasons for the delay.

(e)           Provide Bank with, as soon as available, but no later than twenty (20) days following each Reconciliation Period, an aged listing of accounts receivable and accounts payable by invoice date, in form acceptable to Bank.

6.3          Taxes.  Borrower shall make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates a ttesting to such payments.

6.4          Insurance.  Borrower shall keep its business and the Collateral insured for risks and in amounts,   and as Bank may reasonably request.  Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank.  All property policies shall have a lender’s loss payable endor sement showing Bank as an additional  loss payee and all liability policies shall show Bank as an additional insured and  all policies shall provide that the insurer must give Bank at least twenty (20) days notice before canceling its policy.  At Bank’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Bank’s option, be payable to Bank on account of the Obligations.  If Borrower fails to obtain insurance as required under this Section or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this  Section and take any action under the policies Bank deems prudent.

6.5          Accounts.

(a)           In order to permit Bank to monitor Borrower’s financial performance and condition, Borrower, and all Borrower’s Subsidiaries, shall maintain Borrower’s, and such Subsidiaries, primary depository and operating accounts and securities accounts with Bank, which accounts shall represent at least 90% of the dollar value of Borrower’s and such Subsidiaries accounts at all financial institutions.  Any Guarantor shall maintain all depository, operating and securities accounts with Bank.

(b)           Borrower shall identify to Bank, in writing, any bank or securities account opened by Borrower with any institution other than Bank.  In addition, for each such account that Borrower or Guarantor at any time opens or maintains, Borrower shall, at Bank’s request and option, pursuant to an agreement in form and substance acceptable to Bank, cause the depository bank or securities intermediary to agree that such account is the collateral of Bank pursuant to the terms hereunder.  The provisions of the previous sentence shall not apply to deposit accounts exc lusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees.

6.6          Minimum Tangible Net Worth Financial Covenant.

M-Wave, Inc., on a consolidated basis, shall maintain at all times (which shall be tested  as of the last day of each month) a Tangible Net Worth of not less than $2,500,000 plus (i) 50% of all consideration received after March 31, 2005 for equity securities and subordinated debt of the Borrower plus (ii) 50% of the Borrower’s net income in each fiscal quarter ending on and after March 31, 2005.  Increases in the Minimum Tangible Net Worth Covenant based on consideration received for equity securities and subordinated debt of the Borrower shall be effective as of the end of the month in which such consideration is received, and shall continue effective thereafter .  Increases in the Minimum Tangible Net Worth Covenant based on net income shall be effective on the last day of the fiscal quarter in which said net income is realized, and shall continue effective thereafter.  In no event shall the Minimum Tangible Net Worth Covenant be decreased.

                As used herein “Tangible Net Worth” shall mean the excess of total assets less total liabilities, determined in accordance with GAAP, with the following adjustments:  

(A) there shall be excluded from assets:  (i) notes, accounts receivable and other obligations owing to Borrower from its officers or other affiliates, and (ii) all assets which would be classified as intangible assets under GAAP, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises, and (iii) minority investments in other Persons.

(B) there shall be excluded from liabilities all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Bank or by language in the instrument evidencing the indebtedness which Bank agrees in writing is acceptable to Bank in its good faith business judgment.

6.7          Further Assurances.  Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s security interest in the Collateral or to effect the purposes of this Agreement.

7              NEGATIVE COVENANTS

Borrower shall not do any of the following without Bank’s prior written consent.

7.1          Dispositions.  Convey, sell, lease, transfer or otherwise dispose of (collectively a “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (i) of inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the us e of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) of worn‑out or obsolete equipment.

7.2          Changes in Business, Ownership, Management or Business Locations.  Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto, or have a material change in its ownership (other than by the sale of Borrower’s equity securities in a publi c offering or to venture capital investors so long as Borrower identifies to Bank the venture capital investors prior to the closing of the investment), or management.  Borrower shall not, without at least thirty (30) days prior written notice to Bank: (i) relocate its chief executive office, or add any new offices or business locations, including warehouses  (unless such new offices or business locations contain less than Five Thousand Dollars ($5,000.00) in Borrower’s assets or property), or (ii) change its jurisdiction of organization, or (iii) change its organizational structure or type, or (iv) change its legal name, or (v) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3          Mergers or Acquisitions.  Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person.  A Subsidiary may merge or consolidate into another Subsidiary or i nto Borrower.

7.4          Indebtedness.  Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5          Encumbrance.  Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein.  The Collateral may also be subject to Permitted Liens, except for those liens arising under clause (c) of the definition of Permitted Liens.

7.6          Distributions; Investments.  (i) Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so; or (ii) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock.

7.7          Transactions with Affiliates.  Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s leng th transaction with a non-affiliated Person.

7.8          Subordinated Debt.  Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt, without Bank’s prior written consent.

7.9          Compliance.  Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum fun ding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so.

8              EVENTS OF DEFAULT

Any one of the following is an Event of Default:

8.1          Payment Default.  Borrower fails to pay any of the Obligations when due;

8.2          Covenant Default.  Borrower fails or neglects to perform any obligation in Section 6 or violates any covenant in Section 7 or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant or agreement contained in this Agreement, any Loan Documents and as to any default under such other term, provisi on, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, grace and cure periods provided under this section shall not apply to financial covenants or any other covenants that are required to be satisfied, completed or tested by a date certain;

8.3          Material Adverse Change.  A Material Adverse Change occurs;

8.4          Attachment.  (i) Any portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10) days; (ii) the service of process upon Borrower seeking to attach, by trustee or similar process, any funds of Borrower on deposit with Bank, or any entity under the control of Bank (including a subsidiary); (iii) Borrower is enjoined, restrained, or prevented by court order from conducting any part of its business; (iv) a judgment or other claim becomes a Lien on a portion of Borrower’s assets; or (v) a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency and not paid within ten (10) days after Borrower receives notice;

8.5          Insolvency.  (i) Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (ii) Borrower begins an Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within thirty (30) days (but no  Advances shall be made before any In solvency Proceeding is dismissed);

8.6          Other Agreements.  If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could result in a &n bsp;Material Adverse Change;

8.7          Judgments.  If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Thousand Dollars ($200,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Advances will be made prior to the satisfaction or st ay of such judgment);

8.8          Misrepresentations.  If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document;

8.9          Subordinated Debt. A default or breach occurs under any agreement between Borrower and any creditor of Borrower that signed a subordination agreement with Bank, or any creditor that has signed a subordination agreement with Bank breaches any terms of the subordination agreement;

8.10        Ownership of Subsidiary.  M-Wave, Inc. shall cease to own 100% of the issued and outstanding capital stock in, or shall cease to have the ability and power to elect or appoint 100% of the directors of, M-Wave DBS, Inc.; or

8.11        Cross Default with CFD Loan Agreement.  An "Event of Default", under and as defined in the CFD Loan Agreement, occurs.  

9              BANK’S RIGHTS AND REMEDIES

9.1          Rights and Remedies.  When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following:

(a)           Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

(b)           Stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

(c)           Settle or adjust disputes and claims directly with Account Debtors for amounts, on terms and in any order that Bank considers advisable and notify any Person owing Borrower money of Bank’s security interest in such funds and verify the amount of such account.  Borrower shall collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the Account Debtor, with proper endorsements for deposit;  

(d)           Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral.  Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates.  Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without c harge, to exercise any of Bank’s rights or remedies;

(e)           Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

(f)            Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral.  Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;

(g)           Place a “hold” on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any control agreement or similar agreements providing control of any Collateral; and

(h)           Exercise all rights and remedies and dispose of the Collateral according to the Code.

9.2          Bank Expenses; Unpaid Fees.  Any amounts paid by Bank as provided herein shall constitute Bank Expenses and are immediately due and payable, and shall bear interest at the Default Rate and be secured by the Collateral.  No payments by Bank shall be deemed an agreement to make similar payments in the future or Bank’s waiver o f any Event of Default.  In addition, any amounts advanced hereunder which are not based on Financed Receivables (including, without limitation, unpaid fees and Finance Charges as described in Section 2.2) shall accrue interest at the Default Rate and be secured by the Collateral.

9.3          Bank’s Liability for Collateral.  So long as Bank complies with reasonable banking practices regarding the safekeeping of collateral, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person.  Borrower bears all risk of loss, damage or destruction of the Collateral.

9.4          Remedies Cumulative.  Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative.  Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given.

9.5          Demand Waiver.  Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

9.6          Default Rate.  After the occurrence of an Event of Default, all Obligations shall accrue interest at the Applicable Rate plus five percentage points (5.00%) per annum (the “Default Rate”).  

10           NOTICES.  

Notices or demands by either party about this Agreement must be in writing and personally delivered or sent by an overnight delivery service, by certified mail postage prepaid return receipt requested, or by fax to the addresses listed at the beginning of this Agreement.  A party may change notice address by written notice to the other party.

11           CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

California law governs the Loan Documents without regard to principles of conflicts of law.  Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in California and Borrower accepts jurisdiction of the courts and venue in Santa Clara County, California.  NOTWITHSTANDING THE FOREGOING,  BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST BORROWER OR ITS PROPERTY.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.  EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12           GENERAL PROVISIONS

12.1        Successors and Assigns.  This Agreement binds and is for the benefit of the successors and permitted assigns of each party.  Borrower may not assign this Agreement or any rights or Obligations under it without Bank’s prior written consent which may be granted or withheld in Bank’s discretion.  Bank has the right, withou t the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits under this Agreement, the Loan Documents or any related agreement.

12.2        Indemnification.  Borrower hereby indemnifies, defends and holds Bank and its officers, employees, directors and agents harmless against:  (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or p aid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

12.3        Right of Set-Off.   Borrower hereby grants to Bank, a lien, security interest and right of setoff as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank (including a Bank subsidiary) or in transit to any of them.  At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations.  ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.  

12.4        Time of Essence.  Time is of the essence for the performance of all Obligations in this Agreement.

12.5        Severability of Provision.  Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6        Amendments in Writing; Integration.  All amendments to this Agreement must be in writing signed by both Bank and Borrower.  This Agreement and the Loan Documents represent the entire agreement about this subject matter, and supersede prior negotiations or agreements.  All prior agreements, understandings, representations, warrantie s, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.

12.7        Counterparts.  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.8        Survival.  All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding.  The obligation of Borrower in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.9        Confidentiality.  In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (i) to Bank’s subsidiaries or affiliates in connection with their business with Borrower; (ii) to prospective transferees or purchasers of any in terest in the Advances (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee’s or purchaser’s agreement to the terms of this provision); (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank’s examination or audit; and (v) as Bank considers appropriate in exercising remedies under this Agreement.  Confidential information does not include information that either: (a) is in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

12.10      Attorneys’ Fees, Costs and Expenses.   In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be enti tled to recover its reasonable attorneys’ fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled.

12.11      Conflict With Other Agreements.   To the extent of any conflicts between this Agreement and the CFD Loan Agreement, the Agreement giving the Bank greater rights shall control as to the applicable provision in question.  

13           SURETYSHIP AND RELATED WAIVERS AND PROVISIONS.

13.1        The Borrowers each are, and at all times shall be, jointly and severally liable for each and every one of the Obligations, regardless of which Borrower or Borrowers requested, rece ived, used, or directly enjoyed the benefit of, the extensions of credit hereunder.  Each Borrower's Obligations are independent Obligations and are absolute and unconditional.  Each Borrower hereby waives any defense to such Obligations that may arise by reason of the disability or other defense or cessation of liability of any other Borrower for any reason other than payment in full.  Each Borrower also waives any defense to such Obligations that it may have as a result of Bank's election of or failure to exercise any right, power, or remedy, including the failure to proceed first against another Borrower or any security it holds from such other Borrower.  Without limiting the generality of the foregoing, each Borrower expressly waives all demands and notices whatsoever (except for any demands or notices, if any, that such Borrower expressly is entitled to receive pursuant to the terms of any Loan Document), and agrees that Bank may, without notice (except for such n otice, if any, as such Borrower expressly is entitled to receive pursuant to the terms of any Loan Document) and without releasing the liability of such Borrower, extend for the benefit of any other Borrower the time for making any payment, waive or extend the performance of any agreement or make any settlement of any agreement for the benefit of any other Borrower, and may proceed against each Borrower, directly and independently of any other Borrower, as Bank may elect in accordance with the Loan Documents.  

13.2        Each Borrower acknowledges that the Obligations undertaken herein or in the other Loan Documents, and the grants of security interests and liens by such Borrower to secure Obligations of the other Borrowers, if and when applicable, could be construed to consist, at least in part, of the guaranty of Obligations of the other Borrowers and, in full recognition of that fact, each Borrower consents and agrees as hereinafter set forth in the balance of this Section 13.  The consents, waivers, and agreements of the Borrowers that are contained in the balance of this Section 13 are intended to deal with the suretyship aspects of the transactions evidenced by the Loan Documents (to the extent that a Borrower may be deemed a guarantor or surety for the Obligations of another Borrower) and thus are intended to be effective and applicable only to the extent that any Borrower has agreed to answer for the Obligation of another Borrower or has granted a lien or security interest in any property to secure the Obligation of another Borrower, if and when applicable; conversely, the consents, waivers, and agreements of the Borrowers that are contained in the balance of this Section 13 shall not be applicable to the direct Obligation of a Borrower with respect to a credit accommodation extended directly to such Borrower, and shall not be applicable to security interests or liens on property of a Borrower given to directly secure direct Obligations of such Borrower where no aspect of guaranty or suretyship is involved, if and when any such security interest may arise.  

13.3        Each Borrower hereby waives:  (a) presentment for payment, notice of dishonor, demand, protest, and notice thereof as to any instrument, and all other notices and demands to which any other Borrower might be entitled, including without limitation notice of all of the following:  the acceptance hereof; the creation, existence, or acquisition of any Obligations; the amount of the Obligations from time to time outstanding; any foreclosure sale or other disposition of any property which secures any or all of the Obligations or whic h secures the obligations of any other Borrower of any or all of the Obligations; any adverse change in any other Borrower's financial position; any other fact which might increase such Borrower's risk; any default, partial payment or non-payment of all or any part of the Obligations; the occurrence of any other Event of Default; any and all agreements and arrangements between Bank and any other Borrower and any changes, modifications, or extensions thereof, and any revocation, modification or release of any guaranty or joint and several liability of any or all of the Obligations by or of any person; (b) any right to require Bank to institute suit against, or to exhaust its rights and remedies against, any other Borrower or any other person, or to proceed against any property of any kind which secures all or any part of the Obligations, or to exercise any right of offset or other right with respect to any reserves, credits or deposit accounts held by or maintained with Bank or any Obligations of Bank to any other Borrower, or to exercise any other right or power, or pursue any other remedy Bank may have; (c) any defense arising by reason of any disability or other defense of any other Borrower or any guarantor, endorser, co-maker or other person, or by reason of the cessation from any cause whatsoever of any liability of any other Borrower or any guarantor, endorser, co-maker or other person, with respect to all or any part of the Obligations, or by reason of any act or omission of Bank or others which directly or indirectly results in the discharge or release of any other Borrower or any other person or any Obligations or any security therefor, whether by operation of law or otherwise; (d) any defense arising by reason of any failure of Bank to obtain, perfect, maintain or keep in force any security interest in, or lien or encumbrance upon, any property of any other Borrower or any other person; (e) any defense based upon any failure of Bank to give such Borrower notice of any sale or other disposition of any property securing any or all of the Obligations, or any defects in any such notice that may be given, or any failure of Bank to comply with any provision of applicable law in enforcing any security interest in or lien upon any property securing any or all of the Obligations including, but not limited to, any failure by Bank to dispose of any property securing any or all of the Obligations in a commercially reasonable manner; (f) any defense based upon or arising out of any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against any other Borrower or any guarantor, endorser, co-maker or other person, including without limitation any discharge of, or bar against collecting, any of the Obligations (including without limitation any interest thereon), in or as a result of any such proceeding; and (g) the benefit of any and all statutes of limitation with respect to any action based upon, arising out of or related to this Agreement an d the other Loan Documents.  Until all Obligations have been paid, performed, and discharged in full, nothing shall discharge or satisfy the liability of any Borrower under the Loan Documents except the full performance and payment of all of the Obligations.  If any claim is ever made upon Bank for repayment or recovery of any amount or amounts received by Bank in payment of or on account of any of the Obligations, because of any claim that any such payment constituted a preferential transfer or fraudulent conveyance, or for any other reason whatsoever, and Bank repays all or part of said amount by reason of any judgment, decree or order of any court or administrative body having jurisdiction over Bank or any of its property, or by reason of any settlement or compromise of any such claim effected by Bank with any such claimant (including without limitation any other Borrower), then and in any such event, such Borrower agrees that any such judgment, decree, order, settlement and compromise shall be binding upon such Borrower, notwithstanding any revocation or release of the joint and several liability of such Borrower and the other Borrowers with respect to the Obligations or the cancellation of any note or other instrument evidencing any of the Obligations, or any release of any of the Obligations, and such Borrower shall be and remain liable to Bank for the amount so repaid or recovered, to the same extent as if such amount had never originally been received by Bank, and the provisions of this sentence shall survive, and continue in effect, notwithstanding any revocation or release of the joint and several liability of such Borrower and the other Borrowers with respect to the Obligations or the cancellation of any note or other instrument evidencing any of the Obligations, or any release of any of the Obligations.  Until all Obligations have been irrevocably paid and performed in full, each Borrower hereby expressly and unconditionally waives all rights of subrogation, reimburseme nt and indemnity of every kind against any other Borrower, and all rights of recourse to any assets or property of any other Borrower, and all rights to any collateral or security held for the payment and performance of any Obligations, including (but not limited to) any of the foregoing rights which Borrower may have under any present or future document or agreement with any other Borrower or other person, and including (but not limited to) any of the foregoing rights which Borrower may have under any equitable doctrine of subrogation, implied contract, or unjust enrichment, or any other equitable or legal doctrine.

13.4        Each Borrower hereby consents and agrees that, without notice to or by such Borrower and without affecting or impairing in any way the obligations or liability of such Borrower hereunder, Bank may, from time to time and at any time in accordance with the provisions of this Agreement, do any one or more of the following with respect to any other Borrower:  (a) accelerate, accept partial payments of, compromise or settle, renew, extend the time for the payment, discharge, or performance of, refuse to enforce, and release all or any parties to, any or all of the Obligations; (b) grant any other indulgence to any other Borrower or any other person in respect of any or all of the Obligations or any other matter; (c) accept, release, waive, surrender, enforce, exchange, modify, impair, or extend the time for the performance, discharge, or payment of, any and all property of any kind securing any or all of the Obligations or any guaranty of any or all of the Obligations, or on which Bank at any time may have a lien, or refuse to enforce its rights or make any compromise or settlement or agreement therefor in respect of any or all of such property; (d) substitute or add, or take any action or omit to take any action which results in the release of, any one or more endorsers or any other Borrowers of all or any part of the Obligations, regardless of any destruction or impairment of any right of contribution or other right of such Borrower; (e) amend, alter or change in any respect whatsoever any term or provision relating to any or all of the Obliga tions, including the rate of interest thereon; (f) apply any sums received from any other Borrower, guarantor, endorser, or co-signer, or from the disposition of any collateral or security, to any Obligations whatsoever owing from such person or secured by such collateral or security, in such manner and order as Bank determines in its sole discretion, and regardless of whether such Obligations is part of the Obligations, is secured, or is due and payable; (g) apply any sums received from any Borrower or from the disposition of any collateral to any of the Obligations in such manner and order as Bank determines in its good faith business judgment, regardless of whether or not such Obligations is secured or is due and payable.  Each Borrower consents and agrees that Bank shall be under no obligation to marshal any assets in favor of any Borrower, or against or in payment of any or all of the Obligations.  Each Borrower further consents and agrees that Bank shall have no duties or responsibi lities whatsoever with respect to any property securing any or all of the Obligations.  Without limiting the generality of the foregoing, Bank shall have no obligation to monitor, verify, audit, examine, or obtain or maintain any insurance with respect to, any property securing any or all of the Obligations.  

13.5        Each Borrower hereby waives all rights of subrogation, reimbursement, indemnification, and contribution and any other rights and defenses that are or may become available to such Borrower or any other surety by reason of California Civil Code Sections 2787 to 2855, inclusive.  Each Borrower waives all rights and defenses that such Borrower may have because the Obligations may be or are secured by real property, if and when any such eventuality arises.  This means, among other things:  (a) Bank may collect from any Bor rower without first foreclosing on any real or personal property collateral pledged by any other Borrower; and (b) If Bank forecloses on any real property collateral pledged by any Borrower:  (i) The amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (ii) Bank may collect from any Borrower even if Bank, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from any other Borrower or any endorser, co-maker or other person.  This is an unconditional and irrevocable waiver of any rights and defenses any Borrower may have because the Obligations may be or are secured by real property.  These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.  Each Borrower waives all rights and defenses arising o ut of an election of remedies by Bank, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed or may destroy such Borrower's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise.  

13.6        Each Borrower hereby agrees that one or more successive or concurrent actions may be brought hereon against such Borrower, in the same action in which any other Borrower may be sued or in separate actions, as often as deemed advisable by Bank.  The liability of each Borrower relative to the Obligations is exclusive and independent of any other guaranty or joint and several liability of any other Borrower of any or all of the Obligations whether executed by Borrower or by any other Borrower or any guarantor, endorser, co-maker or other person, or otherwise.  The liability of any Borrower hereunder shall not be affected, revoked, impaired, or reduced by any one or more of the following:  (a) the fact that the Obligations exceeds the maximum amount of any Borrower's liability, if any, specified herein or elsewhere (and no agreement specifying a maximum amount of any Borrower's liability shall be enforceable unless set forth in a writing signed by Bank); or (b) any direction as to the application of payment by any other Borrower or by any other party; or (c) any continuing or restrictive guaranty or undertaking or any limitation on the liability of any other Borrower; or (d) any payment on or reduction of any such guaranty or undertaking; or (e) any revocation, amendment, modification or release of any such guaranty or undertaking; or (f) any dissolution or termination of, or increase, decrease, or change in membership of any Borrower which is a partnership.  Each Borrower hereby expressly represents that it was not induced to agree to be liable for the Obligations by the fact that there are or may be other Borrowers that are jointly and severally liable with such Borrower relative to the Obligations, and each Borrower agrees that any release of any one or more of such other Borrowers shall not release such Borrower from its Obligations either in full or to any lesser extent.

13.7        Each Borrower is fully aware of the financial condition of each other Borrower and is agreeing to be jointly and severally liable with each other Borrower at the request of each such other Borrower and based solely upon its own independent investigation of all matters pertinent hereto, and such Borrower is not relying in any manner upon any representation or statement of Bank with respect thereto.  Each Borrower represents and warrants that it is in a position to obtain, and such Borrower hereby assumes full responsibility for obtaining, any additional information concerning each other Borrower's financial condition and any other matter pertinent hereto as such Borrower may desire, and such Borrower is not relying upon or expecting Bank to furnish to such Borrower any information now or hereafter in Bank's possession concerning the same or any other matter.  

14           DEFINITIONS

14.1        Definitions.  In this Agreement:

“Accounts” are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

“Account Debtor” is as defined in the Code and shall include, without limitation, any person liable on any Financed Receivable, such as, a guarantor of the Financed Receivable and any issuer of a letter of credit or banker’s acceptance.

“Adjustments” are all discounts, allowances, returns, disputes, counterclaims, offsets, defenses, rights of recoupment, rights of return, warranty claims, or short payments, asserted by or on behalf of any Account Debtor for any Financed Receivable.

“Administrative Fee” shall have the meaning as set forth in Section 2.2.4 hereof.

“Advance” is defined in Section 2.1.1.

“Advance Rate”  eighty percent (80.0%), net of any offsets related to each specific Account Debtor, or such other percentage as Bank establishes under Section 2.1.1, provided that the foregoing percentage rate shall be sixty percent (60%) with respect to Foreign Accounts if such Accounts are deemed approved for borrowing purposes hereunder until such time as Bank determines in its discretion that sufficient credit enhancements with respect to any such Foreign Account or Accounts is acceptable and communicates such determination in writing to Borrower, then such Advance Rate regarding such Foreign Account or Accounts shall be deemed to eighty percent (80.0%), net of any applicable offsets.

“Affiliate” is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

“Applicable Rate” is a per annum rate equal to the Prime Rate plus one and three-quarters percentage points (1.75%).

“Bank Expenses” are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings).

“Borrower’s Books” are all Borrower’s books and records including ledgers, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information.

“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

"CFD Loan Agreement" shall mean that certain Loan and Security Agreement dated June 28, 2004 by and between Bank and Borrower, as amended from time to time (including, without limitation, as amended by that certain Assumption and Amendment Agreement dated as of the date hereof by and between Bank and Borrower).   

“Closing Date” is the date of this Agreement.

“Code” is the Uniform Commercial Code as adopted in California, as amended and as may be amended and in effect from time to time.

“Collateral” is any and all properties, rights and assets of Borrower granted by Borrower to Bank or arising under the Code, now, or in the future, in which Borrower obtains an interest, or the power to transfer rights, as described on Exhibit A.

“Collections” are all funds received by Bank from or on behalf of an Account Debtor for Financed Receivables.

“Compliance Certificate” is attached as Exhibit B.  

“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co‑made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, curr ency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices;  but “Contingent Obligation” does not include endorsements in the ordinary course of business.  The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement.

“Current Liabilities” is all obligations and liabilities of Borrower to Bank, plus, without duplication, the aggregate amount of Borrower’s Total Liabilities which mature within one (1) year.

“Default Rate” is defined in Section 9.6.

“Deferred Revenue” is all amounts received or  invoiced, as appropriate, in advance of performance under contracts and not yet recognized as revenue.

“Eligible Accounts” are billed Accounts in the ordinary course of Borrower’s business that meet all Borrower’s representations and warranties in Section 5.3, have been, at the option of Bank, confirmed in accordance with Section 2.1.1 (d), and are due and owing from Account Debtors deemed creditworthy by Bank in its discretion.  Without limiting the fact that the determina­tion of which Accounts are eligible hereunder is a matter of Bank discretion in each instance, Eligible Accounts shall not include the following Accounts (which listing may be amended or changed in Bank’s discretion with notice to Borrower and with it being specifically understood that Accounts against which "Loans" (as defined the CFD Loan Agreement) or reserves are established thereunder with respect to credit accommodations extended thereunder shall under no event be considered Eligible Accounts hereunder):

(a)           Accounts that the Account Debtor has not paid within ninety (90) days of invoice date;

(b)           Accounts for an Account Debtor, fifty percent (50%) or more of whose Accounts have not been paid within ninety (90) days of invoice date;

(c)           Accounts for which the Account Debtor does not have its principal place of business in the United States, unless agreed to by Bank in writing, in its sole discretion, on a case-by-case basis (such Account being referred to herein as "Foreign Accounts");

(d)           Accounts for which the Account Debtor is a federal, state or local government entity or any department, agency, or instrumentality thereof except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727);

(e)           Accounts for which Borrower owes the Account Debtor, but only up to the amount owed (sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts);

(f)            Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if Account Debtor’s payment may be conditional;

(g)           Accounts for which the Account Debtor is Borrower’s Affiliate, officer, employee, or agent;

(h)           Accounts in which the Account Debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; or

(i)            Accounts for which Bank reasonably determines collection to be doubtful or any Accounts which are unacceptable to Bank for any reason.

“ERISA” is the Employment Retirement Income Security Act of 1974, and its regulations.

“Events of Default” are set forth in Article 8.

“Facility Amount” is One Million Eight-Hundred Seventy-Five Thousand Dollars ($1,875,000), which represents the maximum gross face amount of all Financed Receivables hereunder, prior the application of the Advance Percentage, and thus does not refer to the amount of principal indebtedness outstanding hereunder.   .

“Facility Fee” is defined in Section 2.2.2.

“Finance Charges” is defined in Section 2.2.3.

“Financed Receivables” are all those Eligible Accounts, including their proceeds which Bank finances and makes an Advance, as set forth in Section 2.1.1.  A Financed Receivable stops being a Financed Receivable (but remains Collateral) when the Advance made for the Financed Receivable has been fully paid.

“Financed Receivable Balance” is the total outstanding gross face amount, at any time, of any Financed Receivable.

"Foreign Accounts" shall have the meaning ascribed to such term in clause (c) of the definition of Eligible Accounts.

“GAAP” is generally accepted accounting principles, consistently applied.

“Good Faith Deposit” is defined in Section 2.2.8.

“Guarantor” is any present or future guarantor of the Obligations.

“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations.

“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

“Investment” is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

“Invoice Transmittal” shows Eligible Accounts which Bank may finance and, for each such Account, includes the Account Debtor’s, name, address, invoice amount, invoice date and invoice number.

“IP Agreement” is a certain Intellectual Property Security Agreement executed and delivered by Borrower to Bank.

“Intellectual Property Collateral” is a defined in the IP Agreement.

“Lockbox” is defined in Section 2.2.7.

 “Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated, and Loan Documents shall include without limitation the CFD Loan Agreement.  

“Material Adverse Change” is: (i) A material impairment in the perfection or priority of Bank’s security interest in the Collateral or in the value of such Collateral; (ii) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; or (iii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iv) Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likel ihood that Borrower shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period.

“Maturity Date” is June 28, 2006.

“Obligations” are all advances, liabilities, obligations, covenants and duties owing, arising, due or payable by Borrower to Bank now or later under this Agreement or any other document, instrument or agreement, account (including those acquired by assignment) primary or secondary, such as all Advances, Finance Charges, Facility Fee, Administrative Fee, interest, fees, expenses, professional fees and attorneys’ fees, or other amounts now or hereafter owing by Borrower to Bank.

“Perfection Certificate” is a certain representations and warranties letter agreement previously executed and delivered by Borrower to Bank in connection with this Agreement.

“Permitted Indebtedness” is:

(a)           Borrower’s indebtedness to Bank under this Agreement or the Loan Documents;

(b)           Subordinated Debt;

(c)           Indebtedness to trade creditors  incurred in the ordinary course of business; and

(d)           Indebtedness secured by Permitted Liens.

“Permitted Investments” are: (i)  marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any state maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (iii) Bank’s certificates of deposit issued maturing no more than 1 year after issue, (iv) any other investments administered through Bank.  

“Permitted Liens” are:

(a)           Liens arising under this Agreement or other Loan Documents;

(b)           Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank’s security interests;

(c)           Purchase money Liens securing no more than $40,000 in the aggregate amount outstanding  (i) on equipment acquired or held by Borrower incurred for financing the acquisition of the equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment;

(d)           Leases or subleases and non-exclusive licenses or sublicenses granted in the ordinary course of Borrower’s business, if the leases, subleases, licenses and sublicenses permit granting Bank a security interest; and

(e)           Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (d), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase.

“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest rate.

“Reconciliation Day” is the last calendar day of each month.

“Reconciliation Period” is each calendar month.

“Responsible Officer” is each of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower.

“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt to Bank (pursuant to a subordination agreement entered into between Bank, Borrower and the subordinated creditor), on terms acceptable to Bank.

“Subsidiary” is any Person, corporation, partnership, limited liability company, joint venture, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person.

“Tangible Net Worth” has the definition ascribed to such term as is set forth in Section 6.6 hereof.  

“Total Liabilities” is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower’s consolidated balance sheet, including all Indebtedness, and current portion of Subordinated Debt permitted by Bank to be paid by Borrower, but excluding all other Subordinated Debt.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the State of California as of the date first above written.

BORROWER:

M-WAVE, INC.

By

Name:

Title:

M-WAVE DBS, INC.

By

Name:

Title:

BANK:

SILICON VALLEY BANK

By

Name:

Title:

EXHIBIT A

The Collateral consists of all of Borrower’s right, title and interest in and to the following:

All goods, equipment, inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, general intangibles (including payment intangibles), accounts (including health-care receivables), documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

Any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, now owned or later acquired; any patents, trademarks, service marks and applications therefor; trade styles, trade names, any trade secret rights, including any rights to unpatented inventions, know‑how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; or any claims for damages by way of any past, present and future infringement of any of the foregoing; and

All Borrower’s books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

EXHIBIT B

SILICON VALLEY BANK

SPECIALTY FINANCE DIVISION

Compliance Certificate

                I, as authorized officer of each of M-Wave, Inc. and M-Wave DBS, Inc.  (jointly and severally, the “Borrower”) certify under the Loan and Security Agreement (the “Agreement”) between Borrower and Silicon Valley Bank (“Bank”) as follows (all capitalized terms used herein shall have the meaning set forth in the Agreement):  

Borrower represents and warrants for each Financed Receivable:

Each Financed Receivable is an Eligible Account.

Borrower is the owner with legal right to sell, transfer, assign and encumber such Financed Receivable;

The correct amount is on the Invoice Transmittal and is not disputed;

Payment is not contingent on any obligation or contract and Borrower has fulfilled all its obligations as of the Invoice Transmittal date;

Each Financed Receivable is based on an actual sale and delivery of goods and/or services rendered, is due to Borrower,  is not past due or in default, has not been previously sold, assigned, transferred, or pledged and is free of any liens, security interests and encumbrances other than Permitted Liens;

There are no defenses, offsets, counterclaims or agreements for which the Account Debtor may claim any deduction or discount;

It reasonably believes no Account Debtor is insolvent or subject to any Insolvency Proceedings;

It has not filed or had filed against it Insolvency Proceedings and does not anticipate any filing;

Bank has the right to endorse and/ or require Borrower to endorse all payments received on Financed Receivables and all proceeds of Collateral.

No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement contained in the certificates or statement not misleading.

Additionally, Borrower represents and warrants as follows:

Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change.  The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s organizational documents, nor constitute an event of default under any material agreement by which Borrower is bound.  Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

Borrower has good title to the Collateral, free of Liens except Permitted Liens.  All inventory is in all material respects of good and marketable quality, free from material defects.  

Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act.  Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors).  Borrower has complied in all material respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change.  None of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transport ing any hazardous substance other than legally.  Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP.  Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted except where the failure to obtain or make such consents, declarations, notices or filings would  not reasonably be expected to cause a Material Adverse Change.

Borrower is in compliance with the Financial Covenant(s) set forth in Section 6.6 of the Agreement.

All representations and warranties in the Agreement are true and correct in all material respects on this date, and the Borrower represents that there is no existing Event of Default.  

Sincerely,  

Signature

Title

Date

EX-5

Silicon Valley Bank 

Assumption Agreement and Amendment to Loan Documents

Borrowers: M-Wave, Inc.

and

M-Wave DBS, Inc.

Address:     475 Industrial Drive

                    West Chicago, Illinois  60185

Dated:        April ___, 2005