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B Riley logo [logo2.jpg]

  11100Santa Monica Blvd., Suite 800   Los Angeles, CA 90025 January 27, 2006
Tel. 310-966-1444   Fax: 310-388-0147   www.brileyco.com

 
Mr. Bruce Nelson
Special Committee of the Board of Directors
M-Wave, Inc.
475 Industrial Drive West
Chicago, IL 60185

Dear Bruce:

This letter, when properly signed, will constitute an engagement agreement
(“Agreement” hereinafter) between B. Riley & Co., a Delaware corporation (“B.
Riley” hereinafter) and M-Wave, Inc. (the “Company” hereinafter) upon the terms
and conditions set forth below.

1.    Background. We understand that the Company is contemplating a merger with
an entity or group of entities in the ethanol industry (the “Merger Party”).
Such transaction and all related transactions are referred to collectively
herein as the (“Transaction”).

2.    Opinion. We understand that the Special Committee of the Board of
Directors of the Company (the “Board”) has requested that B. Riley render an
opinion (the “Opinion” hereinafter) as to the fairness, from a financial point
of view, of the Transaction. The Opinion will be delivered in writing. The
Opinion shall not address the Company’s underlying business decision to effect
the Transaction.

It is contemplated that the Opinion will include, in addition to any other
matters that B. Riley in its sole discretion deems appropriate, a description of
the principal materials that B. Riley has reviewed and upon which B. Riley is
relying and the principal assumptions and qualifications upon which B. Riley is
relying. B. Riley shall be responsible only for conclusions or opinions set
forth in its written Opinion.

Any summary of, or reference to, the Opinion, any verbal presentation with
respect thereto, or other references to B. Riley in connection with the
Transaction, will in each instance be subject to B. Riley’s prior review and
written approval, which will not be unreasonably be withheld. This Opinion is
for the express and exclusive use of only the Company, its Board, the Special
Committee of the Board and shareholders. Neither B. Riley’s verbal conclusions
nor the Opinion will be used for any purpose other than in connection with the
Transaction. Notwithstanding the foregoing, B. Riley consents to a description
of and the inclusion of the text of its written Opinion in (i) any filing
required to be made by the Company with the Securities and Exchange Commission
in connection with the Transaction and in materials delivered to the Company’s
shareholders, and (ii) in response to any subpoena, court order or similar legal
demand in connection with the defense of any lawsuit relating to the
Transaction.

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In connection with the Opinion, we will make such reviews, analyses and
inquiries as we deem necessary and appropriate under the circumstances. Among
other things, we will meet with certain senior management of the Company and the
Merger Party, visit certain facilities and business offices of the Company and
the Merger Party, review certain of the Company’s and the Merger Party’s
historical financial statements, review certain other documents, including any
SEC filings of the Company, review forecasts and projections prepared by the
Company’s and the Merger Party’s management and/or their respective advisors,
review publicly available data about certain comparable companies and certain
other transactions we deem relevant.

3.    Information. Each signatory hereto recognizes and confirms that in
rendering services hereunder, B. Riley has been and will be using and relying on
and assuming the accuracy of, without independent verification, data, materials
and other information (including, without limitation, the financial forecasts
and projections), with respect to the Company and the Merger Party, furnished to
B. Riley by or on behalf of the Company and the Merger Party and its agents,
counsel, employees and representatives (the “Information”).

B. Riley does not assume responsibility for the accuracy and completeness of the
Information, including, but not limited to, the disclosure materials related to
the Transaction, and B. Riley shall not be obligated to conduct any independent
study or investigation as to the accuracy or completeness of the Information.

The Company agrees to furnish to B. Riley complete copies of all relevant
documents with respect to the Transaction, prior to the consummation of the
Transaction, filed with or submitted to any regulatory agency, and all such
other data, material and other information as B. Riley may reasonably request.
The Company will furnish to B. Riley, concurrently with their submission to
others, all substantive drafts of and a copy of the final disclosure materials
and financing and other documents related to the Transaction, and will keep B.
Riley apprised of changes in the terms of the Transaction on a timely basis as
they are decided upon.

4.    Fees. As compensation for the services rendered by B. Riley hereunder, the
Company shall pay B. Riley a fee of $75,000 and expenses as follows:

 
(a)
A fee of $25,000 payable upon execution of this retainer agreement;

 
(b)
An initiation fee of $25,000 when the Board formally requests the opinion to be
rendered;

 
(c)
A fee of $25,000 when B. Riley delivers its final written opinion to the Special
Committee; and

 
(c)
Out of pocket expenses, not to exceed $10,000 without prior Company approval
(including, but not limited to, the fees and expenses of B. Riley’s legal
counsel) incurred in connection with this Agreement and the Opinion.

No portion of our fee is contingent upon the conclusions reached in the Opinion
All fees paid are non-refundable.

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If B. Riley is requested to expand its Opinion to cover any areas beyond the
scope set forth in Section 2, such expanded scope of engagement and the fee to
be paid to B. Riley shall be agreed upon prior to B. Riley undertaking such
expanded engagement.

5.    Term. This Agreement shall commence upon the signing of this Agreement and
remain in effect for a period of twelve months. B. Riley agrees to render the
Opinion within 30 days of the Board making a formal request for the Opinion.

6.    Indemnification, Contribution, and Release. The Company agrees to provide
indemnification to B. Riley and certain other parties, in accordance with
Attachment 1, which is attached hereto and incorporated herein by this
reference.

7.    Other Services. If B. Riley is called upon to render services, give
testimony, produce documents, answer depositions or interrogatories, or
otherwise become involved in connection with any administrative or judicial
proceedings, investigations or inquiries relating to the Transaction, the
Company will pay, in addition to the other fees hereunder, for the time
reasonably required to be expended by any officers or employees of B. Riley, at
their standard hourly rates as then in effect, plus reasonable out-of-pocket
expenses relating thereto, and any and all reasonable legal fees and expenses
incurred by B. Riley in so appearing or preparing for appearance.

8.    Company Obligation.  The obligations of B. Riley are solely company
obligations, and no officer, director, employee, agent, shareholder, member,
owner or controlling person shall be subjected to any personal liability
whatsoever to any person, nor will any such claim be asserted by or on behalf of
any other party to this Agreement or any person relying on the Opinion.

9.    Attorney Fees; Choice of Law. If any party to this Agreement brings an
action directly or indirectly based on this Agreement or the Opinion, the
prevailing party shall be entitled to reasonable expenses therefor, including,
but not limited to, attorney’s fees and court costs. The Agreement shall be
governed by the internal laws of the State of California, without regard to
conflict of laws principles.

10.     Other Issues. This Agreement shall not be assigned by B. Riley without
the Company’s prior written consent. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect pursuant to the terms hereof. This Agreement incorporates the entire
understanding of the parties and supersedes all previous agreements or
understandings, whether written or oral, and may be modified only by an express
writing executed by all parties hereto.

11.    Confidentiality. B. Riley agrees that the “Confidential Information” (as
defined below) will not be used by B. Riley for any purpose except in connection
with rendering the Opinion pursuant to the terms hereof and that such
Confidential Information will be kept confidential by B. Riley and its agents;
provided, however, that (1) any such Confidential Information may be disclosed
to B. Riley’s directors, officers, employees and representatives who need to
know such information for the purpose described in this Agreement (it being
understood that such directors, officers, employees and representatives shall be
informed by B. Riley of the confidential nature of such information and shall be
requested by B. Riley to treat such information confidentially), (2) any
disclosure of such Confidential Information may be made to which the Company
consents in writing, and (3) any of such Confidential Information may be
disclosed if B. Riley is required to disclose it by legal or administrative
process or for other appropriate legal reasons. The term “Confidential
Information” means the existence and subject matter of this letter agreement,
any information related to the Company’s consideration of the Transaction and
all Information except Information that (i) is or becomes publicly available
other than as a result of disclosure by B. Riley or its agents, representatives
or employees, (ii) was known by B. Riley prior to its disclosure to B. Riley by
the Company, or (iii) is or becomes available to B. Riley on a non-confidential
basis from a source other than the Company or its agents which is not prohibited
from disclosing such Information by a legal, contractual or fiduciary obligation
to the Company.

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12.    Survival of Certain Provisions. The provisions of Section 2 entitled
“Opinion,” Section 4 entitled “Fees,” Section 5 entitled “Indemnification;
Contribution; and Release,” Section 6 entitled “Other Services,” Section 7
entitled “Company Obligation,” Section 8 entitled “Attorney Fees; Choice of
Law,” Section 10 entitled “Confidentiality” and this Section shall survive any
termination of this Agreement.

We trust that the foregoing terms and provisions are agreeable to you, and
request that you sign and return the enclosed copy of this Agreement to B.
Riley.

Sincerely,

B. Riley

 
By:   
           
Dennis McCarthy
   
Managing Director
 

The foregoing has been read, understood and approved, and the undersigned
retains
B. Riley upon the foregoing terms.

Dated:    
   

M-Wave, Inc.

By:  
           
Bruce Nelson
   
Special Committee of the Board of Directors
 

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“ATTACHMENT 1”

INDEMNIFICATION, CONTRIBUTION AND RELEASE

B. Riley & Co.
11100 Santa Monica Blvd.
Suite 800
Los Angeles, CA 90025

(a)   If B. Riley or any employee, agent, officer, director, attorney,
shareholder or any person who controls B. Riley (any or all of the foregoing,
hereinafter an “Indemnified Person”) becomes involved in any capacity in any
legal or administrative action, suit, proceeding, investigation or inquiry,
regardless of the legal theory or the allegations made in connection therewith,
directly or indirectly in connection with, arising out of, based upon, or in any
way related to (i) this Agreement; (ii) the services that are the subject of
this Agreement; (iii) any document or information, whether verbal or written,
referred to herein or supplied to B. Riley; (iv) the breach of the
representations, warranties or covenants by the Company given pursuant hereto;
(v) B. Riley’s involvement in the Transaction or any part thereof; (vi) any
filings made by or on behalf of any party with any governmental agency in
connection with the Transaction; or (vii) the Transaction, the Company will on
demand, advance or pay promptly, on behalf of each Indemnified Person,
reasonable attorneys’ fees and other expenses and disbursements (including, but
not limited to, the cost of any investigation and related preparation) as they
are incurred by the Indemnified Person. The Company also indemnifies and holds
harmless each Indemnified Person against any and all losses, claims, damages,
liabilities, costs and expenses (including, but not limited to, reasonable
attorneys’ fees, disbursements and court costs, and costs of investigation and
preparation) to which such Indemnified Person may become subject in connection
with any such matter.

(b)   If for any reason the foregoing indemnification is determined to be
unavailable to any Indemnified Person or insufficient fully to indemnify any
such person, then the Company will contribute to the amount paid or payable by
such person as a result of any such loss, claim, damage, liability, cost or
expense, in such proportion as is appropriate to reflect not only the
relationship between B. Riley’s fee on the one hand and the aggregate value of
the Transaction on the other hand, but also the relative fault of the
Indemnified Person, as well as any other relevant equitable considerations.

(c)   The Company’s obligations under this Section shall be in addition to any
liability that the Company or any other person may otherwise have to B. Riley or
any Indemnified Person.

(d)   The indemnification obligations hereunder shall not apply to any loss,
claim, damage, liability or expense that is finally judicially determined on the
merits to have been caused primarily by the gross negligence, bad faith, willful
misfeasance, or reckless disregard of its obligations or duties on the part of
B. Riley or such Indemnified Person. In the event of such final judicial
determination, the Company shall be entitled to recover from the Indemnified
Person or B. Riley the costs and expenses paid on behalf of such Indemnified
Person and/or B. Riley pursuant to this indemnification obligation.

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(e)   The provisions of this Attachment shall be enforceable by each Indemnified
Person and such person’s heirs, representatives and successors, and shall
survive any termination of this Agreement.

(f)   The Company agrees that it will not settle, compromise or discharge any
suit, claim, litigation, threatened litigation or threatened claim arising out
of, based upon, or in any way related to the Transaction unless and until the
Company has obtained a written agreement, approved by B. Riley (which shall not
be unreasonably withheld) and executed by each party to such proposed
settlement, compromise or discharge, releasing B. Riley from any and all
liability, provided, however that the Company may settle, compromise or
discharge any suit, claim, litigation, threatened litigation or threatened claim
if the Company pays all expenses and costs related thereto.
 
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