SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 
 FORM
10-Q
 
 
 QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
 For the quarter ended March 31,
      2008
              
              
              
              Commission File
      No.   0-19944M~WAVE,
      INC.(Exact
      name of registrant as specified in its charter)DELAWARE
              
              
              
              36-3809819(State
      or other jurisdiction of Incorporation or organization)
              
              
              
              (I.R.S.  Employer
      identification No.)1300 Norwood Ave. Itasca,
      Illinois
              
              
              
              60143(Address
      of principal executive offices)
              
              
              
              (Zip
      Code)Registrant’s
      telephone number including area code:
              
              (630) 562-555011533 Franklin Ave. Franklin Park,
      Illinois
              
              
              
              60131(Former
      address, if changed since last report)
              
              
              
              (Zip
      Code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 TNo £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):  Large Accelerated filer £Accelerated
filer £Non-Accelerated filer £Smaller
reporting company T
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
  The
registrant has 1,813,150 shares of common stock outstanding at May 14,
2008.
  
 
  M-WAVE,
INC.
 
 CONTENTS
 
 
 PART
      I.  FINANCIAL INFORMATIONItem
      1.
              
              Financial Statements:Consolidated Balance Sheets as of March 31, 2008 and December
      31, 2007 (unaudited)
              
              Page
      3Consolidated Statements of Operations for the Three Months
      Ended March 31, 2008 and 2007 (unaudited)
              
              Page
      4Consolidated Statements of Cash Flows for the Three Months
      Ended March 31, 2008 and 2007 (unaudited)
              
              Pages
      4Notes to Consolidated Financial Statements
      (unaudited)
              
              Pages
      6-10Item
      2.
              
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              Pages
      10-17Item
      3.
              
              Quantitative and Qualitative Disclosures about Market
      Risk
              
              Page
      17Item
      4T.
              
              Controls and Procedures
              
              Page
      17PART
      II.  OTHER INFORMATIONItem
      1
              
              Legal Proceedings
              
              Page
      19Item
      1A
              
              Risk Factors
              
              Page
      19Item
      2
              
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              
              Page
      19Item
      3
              
              Defaults Upon Senior Securities
              
              Page
      19Item
      4
              
              Submission of Matters to a Vote of Security
      Holders
              
              Page
      19Item
      5
              
              Other Information
              
              Page
      19Item
      6
              
              Exhibits
              
              Page
      19Signatures
              
              Page
      20
  2
 Table of Contents
  PartI - Financial Information
 Item1 - Financial Statements
 
 M-Wave, Inc.
 CONSOLIDATED
BALANCE SHEETS
 (unaudited)
 
 March 31,
              
              
              December 31,2008
              
              
              2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              644,495
              
              
              $
              1,081,019Accounts
      receivable, net of allowance for doubtful accounts, 2008- $80,000: 2007-
      $80,000
              
              
              1,085,207
              
              
              
              1,271,479Inventories,
      net
              
              
              1,676,911
              
              
              
              1,486,998Prepaid
      expenses and other assets
              
              
              140,880
              
              
              
              70,861Total
      current assets
              
              
              3,547,493
              
              
              
              3,910,357EQUIPMENT:Equipment
              
              
              424,910
              
              
              
              424,910Less
      accumulated depreciation
              
              
              (249,986
              )
              
              
              (230,051
              )Equipment,
      net
              
              
              174,924
              
              
              
              194,859TOTAL
              
              $
              3,722,417
              
              
              $
              4,105,216LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              1,860,701
              
              
              $
              1,941,969Accrued
      expenses
              
              
              796,495
              
              
              
              713,256Total
      current liabilities
              
              
              2,657,196
              
              
              
              2,655,225COMMITTMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY:Preferred
      stock, $100 par value; Series A authorized, 30,000 shares;issued and
      outstanding: 2008 and 2007: 12,500 shares
              
              
              656,800
              
              
              
              656,800Series
      B authorized, 70,000 shares; issued and outstanding:2008 and 2007: 69,648
      shares
              
              
              6,842,797
              
              
              
              6,842,797Common
      stock, $.005 par value; authorized, 200,000,000 shares; issued and
      outstanding 2008 and 2007: 1,813,150 shares
              
              
              11,236
              
              
              
              11,236Additional
      paid-in capital
              
              
              14,427,877
              
              
              
              14,427,683Accumulated
      deficit
              
              
              (18,588,319
              )
              
              
              (18,203,355
              )Treasury
      stock, at cost, 2008 and 2007: 433,954 shares
              
              
              (2,285,170
              )
              
              
              (2,285,170
              )Total
      stockholders' equity
              
              
              1,065,221
              
              
              
              1,449,991TOTAL
              
              $
              3,722,417
              
              
              $
              4,105,216
 
 
 See notes
to consolidated financial statements
  3
 Table of Contents
  M-Wave, Inc.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (unaudited)
 
 Three
      Months Ended March 312008
              
              
              2007NET
      SALES
              
              $
              3,031,704
              
              
              $
              2,262,921COST
      OF GOODS SOLD
              
              
              2,199,792
              
              
              
              1,700,396Gross
      profit
              
              
              831,912
              
              
              
              562,525OPERATING
      EXPENSES:General
      and administrative
              
              
              715,144
              
              
              
              676,178Selling
      and marketing
              
              
              237,649
              
              
              
              213,066Total
      operating expenses
              
              
              952,793
              
              
              
              889,244Net
      loss
              
              $
              (120,881
              )
              
              $
              (326,719
              )Preferred
      stock dividends
              
              $
              (264,082
              )
              
              $
              0Net
      loss attributable to common shareholders
              
              $
              (384,963
              )
              
              $
              (326,719
              )BASIC
      AND DILUTED LOSS PER COMMON SHARE
              
              $
              (0.21
              )
              
              $
              (0.19
              )Weighted
      average shares outstanding
              
              
              1,813,150
              
              
              
              1,763,150
   See notes
to consolidated financial statements
  4
 Table of Contents
 
 M-Wave, Inc.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (unaudited)
 
 Three
      Months Ended March 312008
              
              
              2007OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (120,881
              )
              
              $
              (326,719
              )Adjustments
      to reconcile net loss to net cash flowsused in operating
      activities:Depreciation
              
              
              19,935
              
              
              
              22,268Stock
      compensation recognized on options and warrants
              
              
              193
              
              
              
              92,173Changes
      in assets and liabilities, net of effects of acquired
      business:Accounts
      receivable
              
              
              186,272
              
              
              
              196,115Inventories
              
              
              (189,913
              )
              
              
              (60,948
              )Prepaid
      expenses and other assets
              
              
              (70,019
              )
              
              
              (66,984
              )Accounts
      payable
              
              
              (81,268
              )
              
              
              (80,573
              )Accrued
      expenses
              
              
              (180,843
              )
              
              
              (18,058
              )Net
      cash flows used in operating activities
              
              
              (436,524
              )
              
              
              (242,726
              )INVESTING
      ACTIVITIES:Repayments
      on note receivable
              
              
              0
              
              
              
              6,836Net
      cash flows provided by investing activities
              
              
              0
              
              
              
              6,836FINANCING
      ACTIVITIES:Payments
      on short and long term debt
              
              
              0
              
              
              
              (18,000
              )Net
      cash flows provided by financing activities
              
              
              0
              
              
              
              (18,000
              )NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (436,524
              )
              
              
              (253,890
              )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
              
              
              1,081,019
              
              
              
              1,696,340End
      of period
              
              $
              644,495
              
              
              $
              1,442,450SUPPLEMENTAL
      SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:Accrued
      dividends on preferred stock
              
              
              264,082
              
              
              
              0
  See notes
to consolidated financial statements
  5
 Table of Contents
  M-WAVE, Inc.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1.  Basis
of Presentation
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America for interim financial information and with the instructions to Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation, consisting only of normal recurring adjustments, have
been included.
 
 Operating
results for the three months ended March 31, 2008 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2008.  For further information, refer to the financial statements and
footnotes thereto included in the Company’s annual report on Form 10-KSB for the
year ended December 31, 2007.
  2.
Business Product Lines
 
 Sales by
product line for the three months ended March 31, 2008 and 2007 consisted of the
following:
 
 Three
      months ended March 31,2008
              
              
              2007PCB
              
              $
              1,946,229
              
              
              $
              1,715,104Non
      PCB
              
              
              1,038,902
              
              
              
              457,715Other
              
              
              46,573
              
              
              
              90,102Total
      sales
              
              $
              3,031,704
              
              
              $
              2,262,921
 
 Sales
within the printed circuit board product line (“PCB”) include ten key customers,
which represented approximately 98% of sales in the first quarter of 2008 versus
approximately 94% of sales in the first quarter of 2007.  Sales for
the Company’s top ten PCB customers were up approximately 18% compared to prior
year.
 
 Non
printed circuit board (“Non PCB”) sales represent sales of new products, other
than printed circuit boards, to the Company’s existing customer
base.  Sales within the Non PCB product line include three primary
customers, which represented approximately 77% of sales of Non PCB products in
the first quarter of 2008 versus approximately 90% of sales in the first quarter
of 2007.  Sales for the Company’s top three Non PCB customers were up
approximately 94% compared to prior year’s sales.
  6
 Table of Contents
  Other
sales primarily represent tooling charges billed to customers for either new
products or existing products that have gone through a revision and freight
costs billed to customers.
 
 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.
 
 3.
Equity
 
 The
Series B stock is non-voting and is entitled to receive monthly dividends at an
annual rate of 15%, subject to reduction to 9% after the Registration Statement
is declared effective by the Securities and Exchange Commission. The Company is
to use its best efforts to file a registration statement covering the shares of
common stock underlying the Series B Convertible Preferred Stock (the
“Conversion Shares”), the shares of common stock underlying the Warrants (the
“Warrant Shares”), and the shares of common stock underlying the Series A
Preferred Stock issued by the Company to the Purchasers on June 17,
2004.  Mercator waived their dividend payments for the three months
ended March 31,  2007.  Dividends for the three months ended
March 31, 2008 of approximately $264,000 has been accrued but
unpaid.
 
 During
the first three months of 2008 and 2007, M.A.G. Capital, LLC did not convert any
shares of their preferred stock into common shares. As of March 31, 2008 there
are 12,500 Series A preferred shares outstanding and 69,648 Series B preferred
shares outstanding.
 
 Potentially
dilutive common shares consist of the incremental common shares issuable upon
conversion of convertible preferred shares, and the exercise of common stock
options and warrants for all periods.  For all periods ended March 31,
2008 and 2007, the basic and diluted shares reported are equal because the
common share equivalents are anti-dilutive due to the net losses for each
period.  Below is a tabulation of the potentially dilutive securities
for the periods ended March 31, 2008 and 2007:
 
 
 2008
              
              
              2007Weighted
      average shares outstanding
              
              
              1,813,150
              
              
              
              1,763,150Options
      in the money, net
              
              
              0
              
              
              
              68,302Warrants
      in the money, net
              
              
              0
              
              
              
              127,026Preferred
      shares convertible to Common
              
              
              0
              
              
              
              2,204,051Total
      Outstanding and PotentiallyDilutive
      shares
              
              
              1,813,150
              
              
              
              4,162,529
  7
 Table of Contents
  On July
12, 2007, the Board of Directors authorized a six month extension of M.A.G.
Capital’s warrants that were set to expire on July 23, 2007.  This
action extended the life of approximately 253,000 of approximately 320,000
warrants, all priced at $2.48, to January 23, 2008.  The value of the
warrants was determined using the Black-Scholes pricing model which calculated a
value of approximately $49,000 based on a fair value price of $0.19, assuming an
expected life of 6 months, a risk-free interest rate of 5.13%, volatility of
21.3%, and no dividend yield.  M.A.G. Capital has approximately 50,000
warrants that were set to expire on February 23, 2008, and approximately 17,000
warrants that were set to expire on June 16, 2008.
 
 On
January 19, 2008, the Board of Directors authorized an additional six month
extension of all warrants held by M.A.G. Capital, LLC, that were set to expire
on January 23, February 23, and June 16, 2008, respectively.  This
action extended the life of approximately 320,000 warrants, all priced at $2.48,
to July 23, August 23, and December 16, 2008, respectively.  The value
of the warrants was determined using the Black-Scholes pricing model which
calculated a value of approximately $193 based on a nominal fair value price,
assuming an expected life of 6 months, a risk-free interest rate of 3.66%,
volatility of 52.4%, and no dividend yield.    All warrants
owned by M.A.G. Capital are fully vested and exercisable as of March 31,
2008.
 
 4.
Litigation
 
 The
Company is not a party to any litigation whose outcome is expected to have a
material adverse effect on the financial position or results of operations of
the Company.
 
 5.
Share-Based Compensation
 
 The
Company has a stock option plan that authorizes the granting of options to
officers, key employees and directors to purchase the Company’s common stock at
prices equal to or above the market value of the stock at the date of
grant.  Under this plan, the Company has allocated virtually all
shares available for future grants as of March 31, 2008.  The exercise
price of all employee and director options granted in 2007 are above fair market
value.
  Compensation
expense is recognized only for share-based payments expected to vest. We
estimate forfeitures at the date of grant based on our historical experience and
future expectations. Estimated forfeitures are expected to be minimal and not
material to the financial statements.
  Under
M-Wave’s share-based long-term incentive compensation plans (“incentive plans”)
M-Wave grants non-qualified stock options to certain employees.
  8
 Table of Contents
  The
Company recognized share-based compensation expense related to options of
approximately $92,000 in general and administrative expenses in the statement of
operations for the three months ended March 31, 2007.  No compensation
expense related to options was recognized for the three months ended March 31,
2008.
  As of
March 31, 2008, there was no unrecognized compensation costs related to
non-vested share-based compensation arrangements granted under the incentive
plans.  The requisite service period for all outstanding options has
been completed as of March 31, 2008.
  For the
three months ended March 31, 2007, the Company issued 34,776
options.  These grants were priced at $3.41 .  There were no
options granted for the three months ended March 31, 2008.  There were
no options exercised or forfeited, nor did any expire during the three months
ended March 31, 2008 and 2007, respectively.
  Total
common stock warrants outstanding at March 31, 2008 were 354,113, and were all
exercisable at March 31, 2008.  During the second quarter of 2007,
50,000 warrants priced at $1.76 were exercised.  The Company received
cash of approximately $88,000 and recorded an increase to common stock and
additional paid in capital.
 
 6.
Financial Instruments
 
 On
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  However, the FASB
issued FSP SFAS 157-2 which deferred the effective date of SFAS 157, until the
beginning of our 2009 fiscal year, as it relates to fair value measurement
requirements for nonfinancial assets and liabilities that are not remeasured at
fair value on a recurring basis.  The Company determined that the
adoption of SFAS 157 did not have a material effect on its consolidated
financial statements.
 
 The fair
value framework requires the categorization of assets and liabilities into three
levels based upon the assumptions (inputs) used to price the assets or
liabilities.  Level 1 provides the most reliable measure of fair
value, whereas Level 3 generally requires significant management
judgment.  The three levels are defined as follows:
 £
              Level 1:Unadjusted
      quoted prices in active markets for identical assets and
      liabilities.
 £
              Level 2: Observable
      inputs other than those included in Level 1.  For example,
      quoted prices for similar assets or liabilities in active markets or
      quoted prices for identical assets or liabilities in inactive
      markets.
  9
 Table of Contents
  £
              Level 3: Unobservable
      inputs reflecting management’s own assumptions about the inputs used in
      pricing the asset or liability.
 
 The
Company currently does not have any Level 1, Level 2 or Level 3 financial
instruments.  Substantially all of the Company’s cash and cash
equivalents are held in demand deposits, including money market accounts, with
its bank.  The fair value of these assets is determined by deposit
values and interest earned based in stated bank rates.
 
 7.
Reclassifications
 
 Certain
items in the 2007 consolidated financial statements have been reclassified to
conform to the 2008 presentation.
 
 8.  New
Accounting Pronouncements
 
 In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and HedgingActivities, which amends SFAS
133.  SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities to discuss the underlying risks that an entity
intends to manage as well as accounting designation.  This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2008.  The Company does not believe that adoption of SFAS
161 will have a material effect on its consolidated financial
statements.
 
 Item2:
 
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  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 commercial 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
our global base of production partners located in China and Southeast Asia, and
domestically, through 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.
  10
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  We began
Virtual Manufacturing during 2000 by developing subcontracting relationships
with predominately Asian global manufacturers, from our base in Singapore. 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 believe 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 50 customers represents a
highly sophisticated group of purchasers.
  In 2005,
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.  Our niche focuses in a higher
mix of products at lower volumes that larger scale distributors or brokers fail
to address.  Our customers tend to be smaller middle market companies
through midsize firms with little presence or capability in Asia that elect us
as their procurement partners.
 
 Significant
Events
 
 On
February 28, 2008, we exercised our 60 day right to terminate our occupancy in
Franklin Park, Illinois.  Concurrently, we entered into a lease
agreement to occupy approximately 17,600 square feet of space located at 1300
Norwood Avenue, Itasca, IL 60413.  The facility is approximately 8
miles northwest of our current location and provides the Company additional
warehouse space to accommodate our growing core businesses.  In April
2008, we moved into our new facility.
  On
January 26, 2007, the Company entered into a Merger Agreement with SunFuels,
Inc. and Blue Sun Biodiesel, LLC (SunFuels).
  On
January 31, 2008, the Merger agreement expired and was terminated by M-Wave’s
board of directors on February 1, 2008. The company does not have further
obligations to Blue Sun with respect to the existing Merger
Agreement.   The Board of Directors of M-Wave, Inc. determined
that it was in the best interest of their shareholders, customers, suppliers,
and employees to terminate the Merger Agreement. The Board informed Sunfuels
that it remained open to pursuing a merger transaction at an appropriate future
date, though to date, no further discussions have taken place.
  11
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  On
February 8, 2008, the Asset Purchase Agreement signed on July 20, 2007, by and
among the Company, M-Wave International, LLC, an Illinois limited liability
company (the “Purchaser”), Joseph Turek, and Robert Duke, an officer an employee
respectively, was terminated by the Company’s Board of Directors.  The
closing of the Merger Agreement with SunFuels, Inc. was a condition precedent in
completing the Asset purchase Agreement.  The Board also authorized
payment of the $30,000 termination fee to offset Purchaser’s
expenses.
  M-Wave’s
Board determined that its primary short-term goal should be to regain compliance
with the requirements for continued listing on The NASDAQ Capital
Market.  Unfortunately, M-Wave was unable to complete additional
equity financing on acceptable terms, and on April 1, 2008, the Company received
a letter indicating that the NASDAQ Listing Qualifications Hearings Panel has
determined to delist the Company’s common stock from The NASDAQ Stock Market
LLC, and suspended trading in the Company’s securities effective with the open
of business on April 3, 2008.  The NASDAQ Panel’s determination was
based upon the Company’s non-compliance with the minimum stockholders’ equity
requirement for continued listing on The NASDAQ Capital Market, as set forth in
Marketplace Rule 4310(c)(3).
 
 The
Company’s securities were immediately eligible for quotation in the Pink Sheets,
an electronic quotation service for securities traded over-the-counter,
effective with the open of business on April 3, 2008.  The Company is
also working with a market maker and is hopeful that its securities will trade
on the Over-the-Counter Bulletin Board (“OTCBB”) in the
future.  Trading of the Company’s securities on the OTCBB, which is
maintained by the Financial Industry Regulatory Authority (“FINRA”), is subject
to a market maker’s filing of the appropriate application with, and the
clearance of such application by, FINRA.  The Company anticipates
disclosing further trading venue information for its common stock once such
information becomes available.
 
 On April
11, 2008, Jim Mayer, Interim Chief Executive Officer, notified the Company that
he was resigning to pursue other opportunities.  Mr. Mayer agreed to
assist the Company in an advisory role until August 15, 2008.
 
 Pursuant
to Mr. Mayer’s resignation, the Board of Directors appointed Joe Turek, the
Company’s Chairman and Chief Operating Officer, as acting Chief Executive
Officer.
 
 RESULTS
FOR THE THREE MONTHS ENDED March 31, 2008 COMPARED TO THE THREE MONTHS ENDED
March 31, 2007
 
 Net
Sales
  12
 Table of Contents
  Net sales
were approximately $3,032,000 for the three months ended March 31, 2008 versus
approximately $2,263,000 during the three months ended March 31, 2007, an
increase of approximately $769,000 or 34.0%.  Sales within our PCB
product line increased approximately $231,000 during the first quarter of 2008,
an increase of approximately 13% of prior year first quarter
sales.  Sales to our top ten PCB customers were approximately
$1,899,000 during the three months ended March 31, 2008, an increase of
approximately $288,000 compared to the three months ended March 31,
2007.  Sales within our three largest customers were stronger,
accounting for the majority of the increase within our PCB customer
base.  Sales amongst our top ten PCB customers represented
approximately 98% of sales within this product line for the three months ended
March 31, 2008 compared to approximately 94% of sales within this product line
for the three months ended March 31, 2007.
 
 Sales
within our non-PCB product line were approximately $1,039,000 for the three
months ended March 31, 2008, approximately $387,000 above sales for the three
months ended March 31, 2007. As this line grows, we expect to achieve long-term
revenues to approach those currently experienced within our digital product
line.  The non-PCB sales recorded in the first quarter were on par
with sales recorded during the most recent quarters.  We continue to
focus our efforts on growing our core business and customer base, primarily by
concentrating efforts on expanding our customer base within our Non-PCB product
line.
 
 Other
revenues for the three months ended March 31, 2008 were approximately $47,000,
approximately $43,000 below other revenues recorded in the three months ended
March 31, 2007.  Other revenues primarily consist of tooling charges
for new and redesigned products, freight charges billed, and cash discounts
taken by customers for early payments, which are recorded as a reduction of
sales.    Tooling revenues for the first quarter of 2008
were approximately $24,000 below tooling revenues recorded during the first
quarter of 2007.
 
 Gross
Profit and Cost of Goods Sold
 
 The
Company’s gross profit for the three months ended March 31, 2008 was
approximately $832,000, or 27.4% of net sales, compared to a gross profit of
approximately $563,000, or 24.9% of net sales, for the three months ended March
31, 2007.  Increased sales levels was the primary driver of increased
margin dollars, with sales of two items to two Non-PCB customers accounting for
the majority of year over year gross profit percentage increase.
 
 Operating
Expenses
 
 General
and administrative expenses were approximately $715,000 or 23.6% of net sales in
the first quarter of 2008 compared to approximately $676,000 or 29.9% of net
sales in the first quarter of 2007, an increase of approximately
$39,000.
  13
 Table of Contents
  General
and administrative expenses consist primarily of salaries and benefits,
professional services, depreciation of office equipment and computer systems,
and occupancy expenses. In comparison to the first quarter of 2007, payroll
related expenses increased approximately $14,000.   Professional
services, which include legal, auditing, and consulting fees, increased
approximately $13,000 in the first quarter of 2008 compared to prior year
expenses.  Public company related costs such as investor relations,
Sarbanes-Oxley expenses, and board and committee fees were approximately
$190,000 in the first quarter of 2008 compared to approximately $124,000 during
the first quarter of 2007, an increase of approximately
$66,000.  Approximately $78,000 of expenses recorded during the first
quarter of 2008 related to costs associated with the failed Blue Sun
transaction.  We recorded stock compensation expenses during the first
quarter of 2008 of approximately $0 compared to approximately $92,000 for the
first quarter of 2007.  Stock compensation expense for the first
quarter of 2008 related to extending the life of warrants held by M.A.G.
Capital, LLC while prior year expenses related to the vested portion of prior
options granted. Other operating expenses increased approximately $39,000 during
the first quarter of 2008 compared to the first quarter of
2007.  These expenses include travel, telephone, insurance,
depreciation, and rent.  Primary drivers in the increased expense
related to moving expenses related to our facility move of approximately $10,000
in the first quarter of 2008 combined with a workers compensation premium refund
recorded in the first quarter of 2007.
 
 Selling
and marketing expenses were approximately $238,000 or 7.8% of net sales in the
first quarter of 2008 compared to approximately $213,000 or 9.4% of net sales in
the first quarter of 2007.  Selling and marketing expenses include the
cost of salaries, advertising and promotion of the Company’s products, and
commissions paid to independent sales organizations. In comparison to the first
quarter of 2007, commission paid to independent sales organizations increased by
approximately $22,000 due to higher sales levels; payroll-related expenses
decreased by approximately $4,000. Costs related to our Singapore office
decreased by approximately $2,000; other sales expenses, including travel
related expenses increased by approximately $9,000 in the first quarter of 2008
compared to the first quarter of 2007.
 
 Operating
Loss
 
 Operating
loss from continuing operations was approximately $121,000 in the first quarter
of 2008 compared to an operating loss of approximately $327,000 in the first
quarter of 2007. The decrease in operating loss of approximately $206,000 was
primarily related to increased gross profit dollars attributable to higher sales
levels.
 
 Interest
Income
 
 We
recorded no interest income during the first quarter of 2008 or
2007.
 
 Interest
Expense
  We
recorded no interest expense during the first quarter of 2008 or
2007.
  14
 Table of Contents
  Preferred
Stock Dividends
 
 We
recorded preferred stock dividends in the first quarter of 2008 of approximately
$264,000.  The Company recorded no preferred stock dividends during
the first quarter of 2007.  In the prior year,  we received
a waiver of dividends from M.A.G. Capital, LLC.  Dividends relate to
the issuance of Series B preferred stock to M.A.G. Capital, LLC, and its
affiliates.
 
 Liquidity
and Capital Resources
 
 Net cash
used by operations was approximately $437,000 for the first three months of 2008
compared to approximately $242,000 used by operations for the first three months
of 2007.
 
 Accounts
Receivable decreased approximately $186,000 due to improved collection cycles.
Inventories increased approximately $190,000 related to higher inventory levels
to support increased sales levels. Accounts Payable decreased approximately
$81,000 primarily due to the payments to suppliers in the normal course of
business.
 
 Net cash
provided by investing activities was $0 for the first three months of 2008
compared to approximately $7,000 in the first three months of 2007. Capital
expenditures were $0 in the first three months of 2008 and 2007.
 
 Net cash
provided by financing activities was $0 during the first three months of 2008
compared to approximately $18,000 used in financing activities during the first
three months of 2007 related to payments on our note payable for equipment
acquired in 2006.
 
 Currently
the Company is committed to growing its core business, as it relates to the
continuing operations of its digital product line and other non-PCB components
and assemblies. However, if the Company is unable to secure adequate financing
to grow its core business, the Company may be forced to modify its business and
strategic plan.
 
 After the
Company retires its payables related to the failed merger and related costs, the
Company will have substantially reduced its current cash burn
rate.  As of the date of this filing, the Company had approximately
$635,000 cash on hand.  Therefore, based upon the current level of
operations and restructuring of our business focusing on higher margin product
lines, we believe that future cash flows from operations will be adequate to
meet our anticipated liquidity requirements through this fiscal
year.  However, we may need additional funding to accommodate our
anticipated growth needs.
 
 15
 Table of Contents
  Credit
Environment
  In fiscal
year 2008, the credit markets continue to be volatile and have experienced a
shortage in overall liquidity due to the instability in the sub−prime lending
industry and various investment securities. The Company does not engage in any
business activities in the mortgage industry or hold its cash positions in any
accounts other than demand deposits and cash equivalents. The Company believes
it has sufficient liquidity from cash provided by operations and cash on hand.
Sales are to a wide range of diverse commercial industries including electronic
devices for municipal and governmental products, industrial components, and
consumer products. However, if these customers reduce their spending as a result
of the difficulties in the credit markets, it is possible revenues could
decline.
 
 Off-Balance
Sheet Arrangements
 
 The
Company has not created, nor is a party to, any special-purpose or off-balance
sheet entities for the purposes of raising capital, incurring debt, or operating
our business.  The Company does not have any off-balance sheet
arrangements or relationships with entities that are not consolidated into our
financial statements that are reasonably likely to materially affect our
liquidity or the availability of capital resources.
 
 Inflation
 
 Management
believes inflation has not had a material effect on the Company’s operations or
on its financial position.  However, expected supplier price increases
averaging approximately 4% may have a material effect on the Company’s
operations and financial position in the remainder of 2008, if the Company is
unable to pass through those increases under its present contracts.
 
 Foreign
Currency Transactions
 
 All of
the Company’s 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 Affecting
Business and Results of Operations" at the end of Item 6 of our Annual Report on
Form 10-KSB and economic, competitive and other factors affecting our
operations, markets, products and services, expansion strategies and other
factors discussed elsewhere in this report, our Annual Report on Form 10-KSB and
the other documents we have filed with the Securities and Exchange Commission,
as well as the following paragraphs below.
  16
 Table of Contents
  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.
 
 Due to
the delisting of our common stock from the NASDAQ Capital Markets, our common
stock is currently trading on the over-the-counter bulletin board, which may
have an adverse impact on the market price and liquidity of our common stock.
 
 Item3: Quantitative and Qualitative Disclosure About Market
Risks
  Not
applicable.
  Item4T: Controls and Procedures.
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the (i) effectiveness and efficiency of
operations, (ii) reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles, and (iii) compliance with applicable laws and
regulations. The Company’s internal controls framework is based on the criteria
set forth in the Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”).
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  Evaluation
of Disclosure controls and procedures
 
 As of the
end of the period covered by this report, the Company is in process of carrying
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 Chief Financial 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
that ongoing evaluation, the Company’s management concluded that the
effectiveness of its disclosure controls and procedures as of the end of the
period covered by this report, cannot yet be determined such that the
information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms and (ii) accumulated and
communicated to our management, as appropriate to allow timely decisions
regarding disclosure. A controls system cannot provide absolute assurance that
the objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.  The Company is in the
process of designing its disclosure controls and procedures to reach a level of
reasonable assurance of achieving desired control objectives and, based on the
evaluation described above, the Company’s Chief Executive Officer and Chief
Financial Officer are in the process of assessing whether or not the Company’s
disclosure controls and procedures were effective at reaching that level of
reasonable assurance.
  17
 Table of Contents
  During
the evaluation of the Company's disclosure controls and procedures as of the end
of the period covered by this report, the Company's management determined that a
material weakness within its internal control framework, which had been
identified earlier, was still present.
 
 The
weakness relates to segregation of duties.  Current business
conditions have led to limited financial resources for discretionary new
personnel, making it difficult to segregate duties within the financial area. To
address this weakness, the Company has implemented levels of financial reviews
performed by the Chief Financial Officer and/or Chief Executive
Officer.  In completing the evaluation of disclosure controls and
procedures as of the end of the period covered by this report, the Company's
management concluded that as a result of this material weakness in our internal
control over financial reporting, the Company’s management concluded that its
internal control over financial reporting, as of March 31, 2008, was not
effective based on the criteria set forth by COSO in Internal Control -
Integrated Framework. A material weakness in internal control over financial
reporting is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company's annual or interim financial statements
will not be prevented or detected on a timely basis.
 
 Management’s
Plan For Remediation Of Material Weaknesses
 
 In light
of the conclusion that our internal control over financial reporting was not
effective, the Company’s management is in the process of implementing a plan
intended to remediate such ineffectiveness and to strengthen our internal
controls over financial reporting through actively obtaining the assistance of
experienced financial personnel to enhance our financial reporting
capabilities.  As of the date of this filing, the Company is actively
pursuing retaining the experienced financial personnel described above, subject
to cash availability.
  18
 Table of Contents
  This
report does not include an attestation report of the company’s registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
  Changes In Internal
Controls.
 
 There was
no change in the Company's internal control over financial reporting during the
three months ended March 31, 2008 that has materially affected, or is reasonably
likely to materially affect, its internal control over financial
reporting.
 
 PartII - Other Information
 
 Item1:  Legal Proceedings
 
 None
 
 Item1A:  Risk Factors
 
 The
Company has not identified any material changes from risk factors as previously
disclosed in its Annual Report on Form 10-KSB as filed for the year ended
December 31, 2007.
 
 Item2:  Unregistered Sales of Equity Securities and Use
of Proceeds
 
 None
 
 Item3:  Defaults Upon Senior Securities
 
 None
 
 Item4:  Submission of Matters to a Vote of Security
Holders
 
 None
 
 Item5:  Other Information
 
 None
 
 Item6: Exhibits
  19
 Table of Contents
  (a)
              Exhibits
 
 31.1
              Certification
      of the CEO pursuant to Section 302 of the Sarbanes-Oxley
    Act.
 
 31.2
              Certification
      of the CFO pursuant to Section 302 of the Sarbanes-Oxley
    Act.
 
 32.1
              Certification
      pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002.
 
 32.2
              Certification
      pursuant to 18 U.S.C. Section 135O, as adopted pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002.
 
 
 SIGNATURE
 Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
 M~WAVE,
      Inc.Date:
      May 15, 2008
              
              /s/    Jeff
      FiglewiczJeff
      FiglewiczChief
      Financial Officer
 
 Exhibit
      IndexExhibitNo.
              
              Description
              
              Location10.1
              
              Industrial
      Building Lease between M-Wave Inc., and 1300 Norwood Associates LLC, dated
      February 27, 2008
              
              110.2
              
              Separation
      Agreement and Release between M-Wave, Inc. and Jim Mayer dated April 14,
      2008
              
              210.3
              
              Consulting
      Agreement between M-Wave, Inc. and Jim Mayer dated April 14,
      2008
              
              231.1
              
              Certification
      of the CEO Pursuant to Sections 302 of the Sarbanes-Oxley
    Act
              
              Filed
      Herewith31.2
              
              Certification
      of the CFO Pursuant to Sections 302 of the Sarbanes-Oxley
    Act
              
              Filed
      Herewith32.1
              
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act
              
              Filed
      Herewith32.2
              
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act
              
              Filed
      Herewith(1)
              
              Incorporated
      herein by reference to the applicable exhibit to the Registrant's form 8-K
      filed March 6, 2008(2)
              
              Incorporated
      herein by reference to the applicable exhibit to the Registrant's form 8-K
      filed April 17, 2008




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