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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2005; oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number: 0-28010 MEDWAVE, INC.  Delaware
    
    41-1493458(State or other jurisdiction of
incorporation or organization)
    
    (IRS employer
identification number)
 435 Newbury Street
Danvers, MA 01923
(Address of principal executive offices,
zip code) (978) 762-8999
(Registrants telephone number, including
area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period as the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ As of May 6, 2005 the issuer had 11,424,166 shares of Common Stock outstanding.




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##### Table of Contents



Medwave, Inc. Form 10-Q INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets  March 31, 2005 and September 30, 2004
    
    
    2Statements of Operations  Three Months Ended March 31, 2005
and 2004 & Six Months Ended March 31, 2005 and 2004
    
    
    3Statements of Cash Flows  Six Months Ended March 31,
2005 and 2004
    
    
    4Notes to Unaudited Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    7Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters To A Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    18Signatures
    
    
    19Exhibits
    
    
    20-27Amendment to Commercial Lease3rd Lease Modification & Extension AgreementCertifications Pursuant to Section 302Certification Pursuant to Section 906
 1




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements Medwave, Inc. 
 Balance Sheets March 31
    
    
    September 302005
    2004(Unaudited)
    
    
    (Audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,824,210
    
    
    $
    4,793,326Accounts receivable, net
    
    
    168,752
    
    
    
    176,503Inventories, net
    
    
    433,222
    
    
    
    393,039Prepaid expenses
    
    
    172,100
    
    
    
    62,351Total current assets
    
    
    8,598,284
    
    
    
    5,425,219Property and equipment:Research and development equipment
    
    
    33,360
    
    
    
    31,535Office equipment
    
    
    144,768
    
    
    
    114,174Manufacturing and engineering equipment
    
    
    284,390
    
    
    
    285,937Sales and marketing equipment
    
    
    64,259
    
    
    
    113,482Leasehold improvements
    
    
    45,198
    
    
    
    41,913Demonstration equipment
    
    
    25,418
    
    
    
    6,257597,393
    
    
    
    593,298Accumulated depreciation and amortization
    
    
    (405,533
    )
    
    
    (434,798
    )Total net property and equipment
    
    
    191,860
    
    
    
    158,500Patents, net
    
    
    
    
    
    
    1,917Total assets
    
    $
    8,790,144
    
    
    $
    5,585,636Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    550,875
    
    
    $
    342,879Accrued expenses
    
    
    82,582
    
    
    
    113,851Deferred revenue
    
    
    70,565
    
    
    
    60,197Total current liabilities
    
    
    704,022
    
    
    
    516,927Stockholders equity:Common stock, .01 par value:Authorized
shares50,000,000
Issued and outstanding shares-
March 31, 2005 -11,424,166
September 30, 2004 - 10,058,916
    
    
    114,242
    
    
    
    100,589Additional paid in capital
    
    
    34,247,183
    
    
    
    29,350,188Accumulated deficit
    
    
    (26,275,303
    )
    
    
    (24,382,068
    )Total stockholders equity
    
    
    8,086,122
    
    
    
    5,068,709Total liabilities and stockholders equity
    
    $
    8,790,144
    
    
    $
    5,585,636
 The accompanying notes are an integral part of these unaudited financial statements. 2




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Medwave, Inc. 
 Statements of Operations (Unaudited)
 Three months ended March 31
    
    
    Six months ended March 312005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Net Sales
    
    $
    239,449
    
    
    $
    211,856
    
    
    $
    541,440
    
    
    $
    436,783Operating expenses:Cost of sales and production
    
    
    134,634
    
    
    
    185,104
    
    
    
    420,317
    
    
    
    282,914Research and development
    
    
    318,859
    
    
    
    142,775
    
    
    
    466,251
    
    
    
    241,329Sales and marketing
    
    
    490,899
    
    
    
    363,965
    
    
    
    1,018,724
    
    
    
    722,690General and administrative
    
    
    351,984
    
    
    
    200,661
    
    
    
    575,140
    
    
    
    415,562Operating loss
    
    
    (1,056,927
    )
    
    
    (680,649
    )
    
    
    (1,938,992
    )
    
    
    (1,225,712
    )Other income(expense):Interest income
    
    
    30,292
    
    
    
    7,248
    
    
    
    45,757
    
    
    
    9,248Loss on disposal of equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,302
    )Net loss
    
    $
    (1,026,635
    )
    
    $
    (673,401
    )
    
    $
    (1,893,235
    )
    
    $
    (1,241,766
    )Net loss per share  Basic and diluted
    
    $
    (0.10
    )
    
    $
    (0.07
    )
    
    $
    (0.18
    )
    
    $
    (0.13
    )Weighted average number of common and
common equivalent shares outstanding  basic and diluted
    
    
    10,785,405
    
    
    
    9,703,724
    
    
    
    10,418,169
    
    
    
    9,230,546
 The accompanying notes are an integral part of these unaudited financial statements. 3




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Medwave, Inc. 
 Statements of Cash Flows (Unaudited)
 Six months ended March 312005
    
    
    2004Operating activitiesNet loss
    
    $
    (1,893,235
    )
    
    $
    (1,241,766
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    22,840
    
    
    
    16,945Loss on disposal of equipment
    
    
    
    
    
    
    25,302Changes in operating assets and liabilities:Accounts receivable
    
    
    7,751
    
    
    
    10,568Inventories
    
    
    (40,183
    )
    
    
    31,386Prepaid expenses
    
    
    (109,749
    )
    
    
    (71,247
    )Accounts payable
    
    
    207,996
    
    
    
    (124,579
    )Accrued expenses
    
    
    (31,269
    )
    
    
    12,550Deferred revenue
    
    
    10,368
    
    
    
    1,687Net cash used in operating activities
    
    
    (1,825,481
    )
    
    
    (1,339,154
    )Investing ActivitiesPurchase of patent
    
    
    
    
    
    
    (1,917
    )Purchase of property and equipment
    
    
    (54,283
    )
    
    
    (62,290
    )Net cash used in investing activities
    
    
    (54,283
    )
    
    
    (64,207
    )Financing activitiesProceeds from issuance of common stock
    
    
    4,910,648

    
    
    
    5,164,788Cash provided by financing activities
    
    
    4,910,648
    
    
    
    5,164,788Increase in cash and cash equivalents
    
    
    3,030,884
    
    
    
    3,761,427Cash and cash equivalents at beginning of period
    
    
    4,793,326
    
    
    
    1,694,648Cash and cash equivalents at end of period
    
    $
    7,824,210
    
    
    $
    5,456,075
 The accompanying notes are an integral part of these unaudited financial statements. 4




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Medwave, Inc. 
 Notes To Unaudited Financial Statements March 31, 2005  1.
    Basis of PresentationThe financial statements included in this report have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated
under the Securities Exchange Act of 1934. Accordingly, they do not include all of the
information and disclosures required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the
financial information have been included for the interim periods presented. The preparation of
financial statements in conformity with accounting principles generally accepted in the United
States 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 reported
period. Actual results could differ from those estimates. Operating results for interim periods
are not necessarily indicative of results that may be expected for the entire fiscal year.
Accordingly, these interim period condensed financial statements should be read in conjunction
with the financial statements contained in the Companys Annual Report on Form 10-K for the
year ended September 30, 2004.2.
    InventoriesInventories which consist of material, labor and overhead are valued at the lower of cost or
market on the first-in, first-out (FIFO) method and consist of the following: March 31,
    
    
    September 30,2005
    
    
    2004Raw materials
    
    $
    312,283
    
    
    $
    277,726Work-in-process
    
    
    36,128
    
    
    
    Finished goods
    
    
    84,811
    
    
    
    115,313Total
    
    $
    433,222
    
    
    $
    393,039
 5




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3.
    Stockholders EquityA summary of changes in stockholders equity for the six months ended March 31, 2005 is as
follows: Common Stock.01 Par Value

    

    Additional

    

    AccumulatedShares
    
    
    
    Amount
    
    
    
    Paid in Capital
    
    
    
    Deficit
    
    
    
    TotalBalance at September 30, 2004
    
    
    
    10,058,916
    
    
    
    $
    100,589
    
    
    
    $
    29,350,188
    
    
    
    $
    (24,382,068
    )
    
    
    $
    5,068,709Private Placement- February, 2005 Net of Issuance Cost
    
    
    
    1,300,000
    
    
    
    
    13,000
    
    
    
    
    4,756,738
    
    
    
    
    
    
    
    
    
    4,769,738Exercise of Stock Options/Warrant
    
    
    
    65,250
    
    
    
    
    653
    
    
    
    
    140,257
    
    
    
    
    
    
    
    
    
    140,910Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,893,235
    )
    
    
    
    (1,893,235
    )Balance at March 31, 2005
    
    
    
    11,424,166
    
    
    
    $
    114,242
    
    
    
    $
    34,247,183
    
    
    
    $
    (26,275,303
    )
    
    
    $
    8,086,122
  Stock Based CompensationPro forma information regarding net loss and loss per share is required by Statement 123, and
has been determined as if the Company had accounted for its employee stock options under the
fair value method of Statement 123. The fair value for these 2005 options was estimated at the
date of grant using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 4.36% for the period ended March 31, 2005; dividend yield of 0%;
volatility factor of the expected market price of the Companys common stock of .41, and a
weighted average expected life of the option of five years.The Company granted options to purchase 89,000 shares and 48,000 shares during the six-month
periods ended March 31, 2005 and 2004 respectively.For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. The Companys pro forma information is as follows: Three months ended March 31
    

    Six months ended March 312005
    
    
    
    2004
    
    
    
    2005
    
    
    
    2004Net loss as reported
    
    
    $
    (1,026,635
    )
    
    
    $
    (673,401
    )
    
    
    $
    (1,893,235
    )
    
    
    $
    (1,241,766
    )Add: Stock-based employee compensation expense
included in reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
determined under fair value method for all awards
    
    
    
    (127,012
    )
    
    
    
    (14,060
    )
    
    
    
    (246,795
    )
    
    
    
    (217,028
    )Pro forma net loss
    
    
    $
    (1,153,647
    )
    
    
    $
    (687,461
    )
    
    
    $
    (2,140,030
    )
    
    
    $
    (1,458,794
    )Basis and diluted loss per shareAs reported
    
    
    
    (0.10
    )
    
    
    
    (0.07
    )
    
    
    
    (0.18
    )
    
    
    
    (0.13
    )Pro forma
    
    
    
    (0.11
    )
    
    
    
    (0.07
    )
    
    
    
    (0.21
    )
    
    
    
    (0.16
    )
 6




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Shareholder Rights AgreementOn September 29, 2003, the Company adopted a shareholder rights agreement in order to obtain
maximum value for shareholders in the event that a person or group of affiliated persons obtain
15% or more of the outstanding shares of common stock. To implement the agreement, Medwave
issued a dividend of one right for each share of its common stock held by shareholders of
record as of the close of business on September 30, 2003. Each right initially entitles
shareholders to purchase one share of Medwaves common stock for $50. However, the rights are
not immediately exercisable and will become exercisable only if certain events occur as
discussed above. The rights expire September 30, 2013. The Company, at its option, also holds
certain redemption privileges related to the rights as described in the agreement.4.
    Net Loss Per ShareNet loss per share is based on the weighted average number of common shares outstanding in each
year. Diluted earnings per share (EPS) is similar to basic EPS, except that the weighted
average of common shares outstanding is increased to include the additional common shares that
would have been outstanding if the potential dilutive common shares, consisting of shares of
those stock options and warrants for which market price exceeds exercise price, had been
issued. Such common equivalent shares are excluded from the calculation of diluted EPS in loss
years, as the impact is antidilutive. Therefore, there was no difference between basic and
diluted EPS for each period presented. The number of common equivalent shares excluded from the
calculation was 3,127,450 and 3,244,950 as of March 31, 2005 and 2004, respectively.5.
    Stock Purchase AgreementOn February 11, 2005 the Company entered into a Securities Purchase Agreement with certain
investors. Under the terms of the agreement, the Company issued 1,300,000 shares of common
stock yielding $4,769,738 net of issuance costs and issued additional investment rights for the
option to purchase 575,000 shares of Common Stock at a purchase price of $4.00 per share. 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The Private Securities Litigation Reform Act of 1995 contains certain safe harbors
regarding forward-looking statements. From time to time, information provided by Medwave Inc.,
or the Company, or statements made by our directors, officers or employees may contain
forward-looking information subject to numerous risks and uncertainties. Statements made in
this report that are stated as expectations, plans, anticipations, prospects or future
estimates or which otherwise look forward in time are considered forward-looking statements
and involve a variety of risks and uncertainties, known and unknown, which are likely to
affect the actual results. The following factors, among others, have affected and, in the
future, could affect the Companys actual results: resistance to the acceptance of new medical
products, the market acceptance of the Vasotrac system, the Vasotrax hand-held unit, or other
products of the Company, hospital budgeting cycles, the possibility of adverse or negative
commentary from clinical researchers or other users of the Companys products, the Companys
success in creating effective distribution channels for its products, the Companys ability to
scale up its manufacturing process, the magnitude of orders under the Companys agreement with
Nihon
Kohden, Zoll Medical and Analogic Corp., the Companys ability to enter into additional agreements,
delays in product development or enhancement or regulatory approval, and other factors detailed
from time to time in the Companys reports filed with the SEC, including those set forth under the
caption Risk Factors in the Companys Annual Report on Form 10-K filed on January 12, 2005.
Consequently, no forward-looking statement can be guaranteed and actual results may vary
materially. 7




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This discussion summarizes the significant accounting policies, accounting estimates and other
significant factors affecting the liquidity, capital resources and results of operations of the
Company for the three-month and six-month periods ended March 31, 2005 and 2004. This discussion
should be read in conjunction with the financial statements and other financial information
included in our Annual Report on Form 10-K for the year ended September 30, 2004 filed with the
SEC. Overview Operating revenue was $541,400 and $436,800 for the six-month periods ended March 31, 2005 and
2004, respectively, an increase of 24%. Revenue from the North American market was approximately
$452,800 and $290,000 for the six-month periods ended March 31, 2005 and 2004, respectively,
representing an increase of 56%. Revenue generated from patient sensors and service increased 90%
to $211,900 for the six-month period ended March 31, 2005 compared to $111,300 for the six-month
period ended March 31, 2004. Revenue from international markets was approximately $88,600 and
$146,800 for the six-month periods ended March 31, 2005 and 2004, respectively, representing a
decrease of 40%. All international sales are transacted in U.S. dollars. During March 2005, we announced that we entered into a Supplier and License Agreement with Analogic
Corporation. Analogic is a designer and manufacturer of patient monitoring products. Analogic has
been a supplier to some of the largest, most well-known patient monitoring companies for many
years. This agreement allows Analogic to integrate Medwaves sensor based technology into their
patient monitoring family of products. We are working with Analogic to insure timely and smooth
implementation of our technology into their products. During June 2004, we announced the signing of an OEM agreement with ZOLL Medical Corporation. ZOLL
Medical is a leader in cardiac resuscitation devices and an innovator in their field. We have been
working with Zoll to determine implementation schedules regarding our technology and its
incorporation into their products. We anticipate that we will begin to ship products to fulfill
this agreement in the quarters ahead. During September 2004, we signed a Joint Investigation Agreement with a global electronics company.
We have been working with this company since that time to implement and achieve specific milestones
that are called out in the agreement. To date, we have completed all of the identified milestones
and are in the process of discussing the next phases of this agreement and the business
arrangement, which may come from the next aspect of this agreement. We continue to place a tremendous amount of management time and focus on other potential OEM
agreements, distribution, and sales channel expansion possibilities. The scope of the discussions
has increased as we pursue alternate avenues for Medwave to supply products and technology,
including licensing, distribution, private labeling, and co-development opportunities. We believe
that these agreements with other organizations may provide a significant possibility to sell large
volumes of our technology, as well as complement our direct sales forces activities by further
validating our technology in the market, across multiple market segments. We also believe that we
have superior clinical validation across a multitude of clinical settings and on patients who are
traditionally very difficult to monitor blood pressure.
With this ongoing clinical validation and the growing market presence that we have created with our
direct sales force, we believe that our technology has established significant momentum in the
non-invasive blood pressure monitoring marketplace. Many of the clinical studies which have been
performed, most notably the ones concerning obese, pediatric and emergency patients, have
highlighted the benefits our technology brings to these challenging environments and patient types.
Based on these activities, we are progressing with our business strategy to sell our products into
the point-of-care and low-end vital signs markets, while simultaneously partnering with other
companies regarding integration of our technology into their products. We believe that higher
acuity care areas within healthcare have clinically accepted our technology, as evidenced by our
Group Purchasing Agreements and the positive 8




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##### Table of Contents



results from the studies and customer discussions
within these areas. However, we also believe that the demand from these environments is more geared
towards an integrated module of a larger more comprehensive bedside monitoring system. Hospitals
have moved towards a systems approach in high acuity environments, and as a result, desire
integrated parameters. To fulfill our point-of-care strategy, we have recently introduced our solution for this market. We
have exhibited a new product, Primo, to the nursing community at the National Teaching Institutes
annual meeting, held in New Orleans, May 10-12, 2005. Primo is a spot point-of-care blood pressure
monitoring device designed to be able to take a blood pressure of a patient in the pediatric to
adult range, in settings where manual or automatic blood pressure measurements are required. The
advantages which are offered by Primo include: speed of readings (seconds not minutes); significant
improvement in patient comfort (because it does not completely occlude blood flow as a cuff does);
and ease of use. Primo can be applied with one hand in most cases, and activated with the same
hand. Once activated, Primo takes blood pressure automatically and displays the results within 12
seconds on an accessible user screen. The benefits and performance capabilities of Primo offer
economic benefits for our customers by increasing throughput of patients, allowing caregivers to
potentially see more patients per day due to workflow improvements. The ergonomics of Primo are
unlike any other Medwave product ever produced. We hired an outside industry design firm, therefore
the look of the Primo is as state-of-the-art as is its performance. The Primo does not comply with the United
States FDA premarket notification regulations. Medwave, Inc. does not intend to introduce the Primo
into commercial distribution at this time. The Primo is an investigational device only. It has been estimated in industry market reports that the point-of-care blood pressure monitoring
market, including manual and automatic blood pressure cuff products, is a several hundred million
dollars per year market segment. We believe that Primo addresses all of the performance
requirements and the aesthetics to become a leader within these markets. Over the past year, we have been recruiting higher level sales professionals in our hospital sales
force, and have hired several very seasoned sales professionals from companies in the medical
device industry who have tremendous experience in selling into healthcare systems and selling
complex medical technology. Several of these individuals have experience selling into multiple
departments within the hospital market and selling into very competitive market segments. In
addition, we have hired a few sales people to address the alternate care markets. We believe that
the Primo product will have an excellent presence in both the hospital and alternative care market
segments. We continue to hear favorable results from clinical studies, which have been ongoing for the past
few years. Some clinical studies remain incomplete or have been terminated due to changes in
objective or personnel, but to date, we have not received negative results from any completed
study. Several of the completed studies have been published in prominent medical
journals. Following is an updated listing of these studies, along with others which are still in
the process of being completed, presented and/or published. 9




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Medwave Bibliography A. Published Studies PrincipleDate
    
    
    Title
    
    
    Journal/Meeting
    
    
    Edition/Pages
    
    
    Invesigator/InstitutionSeptember 1999
    
    
    A New Noninvasive
Method to Measure
Blood Pressure
Results of a
Multicenter Trial
    
    
    Anesthesiology
    
    
    Volume 91, No. 3.
    
    
    Dr. Kumar Bellani,
University of
Minnesota,
Minneapolis, MNOctober 2004
    
    
    Self-Reported
Sensitivity to
Continuous
Noninvasive Blood
Pressure Monitoring
via the Radial
Artery
    
    
    Journal of
Psychosomatic
Research
    
    
    Pages 119-121
    
    
    Bruce H. Friedman,
Virginia Polytechnic
Institute and State
University,
Blacksburg, VAOctober 2004
    
    
    Use of a Radial
Artery Compression
Device for
Non-Invasive,
Near-Continuous
Blood Pressure
Monitoring in the
Emergency
Department
    
    
    The American
Journal of
Emergency Medicine
    
    
    Volume 22, No.6
    
    
    Dr. Stephen Thomas,
Mass. General
Hospital/Harvard
Medical School;
Boston MedFlight,
Boston MAJanuary/March 2005
    
    
    Near-Continuous,
Noninvasive Blood
Pressure Monitoring
in the
Out-of-Hospital
Setting
    
    
    Prehospital
Emergency Care
Journal
    
    
    Volume 9/Number 1
    
    
    Dr. Stephen Thomas,
Mass. General
Hospital/Harvard
Medical School;
Boston MedFlight,
Boston MAMarch 2005
    
    
    Validation of a
Noninvasive Blood
Pressure Monitoring
Device in
Normotensive and
Hypertensive
Pediatric Intensive
Care Patients
    
    
    Journal of Clinical
Monitoring and
Computing
    
    
    Volume 18, Issue 4
    
    
    Dr. Mark J. Heulitt,
University of
Arkansas for Medical
Sciences,
Little Rock, ARMay 2005
    
    
    Comparison of the
Vasotrac with
Invasive Arterial
Blood Pressure
Monitoring in
Children Following
Pediatric Cardiac
Surgery
    
    
    Anesthesia &
Analgesia
    
    
    100:1289-94
    
    
    Dr. Peter C. Laussen,
Childrens Hospital
Boston,
Boston, MA
 10




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B. Abstracts and Poster Presentations PrincipleDate
    
    
    Title
    
    
    Journal/Meeting
    
    
    Edition/Pages
    
    
    Invesigator/InstitutionSeptember 1998
    
    
    Continual
Non-Invasive Blood
Pressure Monitoring
with the
Vasotracä -
Experience in the
Morbidly Obese
    
    
    Anesthesiology
    
    
    Volume 89, No. 3A
    
    
    Dr. Kumar Bellani,
University of Minnesota,
Minneapolis, MNOctober 2000
    
    
    Comparison of The
Vasotrac BP Monitor
with the Arm Cuff
Methods
    
    
    American Society of
Anesthesiologists
    
    
    Poster Presentation
    
    
    Dr. Kumar Bellani,
University of Minnesota,
Minneapolis, MNOctober 2000
    
    
    Assessment of the
Vasotrac Blood
Pressure Monitor
During Deliberate
Hypotension
    
    
    American Society of
Anesthesiologists
    
    
    Poster Presentation
    
    
    Dr. Kumar Bellani,
University of Minnesota,
Minneapolis, MNOctober 2000
    
    
    Radial Artery Blood
Pressure Monitoring
in Children with
the Vasotrac  A
Preliminary Report
    
    
    American Society of
Anesthesiologists
    
    
    Poster Presentation
    
    
    Dr. Kumar Bellani,
University of Minnesota,
Minneapolis, MNMarch 2002
    
    
    The Vasotrac
Accurately Reflects
Pharmacologically
Induced
Cardiovascular
Changes
    
    
    International
Anesthesia Research
Society
    
    
    Poster Presentation
    
    
    Dr. Liviu C. Poliac,
University of Minnesota,
Minneapolis, MNMay 2002
    
    
    Systolic and
Diastolic Time
Intervals Obtained
Noninvasively using
the Vasotrac
    
    
    European Society of
Anaesthesiologists
    
    
    Poster Presentation
    
    
    Dr. Liviu C. Poliac,
University of Minnesota,
Minneapolis, MNOctober 2003
    
    
    Use of a Radial
Artery Compression
Device for
Non-Invasive,
Near-Continuous
Blood Pressure
Monitoring in the
Emergency Dept.
    
    
    American College of
Emergency
Physicians
    
    
    Poster Presentation
    
    
    Dr. Stephen Thomas,
Mass. General
Hosp./Harvard Medical
School; Boston
MedFlight,
Boston MAMay 2004
    
    
    Near-Continuous,
Noninvasive Blood
Pressure Monitoring
in the
Out-of-Hospital
Setting
    
    
    The Society for
Academic Emergency
Medicines Annual
Meeting
    
    
    Poster Presentation
    
    
    Dr. Stephen Thomas,
Mass. General
Hosp./Harvard Medical
School; Boston
MedFlight,
Boston MAOctober 2004/December
2004
    
    
    Intraoperative
Blood Pressure
Measurement on the
Wrist is More
Accurate than on
the Upper Arm in
Morbidly Obese
Patients
    
    
    American Society of
Anesthesiologists,
Post Graduate
Assembly of
Anesthesiologists
    
    
    Poster Presentations
    
    
    Dr. Helmut Hager,
Washington University,
St. Louis, MO
 C. Published Textbooks Title
    
    
    Editor
    
    
    Publisher
    
    
    DateMorbid Obesity: Peri-operative
Management
    
    
    Dr. Adrian Alvarez
    
    
    Cambridge University Press
    
    
    
    2004
 D. Ongoing Projects Project/Study
    
    
    Facility
    
    
    Completion
    
    
    Primary InvestigatorAccuracy of the
Vasotrac System
compared to the
invasive arterial
catheter
    
    
    University of Arizona
    
    
    TBA
    
    
    Dr. Stephen BarkerAccuracy of
Vasotrac with
indwelling arterial
catheter during
corrective spinal
surgery
    
    
    Childrens Hospital Boston
    
    
    TBA
    
    
    Dr. Peter Laussen
 11




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General As of March 31, 2005, Medwave employed 28 full-time employees and five part-time employees. Of the
28 full-time employees, 12 are in sales and field support, 2 are in international sales and product
marketing, 4 are in general and administrative, 9 are research & development/manufacturing, and one
is President and Chief Executive Officer. Of the five part-time employees, three are in general and
administrative, one in R & D, and one in sales and field support. In addition, we are continuing
the process of recruiting a Chief Financial Officer and will most likely need to hire additional
sales and/or sales support staff in the months ahead. Also, we will most likely need to hire
additional engineering and support staff to successfully introduce and support new products as well
as optimize our OEM agreements. Since our inception, we have been engaged exclusively in the
development of devices for monitoring and measuring blood pressure. Blood pressure or, more precisely, arterial pressure, is the pressure that the blood exerts against
the interior of the arterial walls. The level of the pressure depends upon the strength of the
hearts contraction, the volume of blood in the circulatory system, the elasticity of the arteries,
and the degree of capillary constriction impeding circulation. During the hearts relaxation phase,
(the diastole), blood pressure falls. When the heart muscle contracts, (the systole), blood
pressure rises. Clinically, blood pressure is commonly reported as three different values. Systolic
and diastolic pressures are the maximum and minimum pressures during a single cardiac cycle,
respectively. Systolic pressure is also often referred to as contracting pressure, when the heart
muscle is contracting and pumping blood through the blood vessels of the body. Diastolic pressure
is also often referred to as the resting or relaxation pressure of the heart muscle. Mean pressure
is the average pressure during the cardiac cycle. Blood pressure and changes in blood pressure are critical indicators of the health and performance
of the bodys cardiovascular system. Blood pressure varies with age and by gender, such that young
adults tend to have lower blood pressures than older adults, and men tend to have higher blood
pressures than women of the same age. Even in healthy bodies, blood pressure normally fluctuates
during the day. For example, exercise, emotion, and exposure to the cold tend to cause blood
pressure to rise, while it falls in instances of warmth, fainting, hemorrhage, and certain
diseases. All hospital patients require measurement of their blood pressure and many surgical or
critically ill patients require frequent or continual monitoring of their blood pressure. Continual
monitoring of blood pressure is important for patients in operating rooms, surgical recovery rooms,
intensive care units, emergency departments and other critical care sites because of the acuteness
of these patients conditions and rapidity with which their conditions can deteriorate. Trend
information obtained from successive blood pressure measurements plays an important role in the
diagnosis, prognosis, and treatment of diseases. Blood pressure is one vital sign that is measured
in every clinical location of the healthcare spectrum, including a patients own home environment.
Recently, reports have been published, exploiting challenges with conventional blood pressure cuff
technology. The cuff has been reported to have difficulty monitoring people with fairly large or
small arms as well as people with relatively high or low blood pressure and people who may be in
motion or have tremors. Medwave is confident that its blood pressure monitoring
technology will overcome these traditional challenges, and as a result, continues to work on
products that will allow for broader market penetration, eventually including the personal
monitoring markets. In the near future, Medwave believes that it will have products that address
the pre and post hospital market, additional OEM business opportunities, and the consumer blood
pressure market. It is estimated that approximately 65 million people in the United States are
considered hypertensive. This number has increased approximately 30% over the past decade. In
addition, another study conducted by researchers from Tulane University that was recently published
estimates that by the year 2025, over 1 billion people in the world population will be
hypertensive. We believe that with the clinical validation, which has been and continues to be
accomplished regarding our technology, the acceptance of our technology in some of the most
prestigious medical centers in the United States, our ability to incorporate our technology into
handheld devices and with the introduction of Primo, we will have the potential to compete for the
very large and growing personal-use market for blood pressure monitoring. 12




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Medwave, Inc. develops, manufactures, and distributes sensor-based non-invasive blood pressure
solutions. Its Vasotrax® Hand Held Monitor, the Vasotrac® APM205A NIBP Monitor, the Vasotrac®
APM205A Model DS, and the MJ23 OEM Module are new approaches to non-invasive blood pressure
monitoring. Medwave has received the necessary regulatory clearances to market its
technology in Europe, Asia, and the United States. Medwave is ISO13485/ISO9001/MDD93/42/EEC
certified, and its products are CE marked. Medwaves latest addition, the Legatoä OEM
Developers Kit, is designed to introduce the innovative Vasotrac® technology to OEM designers. Recent Developments During early May 2005, we demonstrated and exhibited the Primo Spot Blood Pressure Monitor at the
National Teaching Institutes annual meeting in New Orleans. Primo is a spot blood pressure
monitoring device designed to be able to take a blood pressure of a patient in the pediatric to
adult range, in any setting where manual or automatic blood pressure measurements are required. The
advantages which are offered by Primo include: speed of readings (seconds not minutes); significant
improvement in patient comfort (because it does not completely occlude blood flow as a cuff does);
and ease of use. Primo can be applied with one hand in most cases, and activated with the same
hand. Once activated, Primo takes blood pressure automatically and displays the results within 12
seconds on an accessible user screen. The ergonomics of Primo are unlike any other Medwave product
ever produced. The Primo does not comply with the United
States FDA premarket notification regulations. Medwave, Inc. does not intend to introduce the Primo
into commercial distribution at this time. The Primo is an investigational device only. In March 2005, we announced that we entered into a Supplier and License Agreement with Analogic
Corporation of Peabody, Massachusetts. Analogic is a supplier of patient monitoring products to
other leading companies in the patient monitoring markets. Analogic also sells their products
directly to the healthcare markets. The Supplier and License Agreement allows Analogic to
incorporate Medwaves technology into their patient monitoring products. We are working with
Analogic to insure timely and smooth implementation of our technology into their products. We have continued to place focus on building our direct sales organization. As of March 31, 2005,
we employed 13 in sales and field support for hospitals and alternative care, and 2 in
international sales and product marketing. Over the next few months, we may hire additional
hospital and alternative care sales professionals to expand our reach into the U.S. market. Results of Operations The results of operations compares the three months and six months ended March 31, 2005 and 2004.
The analysis of liquidity and capital resources compares March 31, 2005 to September 30, 2004. Operating revenue was $239,400 and $211,900 for the quarters ended March 31, 2005 and 2004,
respectively, an increase of 13%. Operating revenue was $541,400 and $436,800 for the six month
period ended March 31, 2005 and 2004, respectively, an increase of 24%. This increase is due to
continued growth in the disposable and service markets. The increased revenue in the Service market
results from an agreement with the global electronics company previously mentioned, which may be
disclosed upon entering the second phase of the agreement. Cost of sales and production was $134,600 and $185,100 for the quarters ended March 31, 2005 and
2004, respectively, a decrease of 27%. This decrease reflects a reclassification of expenses
pertaining to employees not related to manufacturing activity. Cost of sales and production was
$420,300 and $282,900 for the six month period ended March 31, 2005 and 2004, respectively, an
increase of 49%. This increase is due to salary and related expenses pertaining to additional
employees for production. Also, the implementation of the new accounting system updates inventory
automatically offsetting the 13




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need for quarterly adjustments, this accounted for a $63,500 reduction
to cost of goods sold in the first quarter of FY 2004. We incurred $318,900 and $142,800 for research and development expenses for the quarters ended
March 31, 2005 and 2004, respectively, an increase of 123%. This increased cost was in support of
new product development. The legal and consulting charges associated with patents also increased,
because of our continued commitment to the development and protection of our innovative ideas and
products. We incurred $466,300 and $241,300 for research and development expenses for the six month
period ended March 31, 2005 and 2004, respectively, an increase of 93%. This activity pertains to
salaries, outside services, and legal fees associated with increased patent filing activity. We incurred $490,900 and $364,000 for sales and marketing as of the quarters ended March 31, 2005
and 2004, respectively, an increase of 35%. We incurred $1,018,700 and $722,700 within the same
department for the six month period ended March 31, 2005 and 2004, respectively, an increase of
41%. The addition of 5 employees in this area substantially increased such items as salaries,
benefits, travel, telephone and supplies. We have been building our workforce to align with the
growth of a developing company. We incurred $352,000 and $200,700 for general administrative expenses as of the quarters ended
March 31, 2005 and 2004, respectively, an increase of 75%. Approximately, 47% of this increase is
related to the reclassification of expenses pertaining to employees that are performing
administrative tasks versus manufacturing activity. Of the remaining 28%, the majority pertains to
the activities and filings associated with being a public company. We incurred $575,100 and
$415,600 for general administrative expenses for the six month period ended March 31, 2005 and
2004, respectively, an increase of 38%. This was reflected in the activity pertaining to outside
services, accounting and legal fees, and IT maintenance. Interest income was $30,300 and $7,200 for the quarters ended March 31, 2005 and 2004,
respectively. Interest income was $45,800 and $9,200 for the six month period ended March 31, 2005
and 2004, respectively. This increase is a direct result of the February 2005 financing activity. Liquidity and Capital Resources Our cash and cash equivalents were $7,824,200 and $4,793,300 at March 31, 2005 and September 30,
2004, respectively reflecting the additional capital received from the February 2005 financing
activity. With the cash equivalents of approximately $7,824,200, we believe that sufficient
liquidity is available to satisfy our working capital needs through at least March 31, 2006. Beginning in January, 2004, we began the process of upgrading our accounting software and
information technology system. The total cost to date is approximately $40,000 for the software
up-grade, implementation, and training, and approximately $5,000 for hardware for the operating
system. We incurred an additional expenditure of $22,000 in the second quarter of 2005 to replace
the obsolete IT communications system. As business growth continues, this project was a necessary
building block to support growth and facilitate the smooth and concurrent processing of all of our
business functions. We will need to raise additional capital to fund our long-term operations if we do not begin to
realize an operating profit. There can be no assurance that we will be able to receive such funds
on acceptable terms. Cash flows used in operations increased to $1,825,500 for the six months ended March 31, 2005 from
$1,339,200 for the six months ended March 31, 2004, an increase of $486,300. The majority of this
increase was due to the costs associated with accounting and legal fees, salaries, and outside
services. In 14




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both periods, we used cash flows to fund operating losses, which were partially offset
by non-cash expense for depreciation. Cash flows used in investing activities decreased to $54,300 for the six months ended March 31,
2005 from $64,200 for the six months ended March 31, 2004. This decrease reflects our effort to
maintain cash reserve. Financing activities provided $4,910,648 (net) from the exercise of stock options as well as the
February 2005 financing during the six months ended March 31, 2005, and $5,164,788 (net) from the
exercise of stock options, as well as the January 2004 financing during the six months ended March
31, 2004. Off-Balance Sheet Arrangements Our only off-balance sheet arrangements are non-cancelable operating leases entered into in the
ordinary course of business. The table under the following caption Contractual Obligations shows
the amount of our operating lease payments by year. Contractual Obligations The following summarizes our contractual obligations at March 31, 2005 and the effect these
contractual obligations are expected to have on our liquidity and cash flows in future periods. We
recently renewed our operating lease commitments for our Danvers, MA and Arden Hills, MN locations.
Both leases cover a three-year period. PAYMENTS DUE BY PERIODTOTAL
    
    
    1 YEAR OR LESS
    
    
    1-3 YEARSOperating lease commitments
    
    $
    491,018
    
    
    $165,864
    
    
    $
    325,155
 Critical Accounting Policies and Estimates Medwaves financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). Preparing financial
statements requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by
managements application of accounting policies. Critical accounting policies for Medwave include
revenue recognition, stock-based compensation, impairment of long-lived assets, and allowance for
doubtful accounts. Revenue Recognition The Company recognizes revenue upon product shipment, provided there exists persuasive evidence of
an arrangement, the fee is fixed or determinable, and collectibility of the related receivable is
reasonably assured. 15




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##### Table of Contents



Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations in accounting for its stock options. Under APB 25,
when the exercise price of stock options equals or exceeds the market price of the underlying stock
on the date of grant, no compensation expense is recognized. As discussed above, the Company has elected to follow APB No. 25, and related Interpretations in
accounting for employee stock options and has adopted the disclosure provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation (Statement 123), relating to the fair value method
of accounting for stock options. Impairment of Long-Lived Assets The Company will record impairment losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be generated by those assets
are less than the assets carrying amount. Accounts Receivable Accounts receivable are customer obligations due under normal trade terms. The Company reviews
accounts receivable on a monthly basis to determine if any receivables will potentially be
uncollectible. The Company includes any reserves for specific accounts receivable balances that are
determined to be uncollectible, along with a general reserve, in the overall allowance for doubtful
accounts. After all attempts to collect a receivable have failed, the receivable is written off
against the allowance. Based on the information available, the Company believes the allowance for
doubtful accounts as of March 31, 2005 is adequate. However, actual write-offs may exceed the
recorded allowance. 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. 
 ITEM 4. Controls and Procedures As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has
evaluated, with the participation of management, including the Chief Executive Officer (who is also
the Companys acting Chief Financial Officer), the effectiveness of its disclosure controls and
procedures as of the end of the period covered by this report. Based on such evaluation, the Chief
Executive Officer has concluded that such disclosure controls and procedures are effective. From time to time, the Company reviews the disclosure controls and procedures, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that the Companys systems
evolve with its business. There was no change in the Companys internal control over financial
reporting that occurred during the six-month period ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting. In connection with their audit for the year ended September 30, 2004, BDO Seidman, LLP, our former
independent registered public accounting firm, advised management and our Audit Committee of the
following significant deficiencies which did not individually or in the aggregate raise to the
level of material weakness: The company lacks a full-time Chief Financial Officer to ensure
consistently timely reporting of financial information. In addition, we have hired a consultant to
assist our internal accounting staff to ensure that all tasks are completed in a timely manner. We
are continuing the process 16




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of recruiting a Chief Financial Officer to ensure consistently timely
reporting of financial information. We believe this effort will address the conditions raised by
BDO Seidman, LLP. 
 PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings Not applicable. 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any equity securities in the period covered by this report. 
 ITEM 3. Defaults Upon Senior Securities Not applicable. 
 ITEM 4. Submission Of Matters To A Vote Of Security Holders Results from March 3, 2005 Annual Meeting of Shareholders The Companys Annual Meeting of Stockholders, held March 3, 2005, imparted results of votes
FOR Frank A. Katarow and John L. Miclot (electing two Class II Directors for three-year
terms). There were 10,072,666 shares of Common Stock entitled to vote at the meeting and a total of
6,771,599 shares (67.23%) were represented at the meeting. 1. Election of Directors: FOR
    
    
    
    WITHHOLDFrank A. Katarow
    
    
    
    6,755,079
    
    
    
    
    16,520John L. Miclot
    
    
    
    6,762,979
    
    
    
    
    8,620
 
 ITEM 5. Other Information  (A)
    Not applicable(B)
    During the period covered by this report, there were no material changes to the
Companys procedures by which security holders may recommend nominees to the Companys
Board of Directors. 17




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ITEM 6. Exhibits  (A)
    EXHIBITS: ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amendment to Articles of Incorporation (2)3.3
    
    Amended and Restated Bylaws (1)3.4
    
    Amendments to Bylaws (2)4.1
    
    Shareholders Rights Plan dated September 29, 2003 (3)10.1
    
    Form of Securities Purchase Agreement dated February 10, 2005 in and among Medwave, Inc. and the
Investors named therein (4)10.2
    
    Amendment to Commercial Lease dated January 20, 2005 between the Company and Hawthorne North
Realty Trust (5)10.3
    
    Third Lease Modification and Extension Agreement dated January 26, 2005 between the Company and
AMB Property, L.P. (5)31.1
    
    Certification of the principal executive officer and principal financial officer, pursuant to Rule
13a  14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (5)
   (1)
    
    Incorporated by reference to Medwave, Inc.s Registration Statement on Form SB-2,
Registration No. 33-96878C.(2)
    
    Incorporated by reference to Medwave, Inc.s Registration Statement on Form S-3,
Registration No. 333-103477.(3)
    
    Incorporated by reference to Medwave, Inc.s Form 8-A12G filed on October 3, 2003.(4)
    
    Incorporated by reference to Medwave, Inc.s Current Report on Form 8-K filed on
February 11, 2005.(5)
    
    Filed herewith. 18




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SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 13, 2005
    
    Medwave, Inc.By:
    
    /s/ Timothy J. OMalleyTimothy J. OMalleyPresident and Chief Executive Officer(Principal Executive Officer and Principal Financial Officer)
 19