##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2005; or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from ______ to ______
 Commission File Number: 0-28010
 MEDWAVE, INC.
  Delaware
    
    
    
    41-1493458(State or other jurisdiction of
    
    
    
    (IRS employerincorporation or organization)
    
    
    
    identification number)
 
 
 þ o
  o o þ
 o þ




---



##### Table of Contents



PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets  December 31, 2005 and September 30, 2005
    
    
    2Statements of Operations  Three Months Ended December 31, 2005 and 2004
    
    
    3Statements of Cash Flows  Three Months Ended December 31, 2005 and 2004
    
    
    4Notes to Unaudited Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    20Signatures
    
    
    21Exhibits
    
    
    22-23Certifications Pursuant to Section 302Certifications Pursuant to Section 906
 1




---



##### Table of Contents



A. PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
  December 31
    
    September 302005
    
    2005(unaudited)
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,203,066
    
    
    $
    5,424,078Accounts receivable, net
    
    
    191,001
    
    
    
    315,081Inventories, net
    
    
    538,674
    
    
    
    443,788Prepaid expenses
    
    
    109,576
    
    
    
    81,659Total current assets
    
    
    5,042,317
    
    
    
    6,264,606Property and equipment:Research and development equipment
    
    
    36,814
    
    
    
    33,344Office equipment
    
    
    157,006
    
    
    
    155,910Manufacturing and engineering equipment
    
    
    779,232
    
    
    
    529,912Sales and marketing equipment
    
    
    71,540
    
    
    
    71,540Leasehold improvements
    
    
    71,109
    
    
    
    71,109Demonstration equipment
    
    
    25,418
    
    
    
    25,4181,141,119
    
    
    
    887,233Accumulated depreciation and amortization
    
    
    (450,930
    )
    
    
    (431,942
    )Total net property and equipment
    
    
    690,189
    
    
    
    455,291Total assets
    
    $
    5,732,506
    
    
    $
    6,719,897Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    511,695
    
    
    $
    593,006Accrued compensation
    
    
    87,325
    
    
    
    103,973Deferred revenue
    
    
    72,954
    
    
    
    77,826Total current liabilities
    
    
    671,974
    
    
    
    774,805Stockholders equity:Common stock, .01 par value:Authorized shares50,000,000
Issued and outstanding shares-
December 31, 2005 - 11,475,416
September 30, 2005 -11,475,416
    
    
    114,754
    
    
    
    114,754Additional paid in capital
    
    
    34,474,744
    
    
    
    34,360,596Accumulated deficit
    
    
    (29,528,966
    )
    
    
    (28,530,258
    )Total stockholders equity
    
    
    5,060,532
    
    
    
    5,945,092Total liabilities and stockholders equity
    
    $
    5,732,506
    
    
    $
    6,719,897
 The accompanying notes are an integral part of these unaudited financial statements.
 2




---



##### Table of Contents



(Unaudited)
 Three months ended December 31,2005
    
    2004Revenue:Net Sales
    
    $
    247,586
    
    
    $
    301,991Operating expenses:Cost of sales and production
    
    
    166,471
    
    
    
    285,683Research and development
    
    
    229,342
    
    
    
    147,392Sales and marketing
    
    
    476,602
    
    
    
    527,825General and administrative
    
    
    415,447
    
    
    
    223,156Total Operating expenses:
    
    
    1,287,862
    
    
    
    1,184,056Operating loss
    
    
    (1,040,276
    )
    
    
    (882,065
    )Other income (expense):Interest income
    
    
    41,568
    
    
    
    15,465Net loss
    
    $
    (998,708
    )
    
    $
    (866,600
    )Net loss per share  Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.09
    )Weighted average number of common and
common equivalent shares outstanding  basic and diluted
    
    
    11,475,416
    
    
    
    10,058,916
 The accompanying notes are an integral part of these unaudited financial statements.
 3




---



##### Table of Contents



(Unaudited)
 Three months ended December 31,2005
    
    2004Operating activitiesNet loss
    
    $
    (998,708
    )
    
    $
    (866,600
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    114,148
    
    
    
    Depreciation and amortization
    
    
    18,988
    
    
    
    9,381Loss on disposal of equipment
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    124,080
    
    
    
    20,689Inventories
    
    
    (94,886
    )
    
    
    68,880Prepaid expenses
    
    
    (27,917
    )
    
    
    (46,605
    )Accounts payable
    
    
    (81,311
    )
    
    
    57,151Accrued compensation
    
    
    (16,648
    )
    
    
    (45,072
    )Deferred revenue
    
    
    (4,872
    )
    
    
    8,790Net cash used in operating activities
    
    
    (967,126
    )
    
    
    (793,386
    )Investing ActivitiesPurchase of property and equipment
    
    
    (253,886
    )
    
    
    (22,925
    )Net cash used in investing activities
    
    
    (253,886
    )
    
    
    (22,925
    )Decrease in cash and cash equivalents
    
    
    (1,221,012
    )
    
    
    (816,311
    )Cash and cash equivalents at beginning of period
    
    
    5,424,078
    
    
    
    4,793,326Cash and cash equivalents at end of period
    
    $
    4,203,066
    
    
    $
    3,977,015
 The accompanying notes are an integral part of these unaudited financial statements.
 4




---



##### Table of Contents



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, 2005.2.
    
    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:
 December 31,
    
    
    September 30,2005
    
    
    2005Raw materials
    
    $
    447,400
    
    
    $
    343,467Finished goods
    
    
    116,274
    
    
    
    125,321Obsolescence reserve
    
    
    (25,000
    )
    
    
    (25,000
    )Total
    
    $
    538,674
    
    
    $
    443,788
 5




---



##### Table of Contents



3.
    
    Stockholders EquityA summary of changes in stockholders equity for the three months ended December 31, 2005 is as
follows:
 Common Stock.01 Par Value
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Paid in Capital
    
    
    Deficit
    
    
    TotalBalance at September 30, 2005
    
    
    11,475,416
    
    
    $
    114,754
    
    
    $
    34,360,596
    
    
    $
    (28,530,258
    )
    
    $
    5,945,092Exercise of Stock Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share Based Compensation
    
    
    
    
    
    
    
    
    
    
    114,148
    
    
    
    
    
    
    
    114,148Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (998,708
    )
    
    
    (998,708
    )Balance at December 31, 2005
    
    
    11,475,416
    
    
    $
    114,754
    
    
    $
    34,474,744
    
    
    $
    (29,528,966
    )
    
    $
    5,060,532
 Share-based payment
 Share-Based Payment Accounting for Stock Issued to
Employees ccounting for Stock-Based Compensation
  Three months endedDecember 31,2005Cost of sales and production
    
    $
    2,035Research and development
    
    
    16,918Sales and marketing
    
    
    26,385General and administrative
    
    
    68,810Net share-based compensation expense
    
    $
    114,148
  6




---



##### Table of Contents



Three months endedDecember 31,2005Expected option term (1)
    
    6.25 yearsExpected volatility factor (2)
    
    
    66.50
    %Risk-free interest rate (3)
    
    
    4.14
    %Expected annual dividend yield
    
    
    0.0
    %
 
 (1)
    
    The option life was determined using the simplified method for estimating expected option
life, which qualify as plain-vanilla options.(2)
    
    The stock volatility for each grant is determined based on the review of the experience of
the weighted average of historical monthly price changes of the Companys common stock over
the most recent ten years, which is the contractual term of the option awards.(3)
    
    The risk-free interest rate for periods equal to the expected term of the stock option is
based on the U.S. Treasury yield curve in effect at the time of the grant.  Three months endedDecember 31,2004Net loss as reported
    
    $
    (866,600
    )Add: Employee compensation expense for options recorded in net loss
    
    
    Less: Total employee compensation expense for options determined
under the fair value method
    
    
    (119,783
    )Pro forma net loss
    
    $
    (986,383
    )Basic and diluted loss per shareAs reported
    
    $
    (0.09
    )Pro forma
    
    $
    (0.10
    )
  7




---



##### Table of Contents



Stock Incentive Plans
    Options OutstandingWeightedAverageWeighted
    
    
    RemainingNumber of
    
    
    Average
    
    
    ContractualShares
    
    
    Exercise Price
    
    
    TermBalance at September 30, 2005
    
    
    1,552,750
    
    
    
    3.84
    
    
    
    6.2Granted
    
    
    17,500
    
    
    
    2.80Exercised
    
    
    
    
    
    
    Canceled
    
    
    (10,000
    )
    
    
    3.64Balance at December 31, 2005
    
    
    1,560,250
    
    
    
    3.80
    
    
    
    6.3
  Options Outstanding
    
    Vested OptionsWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average of
    
    Average
    
    
    
    
    
    AverageRange of
    
    Shares
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contract Life
    
    Price
    
    Exercisable
    
    Price$0.74 - 0.80
    
    
    222,000
    
    
    7 years
    
    $
    0.74
    
    
    
    166,500
    
    
    $
    0.741.14 - 1.60
    
    
    178,500
    
    
    6 years
    
    
    1.48
    
    
    
    133,750
    
    
    
    1.482.04 - 2.25
    
    
    171,250
    
    
    8 years
    
    
    1.85
    
    
    
    75,250
    
    
    
    2.073.00 - 4.75
    
    
    646,000
    
    
    8 years
    
    
    4.20
    
    
    
    243,750
    
    
    
    4.275.06 - 7.13
    
    
    275,500
    
    
    7 years
    
    
    6.63
    
    
    
    258,375
    
    
    
    6.708.94 - 10.00
    
    
    67,000
    
    
    2 years
    
    
    9.50
    
    
    
    67,000
    
    
    
    9.501,560,250
    
    
    6.3 years
    
    
    3.80
    
    
    
    944,625
    
    
    
    4.11
  8




---



##### Table of Contents



Non-Vested OptionsWeightedNumber of
    
    
    AverageShares
    
    
    Fair ValueNon-vested at September 30, 2005
    
    
    634,500
    
    
    
    2.18Granted
    
    
    17,500
    
    
    
    1.81Vested (with
intrinsic value of $250,095)
    
    
    (26,375
    )
    
    
    6.26Forfeited
    
    
    (10,000
    )
    
    
    1.00Non-vested at December 31, 2005
    
    
    615,625
    
    
    
    1.98
  Shareholder Rights Agreement
  3. Net Loss Per Share
  
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  9




---



##### Table of Contents



Overview
     10




---



##### Table of Contents



11




---



##### Table of Contents



A. Published Studies
 PrincipleDate
    
    Title
    
    Journal/Meeting
    
    Edition/Pages
    
    Invesigator/InstitutionOctober 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
    
    Pre-hospital
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
    
    Vol. 100 No. 5
    
    Dr. Peter C. Laussen,
Childrens Hospital
Boston,
Boston, MAOctober 2005
    
    Comparison of
Radial Artery Blood
Pressure
Determination
between the
Vasotrac Device and
Invasive Arterial
Blood Pressure
Monitoring in
Adolescents
Undergoing
Scoliosis Surgery
    
    Anesthesia &
Analgesia
    
    Vol. 101 No. 4
    
    Dr. Peter C. Laussen,
Childrens Hospital
Boston,
Boston, MA
 12




---



##### Table of Contents



B. Abstracts and Poster Presentations
 PrincipleDate
    
    Title
    
    Journal/Meeting
    
    Edition/Pages
    
    Invesigator/InstitutionOctober 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
    
    Abstract and/or
Poster Presentation
    
    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 Barker
  General
   13




---



##### Table of Contents



® ® ä ä ®
 Recent Developments
   B. Results of Operations
   14




---



##### Table of Contents



Cost of Sales and Production
    
    December 31,
    
    
    December 31,2005
    
    
    2004Cost of Sales and Production
    
    $
    166,500
    
    
    $
    285,700Percent change from previous year: Incr/(Decr)
    
    
    (41.7
    %)
    
    
    
  Research and Development
    
    December 31,
    
    
    December 31,2005
    
    
    2004Research and Development
    
    $
    229,300
    
    
    $
    147,400Percent change from previous year: Incr/(Decr)
    
    
    55.6
    %
    
    
    
  Sales and Marketing
    
    December 31,
    
    
    December 31,2005
    
    
    2004Sales and Marketing
    
    $
    476,600
    
    
    $
    527,800Percent change from previous year: Incr/(Decr)
    
    
    (9.7
    %)
    
    
    
  General and Administrative
    
    December 31,
    
    
    December 31,2005
    
    
    2004General and Administrative
    
    $
    415,500
    
    
    $
    223,200Percent change from previous year: Incr/(Decr)
    
    
    86.2
    %
    
    
    
  15




---



##### Table of Contents



C. Liquidity and Capital Resources
       Off-Balance Sheet Arrangements
  16




---



##### Table of Contents



Contractual Obligations
  PAYMENTS DUE BY PERIODTOTAL
    
    
    1 YEAR OR LESS
    
    
    1-3 YEARS
    
    
    3-5 YEARSOperating lease commitments
    
    $
    614,030
    
    
    $
    187,984
    
    
    $
    252,535
    
    
    $
    173,511
 Critical Accounting Policies and Estimates
  Revenue Recognition
  Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees ccounting for Stock-Based Compensation
  17




---



##### Table of Contents



Impairment of Long-Lived Assets
  Accounts Receivable
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
 
 ITEM 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults upon Senior Securities
 18




---



##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
 
 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.
 19




---



##### Table of Contents



ITEM 6. 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)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 (6)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (6)
 
 (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)
    
    Incorporated by reference to Medwave, Inc.s Quarterly Report on Form 10-Q filed on May 13, 2005.(6)
    
    Filed herewith. 20




---



##### Table of Contents



SIGNATURES
  Date: February 14, 2006
    
    Medwave, Inc.By:
    
    /s/ Timothy J. OMalleyTimothy J. OMalleyPresident and Chief Executive Officer(Principal Executive Officer and Principal Financial Officer)
 21