##### 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 June 30, 2006;
 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)
    
    
    
    identificationnumber)
 
 
 þ o
  o o þ
 o þ




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##### 



PagePART I.
    
    FINANCIAL INFORMATIONItem
1.
    
    Financial StatementsBalance Sheets  June 30, 2006 (unaudited) and September 30, 2005
    
    
    2Statements of Operations (unaudited)  Three and Nine Months
Ended June 30, 2006 and 2005
    
    
    3Statements of Cash Flows (unaudited)  Nine Months Ended
June 30, 2006 and 2005
    
    
    4Notes to Unaudited Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    16Signatures
    
    
    
    
    17Exhibits
    
    
    
    
    18
    -19Certification of Principal Executive Officer and Principal Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
  June 30,
    
    September 30,2006
    
    2005(unaudited)
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,876,422
    
    
    $
    5,424,078Accounts receivable, net
    
    
    400,435
    
    
    
    315,081Inventories, net
    
    
    709,884
    
    
    
    443,788Prepaid expenses
    
    
    117,321
    
    
    
    81,659Total current assets
    
    
    7,104,062
    
    
    
    6,264,606Property and equipment:Research and development equipment
    
    
    36,814
    
    
    
    33,344Office equipment
    
    
    169,325
    
    
    
    155,910Manufacturing and engineering equipment
    
    
    803,782
    
    
    
    529,912Sales and marketing equipment
    
    
    71,540
    
    
    
    71,540Leasehold improvements
    
    
    71,109
    
    
    
    71,109Demonstration equipment
    
    
    25,418
    
    
    
    25,4181,177,988
    
    
    
    887,233Accumulated depreciation and amortization
    
    
    (525,646
    )
    
    
    (431,942
    )Total net property and equipment
    
    
    652,342
    
    
    
    455,291Total assets
    
    $
    7,756,404
    
    
    $
    6,719,897Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    482,171
    
    
    $
    593,006Accrued compensation
    
    
    106,621
    
    
    
    103,973Deferred revenue
    
    
    69,942
    
    
    
    77,826Total current liabilities
    
    
    658,734
    
    
    
    774,805Stockholders equity:Common stock, .01 par value:Authorized shares50,000,000

Issued and outstanding shares-
June 30, 2006 - 13,094,280
September 30, 2005 -11,475,416
    
    
    130,942
    
    
    
    114,754Additional paid in capital
    
    
    38,791,948
    
    
    
    34,360,596Accumulated deficit
    
    
    (31,825,220
    )
    
    
    (28,530,258
    )Total stockholders equity
    
    
    7,097,670
    
    
    
    5,945,092Total liabilities and stockholders equity
    
    $
    7,756,404
    
    
    $
    6,719,897
 The accompanying notes are an integral part of these unaudited financial statements.
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(Unaudited)
 Three months ended June 30
    
    Nine months ended June 302006
    
    2005
    
    2006
    
    2005Revenue:Net sales
    
    $
    365,984
    
    
    $
    202,030
    
    
    $
    1,135,679
    
    
    $
    743,470Operating expenses:Cost of sales and production
    
    
    243,714
    
    
    
    156,174
    
    
    
    803,563
    
    
    
    576,491Research and development
    
    
    250,440
    
    
    
    443,199
    
    
    
    719,036
    
    
    
    909,450Sales and marketing
    
    
    636,601
    
    
    
    635,078
    
    
    
    1,633,994
    
    
    
    1,653,802General and administrative
    
    
    500,220
    
    
    
    368,149
    
    
    
    1,441,770
    
    
    
    943,289Total operating expenses
    
    
    1,630,975
    
    
    
    1,602,600
    
    
    
    4,598,363
    
    
    
    4,083,032Operating loss
    
    
    (1,264,991
    )
    
    
    (1,400,570
    )
    
    
    (3,462,684
    )
    
    
    (3,339,562
    )Interest income
    
    
    71,968
    
    
    
    44,012
    
    
    
    167,722
    
    
    
    89,769Net loss
    
    $
    (1,193,023
    )
    
    $
    (1,356,558
    )
    
    $
    (3,294,962
    )
    
    $
    (3,249,793
    )Net loss per share  Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.12
    )
    
    $
    (0.27
    )
    
    $
    (0.30
    )Weighted average number of common and
common equivalent shares outstanding  basic and
diluted
    
    
    13,094,280
    
    
    
    11,436,845
    
    
    
    12,240,268
    
    
    
    10,757,727
 The accompanying notes are an integral part of these unaudited financial statements.
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(Unaudited)
 Nine months ended June 30,2006
    
    2005Operating activitiesNet loss
    
    $
    (3,294,962
    )
    
    $
    (3,249,793
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    374,686
    
    
    
    Depreciation and amortization
    
    
    93,704
    
    
    
    35,128Changes in operating assets and liabilities:Accounts receivable
    
    
    (85,354
    )
    
    
    82,810Inventories
    
    
    (266,096
    )
    
    
    (90,716
    )Prepaid expenses
    
    
    (35,662
    )
    
    
    (210,630
    )Accounts payable
    
    
    (110,835
    )
    
    
    41,795Accrued compensation
    
    
    2,648
    
    
    
    (36,194
    )Deferred revenue
    
    
    (7,884
    )
    
    
    18,214Net cash used in operating activities
    
    
    (3,329,755
    )
    
    
    (3,409,386
    )Investing ActivitiesPurchase of property and equipment
    
    
    (290,755
    )
    
    
    (90,855
    )Net cash used in investing activities
    
    
    (290,755
    )
    
    
    (90,855
    )Financing ActivitiesProceeds from issuance of common stock
    
    
    4,072,854
    
    
    
    5,024,573Cash provided by financing activities
    
    
    4,072,854
    
    
    
    5,024,573Increase in cash and cash equivalents
    
    
    452,344
    
    
    
    1,524,332Cash and cash equivalents at beginning of period
    
    
    5,424,078
    
    
    
    4,793,326Cash and cash equivalents at end of period
    
    $
    5,876,422
    
    
    $
    6,317,658
 The accompanying notes are an integral part of these unaudited financial statements.
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##### 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
reporting 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:
 June 30 ,
    
    
    September 30,2006
    
    
    2005Raw materials
    
    $
    552,920
    
    
    $
    343,467Finished goods
    
    
    206,964
    
    
    
    125,321Obsolescence reserve
    
    
    (50,000
    )
    
    
    (25,000
    )Total
    
    $
    709,884
    
    
    $
    443,788
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3.
    
    Stockholders EquityA summary of changes in stockholders equity for the nine months ended June 30, 2006 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
    )
    
    $
    5,945,092Private Placement -
February, 2006 Net of
Issuance Costs
    
    
    1,617,614
    
    
    $
    16,176
    
    
    $
    4,054,578
    
    
    
    
    
    
    
    4,070,754Exercise of Stock Options
    
    
    1,250
    
    
    
    12
    
    
    
    2,088
    
    
    
    
    
    
    
    2,100Share Based Compensation
    
    
    

    
    
    
    
    
    
    
    374,686
    
    
    
    
    
    
    
    374,686Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,294,962
    )
    
    
    (3,294,962
    )Balance at June 30, 2006
    
    
    13,094,280
    
    
    $
    130,942
    
    
    $
    38,791,948
    
    
    $
    (31,825,220
    )
    
    $
    7,097,670
 Share-based payment
 Share-Based Payment Accounting for Stock Issued to
Employees ccounting for Stock-Based Compensation
  Three months ended
    
    
    Nine months endedJune 30, 2006
    
    
    June 30, 2006Cost of sales and production
    
    $
    2,295
    
    
    $
    7,878Research and development
    
    
    15,836
    
    
    
    50,374Sales and marketing
    
    
    28,555
    
    
    
    85,750General and administrative
    
    
    76,872
    
    
    
    230,684Net share-based compensation expense
    
    $
    123,558
    
    
    $
    374,686
  6




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Three and Nine Months EndedJune 30,2006Expected option term (1)
    
    5.81 yearsExpected volatility factor (2)
    
    
    81.18
    %Risk-free interest rate (3)
    
    
    4.53
    %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 weighted average of historical
monthly price changes of the Companys stock over the expected option term.(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 ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2005
    
    
    2005Net loss as reported
    
    $
    (1,356,558
    )
    
    $
    (3,249,793
    )Add: Employee compensation expense for options recorded in net loss
    
    
    
    
    
    
    Less: Total employee compensation expense for options determined
under the fair value method
    
    
    (132,413
    )
    
    
    (378,616
    )Pro forma net loss
    
    $
    (1,488,971
    )
    
    $
    (3,628,409
    )Basic and diluted loss per shareAs reported
    
    $
    (0.12
    )
    
    $
    (0.30
    )Pro forma
    
    $
    (0.13
    )
    
    $
    (0.34
    )
 Stock Incentive Plans
   7




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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
    
    
    
    6.3Granted
    
    
    23,077
    
    
    
    3.06Exercised
    
    
    (1,250
    )
    
    
    1.68Canceled
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    1,582,077
    
    
    
    3.82
    
    
    
    6.2Granted
    
    
    10,000
    
    
    
    3.10Exercised
    
    
    
    
    
    
    Canceled
    
    
    (12,000
    )
    
    
    3.34Balance at June 30, 2006
    
    
    1,580,077
    
    
    
    3.82
    
    
    
    6.2
  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
    
    
    6.0 years
    
    $
    0.74
    
    
    
    166,500
    
    
    $
    0.741.14 - 1.60
    
    
    177,500
    
    
    5.8 years
    
    
    1.48
    
    
    
    173,750
    
    
    
    1.492.04 - 2.80
    
    
    164,000
    
    
    7.0 years
    
    
    2.11
    
    
    
    113,625
    
    
    
    2.063.00 - 4.75
    
    
    674,077
    
    
    7.6 years
    
    
    4.14
    
    
    
    337,125
    
    
    
    4.245.06 - 7.13
    
    
    275,500
    
    
    4.0 years
    
    
    6.63
    
    
    
    260,250
    
    
    
    6.698.94 - 10.00
    
    
    67,000
    
    
    1.4 years
    
    
    9.50
    
    
    
    67,000
    
    
    
    9.501,580,077
    
    
    6.2 years
    
    
    3.82
    
    
    
    1,118,250
    
    
    
    3.96
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##### Table of Contents



Non-Vested OptionsWeightedNumber of
    
    AverageShares
    
    Fair ValueNon-vested at September 30, 2005
    
    
    634,500
    
    
    
    2.18Granted
    
    
    17,500
    
    
    
    1.81Vested (with no intrinsic value)
    
    
    (26,375
    )
    
    
    6.26Forfeited
    
    
    (10,000
    )
    
    
    1.00Non-vested at December 31, 2005
    
    
    615,625
    
    
    
    1.98Granted
    
    
    23,077
    
    
    
    1.90Vested (with intrinsic value of $22,263)
    
    
    (55,875
    )
    
    
    1.69Forfeited
    
    
    
    
    
    
    Non-vested at March 31, 2006
    
    
    582,827
    
    
    
    1.93Granted
    
    
    10,000
    
    
    
    2.18Vested (with intrinsic value of $74,823 )
    
    
    (119,000
    )
    
    
    1.11Forfeited
    
    
    (12,000
    )
    
    
    1.82Non-vested at June 30, 2006
    
    
    461,827
    
    
    
    2.21
  Shareholder Rights Agreement
  3. Net Loss Per Share
  9




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4. Securities Purchase Agreement
  
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
  
    
    In June 2006, Medwave, Inc. submitted a 510(k) application to the
United States Food and Drug Administration (FDA) for Fusion, our
newest generation of non-invasive blood pressure monitoring system
with vital signs monitoring options. The Fusion multi-level
platform is unique and innovative in that it offers clinicians the
ability to use Medwaves sensor-based blood pressure solution,
with market leading pulse oximetry (SpO2) and thermometry from
Nellcor and Kendall respectively, both Tyco Healthcare companies.
Medwave does not intend to introduce the Fusion into commercial
distribution until such time that the 510(k) review is complete.
 10




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##### Table of Contents




    
    In June 2006, Medwave entered into a Primo distribution agreement
with McKesson Medical- Surgical Inc., which delivers a
comprehensive offering of healthcare equipment to over 300,000
customers including physician offices, surgery centers, long-term
care facilities and home care businesses across the country.
McKesson has approximately 750 sales professionals and 58 regional
offices focused on this market segment. This is a non-exclusive
agreement.
 
    
    Also in June 2006, Medwave announced its expansion into South
America through a distributor agreement with Kennedy Distributors,
an established medical distributor serving South America since the
1940s. This agreement will facilitate the sale of Primo in
Columbia, Ecuador, Peru and Brazil.
 
    
    In July 2006, Medwave signed a non-exclusive agreement to
distribute Primo with Tri-anim, the nations largest provider of
specialty sales and distribution solutions for healthcare
products. Medwaves Primo handheld spot blood pressure monitor
will become a part of Tri-anims suite of offerings being
presented by its nationwide acute care sales team consisting of
approximately 100 sales professionals.
 
    
    Also in July 2006, Medwave entered into a purchasing agreement
with Vision Source, the nations premier network of independent
doctors of optometry with 1,450+ facilities, for the Primo spot
blood-pressure monitoring product. This agreement broadens
Medwaves reach across various medical professional environments
demonstrating the acceptance of Primo, which offers speed,
accuracy, flexibility, and comfort.
 
    
    Medwave signed an agreement with Philips Medizen Systems in
Böblingen, Germany at the end of June 2006. The agreement is a
cooperation agreement, between the companies to facilitate an
interface between Medwaves stand alone devices, and Philips
VueLink open interface. Medwave believes that this agreement
allows the company to interface its stand alone devices,
Vasotrac and Fusion into the Philips Bedside Monitoring Systems,
to facilitate more seamless integration of data.
 General
 ä ä
   11




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Results of Operations
   Cost of Sales and Production
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Cost of Sales and Production
    
    $
    243,714
    
    
    $
    156,174
    
    
    $
    803,563
    
    
    $
    576,491Percent change from
previous year:Incr/(Decr)
    
    
    56
    %
    
    
    
    
    
    
    39
    %
  Research and Development
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Research and Development
    
    $
    250,440
    
    
    $
    443,199
    
    
    $
    719,036
    
    
    $
    909,450Percent change from
previous year:Incr/(Decr)
    
    
    -43
    %
    
    
    
    
    
    
    -21
    %
  12




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Sales and Marketing
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Sales and Marketing
    
    $
    636,601
    
    
    $
    635,078
    
    
    $
    1,633,994
    
    
    $
    1,653,802Percent change from
previous year:Incr/(Decr)
    
    
    0
    %
    
    
    
    
    
    
    -1
    %
  General and Administrative
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005General and Administrative
    
    $
    500,220
    
    
    $
    368,149
    
    
    $
    1,441,770
    
    
    $
    943,289Percent change from
previous year:Incr/(Decr)
    
    
    36
    %
    
    
    
    
    
    
    53
    %
   Liquidity and Capital Resources
   13




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Off-Balance Sheet Arrangements
  Contractual Obligations
  Critical Accounting Policies and Estimates
  Revenue Recognition
  Share-Based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees ccounting for Stock-Based Compensation
 14




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Impairment of Long-Lived Assets
  Accounts Receivable
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
   15




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PART II. OTHER INFORMATION
 
 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)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 (4)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (4)
 
 (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)
    
    Filed herewith. 16




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##### Table of Contents



SIGNATURES
  Date: August 9, 2006
    
    Medwave, Inc.By:
    
    /s/ Timothy J. OMalleyTimothy J. OMalleyPresident and Chief Executive Officer(Principal Executive Officer and

    Principal Financial Officer)
 17