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 1934

For the Quarterly Period Ended March 31, ~~2006~~2007; 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.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		41-1493458 (IRS employer identification number)

~~435~~4382 ~~Newbury~~Round ~~Street~~Lake Road West ~~Danvers~~Arden Hills, MAMN ~~01923~~55112 (Address of principal executive offices, zip code)

(~~978~~651) ~~762~~639-~~8999~~1227 (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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of ~~April~~May 2715, ~~2006~~2007 the issuer had 13,~~094~~104,280 shares of Common Stock outstanding.

Medwave, Inc.

Form 10-Q

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets — March 31, 2006 (unaudited) and September 30, 2005		2
Balance Sheets — March 31, 2007 (unaudited) and September 30, 2006		3
Statements of Operations (unaudited) — Three and Six Months Ended March 31, 2006 and 2005		3
Statements of Operations (unaudited) — Three and Six Months Ended March 31, 2007 and 2006		4
Statements of Cash Flows (unaudited) — Six Months Ended March 31, 2006 and 2005		4
Statements of Cash Flows (unaudited) — Six Months Ended March 31, 2007 and 2006		5
Notes to Unaudited Financial Statements		56
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1011
Item 3. Quantitative and Qualitative Disclosures about Market Risk		1718
Item 4. Controls and Procedures		18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 1A. Risk Factors		19
Item 4. Submission of Matters to a Vote of Security Holders		1819
Item 6. Exhibits		19
Signatures		2021
Exhibits		21-22
Certification
Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Section 302
Certification
Certification Pursuant to 18 U.S.C. Section 1350

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Medwave, Inc.

Balance Sheets

	March 31			September 30
	2006			2005
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	7,549,804		$	5,424,078
Accounts receivable, net		372,037			315,081
Inventories, net		639,799			443,788
Prepaid expenses		148,369			81,659
Total current assets		8,710,009			6,264,606
Property and equipment:
Research and development equipment		36,814			33,344
Office equipment		165,531			155,910
Manufacturing and engineering equipment		789,437			529,912
Sales and marketing equipment		71,540			71,540
Leasehold improvements		71,109			71,109
Demonstration equipment		25,418			25,418
		1,159,849			887,233
Accumulated depreciation and amortization		(486,193	)		(431,942	)
Total net property and equipment		673,656			455,291
Total assets	$	9,383,665		$	6,719,897
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,046,963		$	593,006
Accrued compensation		92,390			103,973
Deferred revenue		77,177			77,826
Total current liabilities		1,216,530			774,805
Stockholders’ equity:
Common stock, .01 par value:
Authorized shares—50,000,000 Issued and outstanding shares — March 31, 2006 - 13,094,280 September 30, 2005 -11,475,416		130,942			114,754
Additional paid in capital		38,668,390			34,360,596
Accumulated deficit		(30,632,197	)		(28,530,258	)
Total stockholders’ equity		8,167,135			5,945,092
Total liabilities and stockholders’ equity	$	9,383,665		$	6,719,897

The accompanying notes are an integral part of these financial statements.

Medwave, Inc.

~~Statements~~Balance ~~of Operations~~Sheets

(Unaudited)


	March 31			September 30
	2007			2006
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	2,211,490		$	4,698,115
Accounts receivable, net		98,962			154,146
Inventories, net		754,075			860,435
Prepaid expenses and other current assets		98,740			113,112

Total current assets		3,163,267			5,825,808


Property and equipment:
Research and development equipment		46,295			36,814
Office equipment		177,465			175,011
Manufacturing and engineering equipment		597,966			599,592
Sales and marketing equipment		82,264			71,540
Leasehold improvements		71,109			71,109
Demonstration equipment		25,418			25,418

		1,000,517			979,484
Accumulated depreciation		(590,941	)		(528,837	)

Property and equipment, net		409,576			450,647


Total assets	$	3,572,843		$	6,276,455


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	194,192		$	557,405
Accrued expenses		367,014			843,573
Accrued payroll and other related expenses		82,152			95,062
Deferred revenue		61,358			75,713

Total current liabilities		704,716			1,571,753


Stockholders’ equity:
Common stock, .01 par value:
Authorized shares—50,000,000
Issued and outstanding shares- March 31, 2007 -13,104,280 September 30, 2006 -13,094,280		131,042			130,942
Additional paid in capital		39,060,073			38,907,977
Accumulated deficit		(36,322,988	)		(34,334,217	)

Total stockholders’ equity		2,868,127			4,704,702


Total liabilities and stockholders’ equity	$	3,572,843		$	6,276,455

	Three months ended March 31						Six months ended March 31
	2006			2005			2006			2005
Revenue:
Net sales	$	522,109		$	239,449		$	769,695		$	541,440
Operating expenses:
Cost of sales and production		393,378			134,634			559,849			420,317
Research and development		239,254			318,859			468,596			466,251
Sales and marketing		520,791			490,899			997,393			1,018,724
General and administrative		526,103			351,984			941,550			575,140
Total operating expenses:		1,679,526			1,296,376			2,967,388			2,480,432
Operating loss		(1,157,417	)		(1,056,927	)		(2,197,693	)		(1,938,992	)
Interest income		54,186			30,292			95,754			45,757
Net loss	$	(1,103,231	)	$	(1,026,635	)	$	(2,101,939	)	$	(1,893,235	)
Net loss per share — Basic and diluted	$	(0.09	)	$	(0.10	)	$	(0.18	)	$	(0.18	)
Weighted average number of common and common equivalent shares outstanding — basic and diluted		12,158,617			10,785,405			11,813,263			10,418,169

The accompanying notes are an integral part of these unaudited financial statements.

The accompanying notes are an integral part of these financial statements.

~~Medwave,~~Statements ~~Inc.~~of Operations (Unaudited)

Statements of Cash Flows


	Three months ended March 31						Six months ended March 31
	2007			2006			2007			2006
Revenue:
Net sales	$	252,327		$	522,109		$	465,011		$	769,695

Operating expenses:
Cost of sales and production		274,951			393,378			572,296			559,849
Research and development		138,154			239,254			316,788			468,596
Sales and marketing		265,739			520,791			776,020			997,393
General and administrative		356,316			526,103			861,561			941,550

Total operating expenses:		1,035,160			1,679,526			2,526,665			2,967,388


Operating loss		(782,833	)		(1,157,417	)		(2,061,654	)		(2,197,693	)

Interest income		29,830			54,186			72,883			95,754

Net loss	$	(753,003	)	$	(1,103,231	)	$	(1,988,771	)	$	(2,101,939	)


Net loss per share — Basic and diluted	$	(0.06	)	$	(0.09	)	$	(0.15	)	$	(0.18	)

Weighted average number of common and common equivalent shares outstanding — basic and diluted		13,104,280			12,158,617			13,101,643			11,813,263

(Unaudited)

	Six months ended March 31,
	2006			2005
Operating activities
Net loss	$	(2,101,939	)	$	(1,893,235	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash share-based compensation expense		251,128			—
Depreciation and amortization		54,251			22,840
Loss on disposal of equipment		—			—
Changes in operating assets and liabilities:
Accounts receivable		(56,956	)		7,751
Inventories		(196,011	)		(40,183	)
Prepaid expenses		(66,710	)		(109,749	)
Accounts payable		453,957			207,996
Accrued compensation		(11,583	)		(31,269	)
Deferred revenue		(649	)		10,368
Net cash used in operating activities		(1,674,512	)		(1,825,481	)
Investing Activities
Purchase of property and equipment		(272,616	)		(54,283	)
Net cash used in investing activities		(272,616	)		(54,283	)
Financing Activities
Proceeds from issuance of common stock		4,072,854			4,910,648
Cash provided by financing activities		4,072,854			4,910,648
Increase in cash and cash equivalents		2,125,726			3,030,884
Cash and cash equivalents at beginning of period		5,424,078			4,793,326
Cash and cash equivalents at end of period	$	7,549,804		$	7,824,210

The accompanying notes are an integral part of these financial statements.

Medwave, Inc.

~~Notes~~Statements toof ~~Unaudited~~Cash ~~Financial Statements~~Flows (Unaudited)

March 31, 2006


	Six months ended March 31,
	2007			2006
Operating activities
Net loss	$	(1,988,771	)	$	(2,101,939	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash share-based compensation expense		144,796			251,128
Depreciation and amortization		62,104			54,251
Changes in operating assets and liabilities:
Accounts receivable		55,184			(56,956	)
Inventories		106,360			(196,011	)
Prepaid expenses and other current assets		14,372			(66,710	)
Accounts payable		(363,213	)		453,957
Accrued liabilities		(489,469	)		(11,583	)
Deferred revenue		(14,355	)		(649	)

Net cash used in operating activities		(2,472,992	)		(1,674,512	)


Investing Activities
Purchase of property and equipment		(21,033	)		(272,616	)

Net cash used in investing activities		(21,033	)		(272,616	)


Financing Activities
Proceeds from issuance of common stock		7,400			4,072,854

Net cash provided by financing activities		7,400			4,072,854


Decrease in cash and cash equivalents		(2,486,625	)		2,125,726
Cash and cash equivalents at beginning of period		4,698,115			5,424,078

Cash and cash equivalents at end of period	$	2,211,490		$	7,549,804

1.		Basis of Presentation
		The 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.		Inventories
		Inventories 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:

The accompanying notes are an integral part of these unaudited financial statements.

	March 31,			September 30,
	2006			2005
Raw materials	$	512,152		$	343,467
Finished goods		152,647			125,321
Obsolescence reserve		(25,000	)		(25,000	)
Total	$	639,799		$	443,788

3Medwave, Inc. Notes ~~Stockholders’~~to ~~Equity~~Unaudited AFinancial ~~summary of changes in stockholders’ equity for the six months ended~~ Statements March 31, ~~2006 is as follows:~~2007

	Common Stock
	.01 Par Value				Additional		Accumulated
	Shares		Amount		Paid in Capital		Deficit			Total
Balance at September 30, 2005		11,475,416	$	114,754	$	34,360,596	$	(28,530,258	)	$	5,945,092
Private Placement — February 2006, Net of Issuance Costs		1,617,614	$	16,176	$	4,054,578		—			4,070,754
Exercise of Stock Options		1,250		12		2,088		—			2,100
Share Based Compensation		—		—		251,128		—			251,128
Net Loss		—		—		—		(2,101,939	)		(2,101,939	)
Balance at March 31, 2006		13,094,280	$	130,942	$	38,668,390	$	(30,632,197	)	$	8,167,135

1. Basis of Presentation

~~Share~~The 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-~~based~~Q ~~payment~~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, 2006.

~~Effective~~Our ~~October 1,~~cash ~~2005,~~and ~~the~~cash ~~Company~~equivalents ~~adopted~~were ~~the~~$2,211,490 ~~provisions~~and of$4,698,115 ~~Statement~~at ~~of Financial Accounting Standards (SFAS)~~March ~~123(R)~~31, ~~Share-Based~~2007 ~~Payment,~~and ~~which establishes accounting for equity instruments~~September ~~exchanged~~30, ~~for employee services~~2006. ~~Under~~Management ~~the~~is ~~provisions~~presently ofimplementing ~~SFAS~~strategies ~~123(R),~~designed ~~share-based~~to ~~compensation~~increase ~~cost~~revenues, iscontain ~~measured~~costs atand ~~the~~improve ~~grant date, based on~~ the ~~fair~~financial ~~value~~results of the ~~award,~~Company’s ~~and~~operations. isThe ~~recognized as an~~Company ~~expense~~believes ~~over~~that ~~the~~net ~~employee’s~~proceeds ~~requisite~~from ~~service~~its ~~period~~private ~~(generally~~placement ~~the~~completed ~~vesting~~in ~~period~~February 2006 of(see ~~the~~note ~~equity grant).~~8 ~~Prior~~ to financial ~~October 1,~~statements ~~2005,~~in the Company’s ~~accounted~~Annual ~~for~~Report ~~share~~on Form 10-~~based~~K ~~compensation~~for tothe ~~employees~~year ended September in30, ~~accordance~~2006 filed with ~~Accounting~~the ~~Principles~~SEC ~~Board~~on ~~(APB)~~January ~~Opinion No. 25~~16, ~~Accounting for Stock Issued to Employees~~2007), ~~and~~together ~~related~~with ~~interpretations.~~achieving ~~The~~its ~~Company~~operating ~~also followed the disclosure requirements of~~budget ~~SFAS~~for ~~123~~2007, ~~Accounting~~will ~~for~~be ~~Stock-Based~~sufficient ~~Compensation. The Company elected~~ to ~~adopt~~fund ~~the~~its ~~modified prospective~~operations ~~transition~~through ~~method~~at asleast ~~provided by SFAS 123(R) and~~October 1, ~~accordingly, financial statement~~2007. ~~amounts~~Management ~~for~~has ~~the~~taken ~~prior~~steps ~~periods~~to ~~presented~~reduce incash ~~the~~expenditures; ~~Form~~including ~~10-Q~~closing ~~have~~its ~~not been restated to reflect the fair~~Danvers, ~~value~~Massachusetts ~~method~~office ofand ~~expensing~~related ~~share-based~~employee ~~compensation~~layoffs.

The ~~following~~Company ~~table~~continues ~~presents~~to ~~share-based~~experience ~~compensation~~net ~~expenses~~losses inand has an accumulated deficit of approximately $36,300,000 through March 31, 2007. The report of our independent registered public accounting firm contained an explanatory paragraph regarding substantial doubt about the Company’s ~~unaudited~~ability ~~statements~~to ofcontinue ~~operations:~~as a going concern at September 30, 2006.

	Three months ended		Six months ended
	March 31, 2006		March 31, 2006
Cost of sales and production	$	2,035	$	5,583
Research and development		16,918		34,538
Sales and marketing		26,385		57,195
General and administrative		68,809		153,812
Net share-based compensation expense	$	114,147	$	251,128

We will need to raise additional capital to fund our long-term operations if we do not begin to realize an operating profit. We have begun a process to explore strategic alternatives to enhance shareholder value, including but not limited to the raising of capital through the sale of securities or assets of the Company, a recapitalization, strategic acquisitions, and the combination, sale or merger of the Company with another entity. There can be no assurance that the exploration of strategic alternatives will result in a transaction. We do not intend to disclose developments with respect to the expiration of strategic alternatives unless and until the Board of Directors has approved a specific transaction.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the six

~~months ended March 31, 2006~~2. ~~Estimates of fair value are not intended~~Inventories ~~to predict actual future events or the value ultimately realized by persons who receive equity awards.~~

~~The~~Inventories ~~fair~~which ~~value~~consist of ~~each~~material, ~~option~~labor ~~grant~~and ~~was~~overhead ~~estimated~~are onvalued at the ~~grant~~lower ~~date~~of ~~using~~cost or market on the ~~Black~~first-~~Scholes option~~in, first-~~pricing~~out ~~model~~(FIFO) method ~~with~~and consist of the following ~~assumptions~~:

	Three and Six Months Ended
	March 31,			September 30,
	March 31,
	2007			2006
	2006
Raw materials	$	496,987		$	587,770
Expected option term (1)	5.88 years
Finished goods		317,088			332,665
Expected volatility factor (2)		66.50	%
Obsolescence reserve		(60,000	)		(60,000	)
Risk-free interest rate (3)		4.38	%
Total	$	754,075		$	860,435
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 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.

3. Stockholders’ Equity

~~The~~A ~~following~~summary ~~illustrates~~of ~~the~~changes ~~effects~~in onstockholders’ ~~net~~equity ~~income and earnings per share~~ for the ~~three and~~ six months ended March 31, ~~2005~~2007 asis ~~if the Company had applied the fair value recognition provisions of~~as ~~SFAS 123 to share-based employee awards.~~follows:

	Three months ended			Six months ended
	Common Stock
	March 31,			March 31,
	.01 Par Value						Additional		Accumulated
	2005			2005
	Shares			Amount			Paid in Capital		Deficit			Total
Net loss as reported	$	(1,026,635	)	$	(1,893,235	)
Balance at September 30, 2006		13,094,280		$	130,942		$	38,907,977	$	(34,334,217	)	$	4,704,702
Add: Employee compensation expense for options recorded in net loss		—			—
Exercise of Stock Options		10,000			100			7,300		—			7,400
Less: Total employee compensation expense for options determined under the fair value method		(127,012	)		(246,795	)
Share Based Compensation		—			—			144,796		—			144,796
Pro forma net loss	$	(1,153,647	)	$	(2,140,030	)
Net Loss		—			—			—		(1,988,771	)		(1,988,771	)
Basic and diluted loss per share
Balance at March 31, 2007		13,104,280		$	131,042		$	39,060,073	$	(36,322,988	)	$	2,868,127
As reported	$	(0.10	)	$	(0.18	)
Pro forma	$	(0.11	)	$	(0.21	)

~~Stock~~Share-based ~~Incentive Plans~~payment

AtEffective ~~March~~October 311, ~~2006~~2005, the Company ~~had~~adopted ~~one~~the ~~stock~~provisions ~~option~~of ~~plan~~Statement ~~that~~of ~~includes~~Financial ~~both incentive stock options~~Accounting ~~and~~Standards ~~non~~(SFAS) 123(R), Share-~~statutory~~Based ~~stock~~Payment, ~~options~~which toestablishes beaccounting ~~granted~~for toequity ~~certain~~instruments exchanged ~~eligible~~for ~~employees, non-~~employee ~~directors,~~ orservices. ~~consultants~~Under of the ~~Company.~~provisions ~~The maximum number~~ of ~~shares~~SFAS ~~currently~~123(R), ~~reserved~~share-based ~~for issuance~~compensation cost is ~~2,450,000~~measured ~~shares.~~at ~~A majority of~~ the ~~options~~grant ~~granted have ten-year contractual terms~~date, ~~vest~~ ~~annually~~based ~~over~~on athe ~~four-year~~fair ~~term~~value ~~and~~of ~~become fully exercisable at~~ the ~~end~~award, ofand ~~four~~is ~~years~~recognized ofas an ~~continued~~expense ~~employment.~~over ~~The~~the ~~options~~employee’s ~~are~~requisite ~~not~~service ~~transferable~~period ~~except~~(generally bythe ~~will~~vesting orperiod ~~domestic~~of ~~relations~~the ~~orders~~equity grant).

AtThe ~~March 31,~~following ~~2006,~~table ~~there~~presents ~~were~~share-based ~~141,173~~compensation ~~shares~~expenses ~~available~~in ~~for future grants under~~ the ~~above~~Company’s ~~stock~~unaudited ~~option~~statements ~~plan.~~of operations:

The following table sets forth the stock option transactions from September 30, 2005 to the present:


	Three months ended March 31						Six months ended March 31
	2007			2006			2007			2006
Cost of sales and production	$	1,572		$	2,035		$	3,464		$	5,583
Research and development		10,033			16,918			20,519			34,538
Sales and marketing		6,566			26,385			16,049			57,195
General and administrative		52,288			68,809			104,764			153,812

Net share-based compensation expense	$	70,459		$	114,147		$	144,796		$	251,128



Effect on loss per share Basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

	Options Outstanding
						Weighted
						Average
				Weighted		Remaining
	Number of			Average		Contractual
	Shares			Exercise Price		Term
Balance at September 30, 2005		1,552,750			3.84		6.2
Granted		17,500			2.80
Exercised		—			—
Canceled		(10,000	)		3.64
Balance at December 31, 2005		1,560,250			3.80		6.3
Granted		23,077			3.06
Exercised		(1,250	)		1.68
Canceled		—			—
Balance at March 31, 2006		1,582,077			3.82		6.2

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected forfeiture rate, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the three months and six months ended March 31, 2007 and 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The ~~following~~weighted ~~table~~average ~~summarizes~~grant ~~information~~date ~~about~~fair ~~stock~~values of options ~~outstanding~~granted atwere $0.32 and $1.90 for the three months ended March 31, 2007 and 2006 respectively, and $0.33 and $1.87 for the six months ended March 31, 2007 and 2006 respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Options Outstanding									Vested Options
	Three months ended March 31						Six months ended March 31
				Weighted			Weighted						Weighted
	2007			2006			2007			2006
	Number of			Average of			Average						Average
Expected option term (1)	6.25 yrs				5.88		6.25 yrs				5.88
Range of	Shares			Remaining			Exercise			Number			Exercise
Expected volatility factor (2)		85.07	%		66.50	%		85.07	%		66.50	%
Exercise Prices	Outstanding			Contract Life			Price			Exercisable			Price
Risk-free interest rate (3)		4.54	%		4.38	%		4.67	%		4.38	%
$0.74 - 0.80		222,000		6 years			$	0.74			166,500		$	0.74
Expected annual dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
1.14 - 1.60		178,000		6 years				1.48			150,000			1.49
2.04 - 2.80		170,500		8 years				2.13			75,750			2.07
3.00 - 4.75		669,077		8 years				4.16			279,750			4.30
5.06 - 7.13		275,500		7 years				6.63			260,250			6.69
8.94 - 10.00		67,000		2 years				9.50			67,000			9.50
		1,582,077		6.2 years				3.82			999,250			4.09

(1) The ~~aggregated~~option ~~intrinsic~~life ~~value~~was ofdetermined ~~the~~using ~~total options outstanding and~~ the ~~vested~~simplified ~~and~~method ~~exercisable options~~for atestimating ~~March 31,~~expected ~~2006~~option ~~was $1~~life,~~275,700~~ ~~and~~which ~~$902,600~~qualify ~~respectively.~~as ~~The intrinsic value of shares exercised during the three~~“plain-~~month~~vanilla” ~~period ended March 31, 2006 was $2,012~~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.

~~The~~Stock ~~following~~Incentive ~~table summarizes the status of Company’s non-vested options since September 30, 2005:~~Plans

	Non-Vested Options
				Weighted
	Number of			Average
	Shares			Fair Value
Non-vested at September 30, 2005		634,500			2.18
Granted		17,500			1.81
Vested (with no instrinsic value)		(26,375	)		6.26
Forfeited		(10,000	)		1.00
Non-vested at December 31, 2005		615,625			1.98
Granted		23,077			1.90
Vested (with instrinsic value of $22,263)		(55,875	)		1.69
Forfeited		—			—
Non-vested at March 31, 2006		582,827			1.93

At March 31, 2007, the Company had one stock option plan that includes both incentive stock options and non-qualified stock options to be granted to certain eligible employees, non-employee directors, or consultants of the Company. The maximum number of shares currently reserved for issuance is 2,450,000 shares. A majority of the options granted have ten-year contractual terms, vest annually over a four-year term and become fully exercisable at the end of four years of continued employment. The options are not transferable except by will or domestic relations orders.

AsAt of March 31, ~~2006~~2007, there ~~was~~were ~~$790~~695,~~300~~673 ofshares ~~total~~available ~~unrecognized~~for ~~compensation~~future ~~cost~~grants ~~related to non-vested share-based compensation arrangements granted~~ under the ~~Company’s~~above stock option plan. ~~This cost is expected to be recognized over a weighted average period of 1.6 years.~~

~~Shareholder~~The ~~Rights~~following ~~Agreement~~table sets forth the stock option transactions from September 30, 2006 to March 31, 2007:

On 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 obtains 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 the events discussed above occur. 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.


	Options Outstanding
						Weighted
						Average
				Weighted		Remaining
	Number of			Average		Contractual
	Shares			Exercise Price		Term
Balance at September 30, 2006		1,557,702		$	3.78		5.9
Granted		100,000			0.45
Exercised		(10,000	)		0.74
Canceled		(773,125	)		4.64

Balance at December 31, 2006		874,577			2.68		6.6
Granted		150,000			0.43
Exercised		—
Canceled		(7,000	)		2.16

Balance at March 31, 2007		1,017,577			2.36		7.0

3. Net Loss Per Share

Net 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 anti-dilutive. Therefore, there was no difference between basic and diluted EPS for each period presented. The number of options and warrants excluded from the calculation was 2,906,228 and 3,127,450 as of March 31, 2006 and 2005, respectively.

4. Stock Purchase Agreement

On February 21, 2006, the Company entered into a Securities Purchase Agreement with certain investors. Under the terms of the agreement, the Company issued 1,617,614 shares of common stock yielding $4,070,754 (net of issuance costs of $361,498) and warrants to purchase an additional 404,403 shares of common stock at an exercise price of $3.29 per share. The warrants are exercisable beginning August 21, 2006.

~~ITEM~~The 2.following ~~Management’s~~table ~~Discussion~~summarizes ~~and~~information ~~Analysis~~about ofstock ~~Financial~~options ~~Condition~~outstanding ~~and~~at ~~Results~~March 31, ~~of Operations~~2007:

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. (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 Primo™ 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 for the year ended September 30, 2005, filed with the SEC on December 15, 2005. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.


	Options Outstanding					Vested Options
			Weighted	Weighted				Weighted
	Number of		Average of	Average				Average
Range of	Shares		Remaining	Exercise		Number		Exercise
Exercise Prices	Outstanding		Contract Life	Price		Exercisable		Price
0.33 - 0.80		450,000	7.0 years	$	0.57		200,000	$	0.74

1.14 - 1.60		52,500	5.4 years		1.43		52,500		1.43

2.04 - 2.80		125,000	6.8 years		2.12		83,750		2.08

3.00 - 4.75		337,077	7.4 years		4.06		200,394		4.14

5.06 - 7.13		21,000	5.6 years		6.88		20,750		6.89

8.94 - 9.13		32,000	1.0 years		8.95		32,000		8.95


		1,017,577	7.0 years		2.36		589,394		2.81

~~This~~Options ~~discussion~~outstanding ~~summarizes the significant accounting policies, accounting estimates~~ and ~~other significant~~vested ~~factors~~at ~~affecting the liquidity, capital resources and results of operations of the Company for the six-month periods ended~~ March 31, ~~2006~~2007 ~~and~~had ~~2005.~~no ~~This~~intrinsic ~~discussion~~value. ~~should~~During ~~be read in conjunction with~~ the ~~financial statements and other financial information included in our Annual~~quarter ~~Report on Form 10-K for the year~~ ended ~~September~~March 3031, ~~2005~~2007, ~~filed~~no ~~with~~options ~~the~~were ~~SEC on December 15, 2005~~exercised.

~~Overview~~The following table summarizes the status of Company’s non-vested options since September 30, 2006:

Revenue was $769,700 and $541,400 for the six-month periods ended March 31, 2006 and 2005, respectively, an increase of 42%. Revenue from the North American market was approximately $719,600 and $452,800 for the six-month periods ended March 31, 2006 and 2005, respectively, representing an increase of 59%. Revenue from international markets was approximately $50,100 and $88,600 for the six-month periods ended March 31, 2006 and 2005, respectively, representing a decrease of 43%. All international sales are transacted in U.S. dollars.


				Weighted
	Number of			Average
	Shares			Fair Value
Non-vested at September 30, 2006		338,952		$	2.11
Granted		100,000			0.34
Vested (with intrinsic value of $188)		(5,250	)		1.23
Forfeited		(128,125	)		2.26

Non-vested at December 31, 2006		305,577			1.48
Granted		150,000			0.32
Vested (with intrinsic value of $0)		(20,394	)		1.93
Forfeited		(7,000	)		1.57

Non-vested at March 31, 2007		428,183			1.05

InAs ~~February~~of March ~~2006~~31, ~~Medwave~~2007, ~~Inc.~~there ~~received~~was ~~510(k)~~$260,633 ~~clearance from the Food and Drug Administration (FDA) on our newest generation~~ of ~~hand~~total ~~held~~unrecognized ~~devices~~compensation –cost ~~Primo.~~related ~~Primo is a portable wrist based~~to non-~~invasive~~vested ~~spot~~share-based ~~blood~~compensation ~~pressure~~arrangements ~~measurement~~granted ~~system.~~under ~~The 510(k) clearance allowed Medwave to begin selling and distributing Primo in~~ the ~~United~~Plan. ~~States~~This ~~point~~cost ~~of care blood pressure markets. Medwave~~ is ~~also~~expected ~~working~~ to be ~~expand~~recognized ~~distribution~~over ofa ~~Primo~~weighted ~~into~~average ~~numerous~~period ~~regions~~ of ~~the world~~1. ~~Medwave has the necessary regulatory clearances in many global markets, including Europe~~8 years. ~~Also,~~The ~~during~~Company ~~February~~amortizes ~~a multiple day launch was held for internal personnel and external distributors to provide in~~share-~~depth~~based ~~training~~compensation on ~~the~~a ~~Primo.~~straight-line ~~This launch was shortly followed by the first recorded sale~~method. ~~The hospital market and alternative care market is estimated to be~~ ~~greater than $600 million annually for point of care devices.~~

Medwave continues to sign non-exclusive distributor agreements with third parties in order to strengthen and broaden the market exposure of our product lines. New agreements have been signed to cover the majority of the North Central and South Central states adding to the existing coverage in the Southeast Atlantic states, Northeast Atlantic states, Northwest Pacific states, and Mountain states. The agreements provide representation across territories in which a direct sales representative has not been assigned, but are

~~closely~~Shareholder ~~managed~~Rights ~~by Medwave Territory Managers. The distribution agreements reach into the~~Plan hospital and post hospital markets. Blood pressure monitoring is a vast market, therefore Medwave believes that having distribution partners in a multitude of segments, combined with direct sales representatives will allow us to gain maximum market penetration.

~~During~~On ~~March~~September ~~2006~~29, ~~Medwave~~2003, ~~worked~~the Company’s Board of Directors adopted a Shareholder Rights Plan. In connection with ~~several~~the ~~group~~Shareholder ~~purchasing~~Rights ~~organizations~~Plan, ~~(GPO)~~the Board of Directors declared a dividend distribution of one common stock purchase right for each outstanding share of common stock to stockholders of record as of the close of business day on September 30, 2003. Initially, these rights are not exercisable and/ trade with the shares of the Company’s common stock. Under the Shareholder Rights Plan, the rights generally become exercisable if a person becomes an “acquiring person” by acquiring 15% or ~~medical~~more of the common stock of Medwave, or if a person commences a tender ~~facilities~~offer tothat ~~amend~~would ~~existing~~result ~~agreements~~in ~~for~~that person owning 15% or more of the ~~inclusion~~common stock of ~~Primo~~Medwave. ~~The~~Under the ~~following~~Shareholder ~~organizations~~Rights Plan, a stockholder of Medwave who beneficially owns 15% or more of the ~~have~~Company’s ~~elected~~common tostock ~~update~~as ~~their~~of ~~agreements:~~September 30, ~~Novation~~2005 generally will be deemed an “acquiring person” if such stockholder acquires additional shares of the Company’s common stock. In the event that a person becomes an “acquiring person” or is declared an “adverse person” by the Board, ~~Amerinet~~each holder of a right (~~including~~other ~~AllHealth~~than the acquiring person or the adverse person) would be entitled to acquire such number of shares of common stock equivalent to a value of twice the then-current exercise price of the right. If Medwave is acquired in a merger or other business combination transaction after any such event, ~~Mayo~~each ~~Foundation~~holder of a right would then be entitled to purchase, at the ~~Tenet~~then-current ~~Healthcare~~exercise ~~and~~price, ~~Sisters~~shares of ~~Charity~~the acquiring company’s common stock having a value twice the exercise price of ~~Leavenworth~~the right.

~~We continue to place a tremendous amount of management time and focus on other potential OEM agreements, distribution, sales channel expansion possibilities, and co-development opportunities~~3. ~~The~~ ~~scope~~Accrued ~~of the discussions has increased as we pursue alternate avenues for Medwave to supply~~expenses products and technology, including licensing, distribution, private labeling, and co-development opportunities. We believe that we have superior clinical validation across a multitude of clinical settings and on patients whose blood pressure measurements are traditionally very difficult to monitor. With this ongoing clinical validation, the growing market presence that we have created with our direct sales force and distributors, awards such as Frost and Sullivan, and our GPO presence; 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 medicine 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 (Primo) and low-end vital signs monitoring (Fusion™, Vasotrac) markets, while simultaneously partnering with other companies regarding integration of our technology (OEM – Legato) into their products to penetrate the mid-range and high-end physiologic patient monitoring, cardiology, and other markets. We believe that higher acuity care areas within healthcare have clinically accepted our technology, as evidenced by our Group Purchasing Agreements and the positive 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. The OEM module market is represented by new product sales as well as a very large installed volume of physiologic monitors, defibrillators, and other medical devices. This market is estimated to generate approximately $250 million per year in revenue.

~~With~~Accrued ~~our~~expenses ~~latest~~consist ~~new product introduction, Primo, we believe we have introduced a disruptive point~~ of ~~care solution for~~ the blood pressure monitoring market. Primo is a portable handheld point-of-care blood pressure monitoring device designed to be able to take a blood pressure of an adult patient with wrist sizes of 11cm – 22cm, in settings where manual or automatic blood pressure measurements are required. Primo offers state of the art technology includingfollowing:

• Readings obtained in approximately 12 seconds — increasing staff efficiencies • Requires no calibration for the life of the product — offering dramatic cost improvement • Provides remarkable improvement in patient comfort • Contains no mercury — enhanced safety • Easily portable and fits in the palm of your hand — enhancing staff convenience • Capability to function on historically difficult patients, such as the overweight and the elderly • Non-invasive blood pressure monitoring, with a LED display that provides a clear readout of blood pressure values • Advanced programming that incorporates “artifact rejection” technology, eliminating background noise and motion


	March 31		September 30
	2007		2006
Accrued severance	$	—	$	426,628
Professional fees		95,744		87,047
Customer refunds		245,430		173,150
Contract settlement		—		125,000
Other		25,840		31,748

	$	367,014	$	843,573

4. Net Loss Per Share

Net 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 anti-dilutive. Therefore, there was no difference between basic and diluted EPS for each period presented. The number of options and warrants excluded from the calculation was 1,421,980 and 2,906,228 as of March 31, 2007 and 2006, respectively.

5. Recent Accounting Pronouncements

On October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 requires that the impact of tax positions be recognized in the financial statements if they are more likely than not to be sustained upon examination, based upon the technical merits of the position. As discussed in the financial statements in the 2006 Form 10-K, the Company has a valuation allowance against the full amount of its deferred tax assets. The Company currently provides a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all, of its deferred tax assets will not

~~The~~be ~~benefits~~realized. ~~and~~The ~~performance~~Company ~~capabilities~~recognizes ofinterest ~~Primo~~accrued ~~offer~~related ~~economic benefits~~ to ~~our~~unrecognized ~~customers~~tax ~~by increasing~~benefits ~~throughput~~in ofinterest ~~patients, allowing caregivers to potentially see more patients per day due to workflow improvements~~expense. ~~The~~Penalties, ~~ergonomics~~if ofincurred, ~~Primo~~ are ~~unlike any other Medwave product ever~~recognized ~~produced.~~as Wea ~~hired~~component ~~an outside industrial design firm to ensure the look~~ of ~~the~~income ~~Primo~~tax ~~is as state-of-the-art as its performance~~expense. WeThe ~~have~~adoption ~~invested in the ergonomics and user interface~~ of ~~Primo.~~ WeFIN ~~believe~~48 ~~that~~did ~~Primo~~not ~~addresses~~have ~~all~~a ofmaterial ~~the~~effect ~~performance~~on ~~requirements and~~ the ~~aesthetics to~~ ~~become~~Company’s afinancial ~~leader~~position ~~within~~or ~~healthcare~~results ~~markets, specifically the $600 million per year point~~ of ~~care markets~~operations. ~~One of our design goals with Primo was to create a product which has disruptive~~ ~~technological functions – while offering compelling economic advantages.~~

~~Results~~In ~~from~~September 2006, ~~clinical~~the ~~studies~~FASB ~~regarding~~issued ~~Medwave’s~~SFAS ~~technology~~No. 157, ~~which~~Fair ~~have~~Value ~~been~~Measures. ~~ongoing~~SFAS ~~for~~157 ~~the~~prescribes ~~past~~a single ~~several~~definition ~~years,~~of ~~continue~~fair tovalue beas ~~favorable.~~the ~~Medwave~~price ~~continues~~that towould ~~embrace~~be ~~new~~received ~~studies~~ to ~~support~~sell ~~that our technology is~~ an ~~improved~~asset ~~and~~or ~~safer~~paid ~~method~~ to ~~measure~~transfer a ~~person’s blood pressure. This has been~~ ~~consistently~~liability ~~validated~~ in ~~numerous~~an ~~clinical~~orderly ~~studies,~~transaction ~~which~~between ~~have~~market ~~been~~participants ~~published~~at ~~and/or~~the ~~presented regarding~~measurement ~~our technology~~date. ~~Some~~The Company ~~clinical~~does ~~studies~~not ~~remain~~believe ~~incomplete~~the oradoption ~~have~~of ~~been~~SFAS ~~terminated~~157 ~~due~~will ~~to changes~~have ina ~~objective~~material orimpact ~~personnel,~~on ~~but~~its tofinancial condition ~~date,~~or ~~we have not received negative~~ results ~~from~~of ~~any completed study~~operations. ~~The~~SFAS ~~following~~157 is aneffective ~~updated~~for ~~listing~~the ofCompany’s ~~recent~~interim ~~studies, along with others which are~~reporting ~~still~~period inbeginning ~~the process of being completed~~October 1, ~~presented and/or published~~2007.

~~Medwave~~In ~~Bibliography~~February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company does not believe the adoption of SFAS 159 will have a material impact on its financial condition or results of operations. SFAS 159 is effective for the Company’s interim reporting period beginning October 1, 2008.

AITEM 2. ~~Published~~Management’s ~~Studies~~Discussion and Analysis of Financial Condition and Results of Operations

				Principal
Date	Title	Journal/Meeting	Edition/Pages	Investigator/Institution
January/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 MA
March 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, AR
May 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, MA
October 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

Certain statements contained herein constitute “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission and within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. The words “believe”, “expect”, “anticipate”, “intend”, “estimate”, and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Medwave to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Medwave undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors. Some of the risks and uncertainties that may cause our actual results to differ materially are those described in “Risk Factors” in Part 1, Item 1A. in our Annual Report on Form 10-K for the year ended September 30, 2006 filed with the SEC on January 16, 2007.

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, 2007 and 2006. 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, 2006 filed with the SEC on January 16, 2007.

Overview

Revenue was approximately $465,000 and $769,700 for the six-month periods ended March 31, 2007 and 2006, respectively, a decrease of 39.6%. Revenue from the North American market was approximately $434,700 and $719,600 for the six-month periods ended March 31, 2007 and 2006, respectively, representing a decrease of 39.6% Revenue from international markets was approximately $30,300 and $50,100 for the six-month periods ended March 31, 2007 and 2006, respectively, representing a decrease of 39.6%. All international sales are transacted in U.S. dollars.

During 2006, Medwave signed non-exclusive distributor agreements with third parties in order to increase market penetration of our product lines. The agreements provide coverage across territories in which a direct

				Principal
Date	Title	Journal/Meeting	Edition/Pages	Investigator/Institution
March 2006	Vasotrac Arterial Blood Pressure and Direct Arterial Pressure Monitoring During Liver Transplantation	Anesthesia & Analgesia	Vol. 102 No. 690-3	James Y. Findlay, FRCA, Mayo Clinic College of Medicine, Rochester, MN

sales representative has not been assigned, but are closely managed by Medwave Territory Managers. The additional coverage includes the South-Atlantic states, Mid-Atlantic states, Northwestern states, and Mountain states.

BOur relationship with Universal Hospital Services (UHS) continues to develop. ~~Abstracts~~We signed an Agreement with them last year. This agreement has two components: one where UHS will become an exclusive rental distributor and ~~Poster~~the ~~Presentations~~other which gives UHS the ability to sell Medwave’s products. UHS has approximately 120 sales professionals in 80 offices within the Unites States. UHS recently notified Medwave, that they have been selected as the exclusive supplier of bariatric equipment (related to obese patients) for a large group purchasing organization, due in part to offering Medwave’s products, which cover a wide range of sizes and settings.

				Principal
Date	Title	Journal/Meeting	Edition/Pages	Investigator/Institution
October 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

Medwave has been dedicated to proving that our technology is a better way to measure a person’s blood pressure, which has been consistently validated in 15 clinical studies published and/or presented regarding our technology.

CWe are developing new products for the future and have been working with clinical partners to test the functionality and validate our technology in various clinical settings. ~~Published~~The ~~Textbooks~~Company completed clinical trials and validations and has received FDA 510(k) clearance to begin marketing FusionTM. FusionTM was launched to the sales force in the first quarter of the current fiscal year and shipments began in November 2006.

Title		Editor		Publisher		Date
Morbid Obesity: Peri-operative Management		Dr. Adrian Alvarez		Cambridge University Press			2004

D. Ongoing Projects

Project/Study Facility Completion Primary Investigator Accuracy of the Vasotrac System compared to the invasive arterial catheter University of Arizona TBA Dr. Stephen Barker Radial artery noninvasive blood pressure measurement in ED Triage Massachusetts General Hospital TBA Dr. Stephen Thomas

We are developing new products for the future and have been working with clinical partners to test the functionality and validate our technology in various clinical settings. Currently, we are working on the clinical validation process for Fusion, our vital signs monitor platform. The purpose of the clinical validation study is to compare the accuracy of Fusion with an invasive arterial catheter. Fusion does not comply with the United States FDA pre-market notification regulations. Medwave, Inc. does not intend to introduce Fusion into commercial distribution at this time. Fusion is an investigational device only. However, we have begun the Institutional Review Board (IRB) process and are hopeful to complete clinical testing/validation process during 2006. At that time, we will prepare and submit our FDA 510(k) application.

General

As of March 31, 2006, Medwave employed 29 full-time employees and four part-time employees. We anticipate the hiring of additional employees within the next several months, primarily in sales, manufacturing, and support services. However, such requirements are subject to change and are highly

~~dependent on the market acceptance of our products, our distribution methods, and existing~~General ~~employment market conditions.~~

~~Our~~As ~~proprietary technology, which uses Medwave’s sensor and algorithm technology, detects and analyzes pulse pressure waveforms from contraction~~ of ~~the heart. The sensor~~March 31, ~~which is placed on the patient’s wrist~~2007, ~~measures arterial waveforms and calculates blood pressure from these measurements. We have applied for U.S. patents covering various aspects of~~ Medwave’s ~~blood~~employed ~~pressure~~18 ~~technology. We currently have twenty~~full-~~six~~time ~~(26) granted~~employees ~~patents~~ and ~~eight~~two ~~(8) patent~~part-time ~~applications pending in the U~~employees.S. We have recently ~~also~~closed ~~been~~our ~~granted~~former ~~eleven~~corporate ~~(11) foreign~~office ~~patents~~in ~~and five (5) pending patent applications within the European Patent Office~~Danvers, ~~India, and Japan~~Massachusetts. We ~~believe~~have ~~that~~transitioned ~~with~~all ~~the clinical validation,~~of ~~which~~our ~~has~~operating ~~been~~functions ~~and continues~~ to ~~be accomplished regarding~~ our ~~technology,~~office ~~the acceptance of our technology~~ in ~~some~~Arden ~~of the most prestigious medical centers in the United States~~Hills, 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 in the futureMinnesota.

~~Medwave,~~Our ~~Inc.~~proprietary ~~develops~~technology, ~~manufactures,~~which ~~and~~uses ~~distributes~~Medwave’s sensor~~-based~~ ~~non-invasive~~and ~~blood~~algorithm ~~pressure~~technology, detects and ~~solutions.~~analyzes ~~Its~~pulse ~~Primo~~pressure ~~Spot~~waveforms ~~Blood~~from ~~Pressure~~contraction ~~Monitor,~~of the ~~Vasotrac~~heart. ~~APM205A~~The ~~NIBP Monitor~~transducer, ~~the~~which ~~Vasotrac~~is placed on ~~APM205A~~the ~~Model~~patient’s DSwrist, ~~and~~measures ~~the~~arterial ~~Legatoä~~waveforms ~~OEM~~and ~~Module~~calculates ~~Developers~~blood ~~Kit~~pressure ~~are~~from ~~new~~these measurements. ~~approaches~~We ~~to non-invasive~~have ~~blood~~applied ~~pressure~~for ~~monitoring~~U.S. ~~Medwave~~patents ~~has~~covering ~~received~~various ~~the~~aspects ~~necessary~~of ~~regulatory~~Medwave’s ~~clearances~~blood topressure ~~market its~~ technology. inAs ~~Europe~~of March 31, ~~Asia~~2007, ~~and~~twenty-six ~~the~~(26) U.S. ~~United~~patents ~~States.~~relating to Medwave’s isblood pressure ~~ISO13485/ISO9001/MDD93/42/EEC~~technology ~~certified~~have been granted, and ~~its~~eight ~~products~~(8) U.S. ~~are~~patent CEapplications ~~marked~~are pending. ~~Among~~We ~~Medwave’s~~have ~~latest~~also ~~additions,~~been ~~the~~granted ~~Legatoä~~ten ~~OEM~~(10) foreign ~~Developers~~patents ~~Kit~~within ~~is designed to introduce~~ the ~~innovative~~European ~~Vasotrac technology~~Patent toOffice, ~~OEM~~India, ~~designers.~~and ~~In addition~~Japan, with ~~the introduction of Primo,~~an ~~Medwave~~additional issix ~~poised~~(6) pending topatent ~~create~~applications ~~significant~~within ~~disruption in~~ the ~~$600 million~~European ~~point~~Patent ofOffice, ~~care~~China, ~~non-invasive~~Hong Kong, ~~blood~~and ~~pressure market~~Japan.

~~Results~~Recent ~~of Operations~~Developments

~~The~~FusionTM ~~results~~— ofFusionTM ~~operations~~is ~~compares~~our new vital signs monitoring platform replacing the ~~three~~Vasotrac ~~months~~monitor. We completed clinical trials and ~~six~~validations ~~months~~and ~~ended~~have ~~March~~received FDA 510(k) clearance to begin marketing FusionTM. FusionTM was launched to the sales force in the first quarter of the current fiscal year and shipments began in November 312006. FusionTM contains our core blood pressure technology, ~~2006~~our sensors, and ~~2005~~employs our algorithms to offer numerous technological advantages to the vital signs monitoring market. In addition to our core blood pressure technology, Fusion offers options to monitor oxygen saturation, temperature and a printer. The ~~analysis~~company is in the process of ~~liquidity~~adding dealers and ~~capital~~manufacturing representative ~~resources~~groups ~~compares~~in ~~March 31,~~strategic ~~2006~~locations throughout the country to ~~September 30,~~achieve ~~2005~~an increased sales presence of the recently launched Fusion product. This allows FusionTM to compete in the vital signs market place.

~~Revenue~~Discontinuance ~~was~~of ~~$522,100~~PrimoTM ~~and~~— ~~$239,400~~We ~~for~~developed the ~~three~~PrimoTM ~~months~~hand-held ~~ended~~blood monitor ~~March 31,~~pressure and began sales after receiving FDA approval in February 2006. ~~and~~Many ~~2005,~~users ~~respectively,~~of Primo anencountered ~~increase~~difficulty ofin ~~118%.~~the ~~Revenue~~proper ~~was~~placement ~~$769,700~~of ~~and~~the ~~$541,400~~Primo’s ~~for~~sensor on the ~~six-month~~wrist ~~period~~which ~~ended~~resulted ~~March 31,~~in ~~2006~~inconsistent ~~and~~performance. ~~2005,~~After ~~respectively,~~75% anof ~~increase~~previously ofshipped ~~42%.~~Primos ~~These~~were ~~increases~~returned ~~reflect~~or ~~the~~scheduled ~~introduction~~for return ofto us, we decided to discontinue selling the Primo. In conjunction with this discontinuation, ~~establishment~~we have written-off our entire existing inventory of ~~additional~~Primo ~~distribution~~hand-held ~~agreements~~monitors and the ~~continued~~manufacturing ~~growth~~equipment inused ~~accessory~~for ~~items~~their production.

~~Cost~~Vasotrac® — We began marketing our Vasotrac® monitoring system in February 1995 after receiving clearance from the FDA. The Vasotrac system helped develop our position as a developer of ~~Sales~~blood pressure monitoring technology that was particularly effective for use with difficult patients and ~~Production~~in difficult to monitor environments. Due to obsolete parts and aging technologies, the Vasotrac® will be discontinued and phased out of the product offerings over the fiscal year 2007 and replaced by FusionTM.

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2006			2005		2006			2005
Cost of Sales and Production	$	393,400		$	134,600	$	559,800		$	420,300
Percent change from previous year: Incr/-Decr		192.3	%		—		33.2	%		—

OEM module — Our OEM solutions address the integrated non-invasive blood pressure module market. Our goal is to present joint integrated solutions to patient monitoring, defibrillator and other medical device companies and ultimately sign additional supplier agreements. Medwave’s sensor based OEM solutions provide us with significant competitive advantages over cuff based companies in the OEM arena. We have been placing additional emphasis on our OEM efforts. Analogic Corporation signed a Supplier and License Agreement in June 2005. This agreement allows Analogic to integrate Medwave’s sensor-based technology into their patient monitoring suite of products. Analogic has successfully integrated Medwave’s technology. They introduced the product at the 2006 American Society of Anesthesiology convention and expect to commercially launch their product sometime in 2007.

The increase between 2005 and 2006 is directly related to the costs of material and production associated with the increased volume of sales. Additionally, the creation of a new product required the purchase of capital equipment, therefore increasing depreciation expense, and the expenses related to disposal of obsolete material valued at $49,200 that was associated with discontinued products.

Results of Operations

The results of operations compares the three months and six months ended March 31, 2007 and 2006. The analysis of liquidity and capital resources compares March 31, 2007 to September 30, 2006.

Revenue was approximately $252,300 and $465,000 for the three months and six months ended March 31, 2007 compared to $522,100 and $769,700 for the three months and six months ended March 31, 2006 respectively. This decrease was due to the discontinuance of certain product lines.

Cost of Sales and Production


	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007			2006		2007			2006
Cost of Sales and Production	$	275,000		$	393,400	$	572,300		$	559,800

Percent change from previous year:
Incr/-Decr		-30.1	%				2.2	%

The majority of the decrease between the three-month periods ended March 31, 2007 and 2006 reflects a decrease in sales of various product lines. The majority of the increase between the six-month periods ended March 31, 2007 and 2006 reflects an increase in depreciation expense due to tooling purchases and production scrap expenses from the discontinuation of the Vasotrax product line. In addition, $70,000 in obsolete inventory was written off during the quarter ended December 31, 2006.

Research and Development

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2006			2005		2006			2005
	2007			2006		2007			2006
Research and Development	$	~~239~~138,~~300~~200		$	~~318~~239,~~900~~300	$	~~468~~316,~~600~~800		$	~~466~~468,~~300~~600
Percent change from previous year: Incr/-Decr		-25.0	%		—		0.5	%		—
Percent change from previous year:
Incr/-Decr		-42.2	%				-32.4	%

The 2007 decrease ~~between~~primarily ~~the~~relates ~~three-month periods ended March 31, 2006 and 2005 was due~~ to ~~the reduction~~a decrease in outside services ~~upon the completion of new product industrial design~~ and ~~the reduction~~clinical ~~of legal~~ consulting expenses ~~related to patents. During the six-month period ended March 31~~, ~~2006, the~~which ~~recognition~~were ofhigher ~~stock-based~~last ~~compensation~~year ~~expense~~due ~~added~~ to ~~research~~new ~~and~~product ~~development~~design ~~costs by $34,500 versus the six-month period ended March 31, 2005. Additional increases in salaries and facility~~ expenses~~, offset previously mentioned reductions~~.

Sales and Marketing

	Three Months Ended					Six Months Ended			~~Six Months Ended~~
	March 31,					March 31,			~~March 31,~~
	2006					2005			2006			2005
	2007			2006		2007			2006
Sales and Marketing	$	~~520~~265,~~800~~700		$	520,800	$	~~490~~776,~~900~~000		$	997,400		$	~~1,018,700~~
Percent change from previous year: Incr/-Decr		6.1	%				—			-2.1	%		—
Percent change from previous year:
Incr/-Decr		-49.0	%				-22.2	%

~~There~~The ~~was~~decrease ~~little net change~~ in ~~the~~ sales and marketing ~~expenses~~expense ~~between~~from ~~the three and six-month periods ending March 31, 2005 and~~ 2006. ~~The~~to ~~higher~~2007 ~~expenses~~primarily ~~incurred~~relates ~~during the three and six-month periods ending March 31, 2006 were due~~ to ~~the~~a ~~recognition of $26,400 and $57,200~~decrease ~~stock-based compensation expenses, respectively, and increases~~ in ~~advertising expenses. These increased expenses were substantially offset by decreases in~~ salaries, ~~benefits and travel expenses during the same periods~~ due to the ~~implementation~~lay-off of ~~our~~ sales ~~strategy~~personnel ofand ~~partnering~~reductions ~~with~~in ~~dealers and~~advertising ~~agents~~services.

General and Administrative

	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2006			2005		2006			2005
General and Administrative	$	526,100		$	352,000	$	941,500		$	575,100
Percent change from previous year: Incr/-Decr		49.5	%		—		63.7	%		—

The recognition of stock-based compensation expense added to general and administrative expenses by $153,800, which accounts for 42% of the noted increase during the six-month periods ended March 31, 2006 and 2005. The allocation for the same period between employees and non-employee directors was $52,100 and $101,700, respectively. The recognition of stock-based compensation expense for the three-month periods ended March 31, 2006 and 2005, added to general and administrative expenses by $68,800, which accounts for 40% of the noted increase. Other increases during the three and six-month periods ending March 31, 2006, are reflected in the activity pertaining to travel, IT maintenance, depreciation, and salaries and related employee expenses due to the addition of the Vice President of Finance.

Interest income was $54,200 and $30,300 for the three-month periods ended March 31, 2006 and 2005, and $95,800 and $45,800 for the six-month periods ended March 31, 2006 and 2005, respectively. These increases are a direct result of increased cash invested from stock issuances.

General and Administrative


	Three Months Ended					Six Months Ended
	March 31,					March 31,
	2007			2006		2007			2006
General and Administrative	$	356,300		$	526,100	$	861,600		$	941,500

Percent change from previous year:
Incr/-Decr		-32.3	%				-8.5	%

Expenses for 2007 include severance payments due to the Danvers closing and associated moving expenses. In addition we had increased expenses associated with outside services relating to accounting services. The overall decrease is due to a reduction in salaries due to the lay-off of administrative personnel.

Interest income was $29,800 and $72,900 for the three months and six months ended March 31, 2007, respectively.

Liquidity and Capital Resources

Our cash and cash equivalents were $72,~~549~~211,~~800~~500 and $54,~~424~~698,100 at March 31, ~~2006~~2007 and September 30, ~~2005~~2006 respectively. ~~With~~Management ~~the~~is ~~cash~~presently implementing strategies designed to increase revenues, contain costs and ~~cash~~improve ~~equivalents~~the financial results of $7the Company’s operations. The Company believes that net proceeds from its private placement completed in February 2006 (see note 8 to financial statements in the Company’s Annual Report on Form 10-K for the year ended September 30,~~549~~ 2006 filed with the SEC on January 16,~~800~~ 2007), wetogether ~~believe~~with ~~that sufficient~~achieving ~~liquidity~~its isoperating ~~available~~budget tofor ~~satisfy~~2007, ~~our~~will ~~working~~be sufficient ~~capital~~to ~~needs~~fund its operations through at least ~~March~~October 311, 2007. Management has taken steps to reduce cash expenditures; including closing its Danvers, Massachusetts office and related employee layoffs.

InThe ~~July 2005,~~Company weregularly ~~began~~reviews toinventory ~~invest~~quantities inon ~~manufacturing~~hand ~~tooling~~and torecords ~~meet~~a ~~new~~provision ~~product~~for ~~development~~excess ~~requirements~~and ~~spending~~obsolete ainventory ~~total~~based ofprimarily ~~$487,600~~on tohistorical ~~date.~~usage Infor the ~~second~~prior ~~and~~twelve-month ~~third~~period ~~quarters~~and future ofsales ~~2005~~forecast. ~~and~~Although the ~~second~~ ~~quarter~~company ofmakes ~~2006,~~every weeffort ~~incurred~~to ~~additional~~ensure ~~expenditures~~accuracy of ~~$34,000~~its ~~in order to replace an~~forecast ~~obsolete~~of ITfuture ~~communications~~product ~~hardware~~demands, ~~and~~the ~~network~~newly ~~system.~~introduced ~~This~~product, ~~project~~Fusion, ~~was~~has ~~necessary~~a inlimited ~~order~~historical tousage. ~~maintain~~Any asignificant ~~consistent~~unanticipated ~~level~~change ofin ~~service~~demand ~~and~~could ~~support~~have ~~for~~a ~~our~~significant ~~business’~~impact ~~functionality.~~of Wethe ~~anticipate spending~~value ~~approximately~~of ~~$20,000~~its inventory ~~more~~and ~~for~~its ~~upgrades~~reported tooperating ~~our operational software during 2006~~results.

WeThe ~~will~~Company ~~need~~continues to ~~raise~~experience ~~additional~~net ~~capital~~losses toand ~~fund~~has ~~our~~an ~~long-term~~accumulated ~~operations~~deficit ifof weapproximately $36,000,000 dothrough ~~not~~March 31, ~~begin~~2007. toThe report of our independent registered public accounting firm ~~realize~~that anwas ~~operating~~filed ~~profit.~~with ~~There~~our ~~can~~Annual beReport noon ~~assurance~~Form ~~that~~10-K wefor ~~will~~the beyear ~~able~~ended September 30, 2006 contained an explanatory paragraph regarding substantial doubt about the Company’s ability to ~~receive~~continue ~~such~~as ~~funds~~a ongoing ~~acceptable~~concern ~~terms~~at September 30, 2006.

~~Cash~~We ~~flows~~will ~~used~~need into ~~operations~~raise ~~decreased~~additional capital to ~~$1,674,500~~fund ~~for~~our ~~the~~long-term ~~six~~operations ~~months~~if ~~ended~~we ~~March 31,~~do ~~2006,~~not ~~from~~begin to ~~$1,825,500~~realize ~~for~~an ~~the~~operating ~~six~~profit. ~~months~~We ~~ended~~have ~~March 31,~~begun ~~2005,~~ a ~~decrease~~process ofto ~~$151,000.~~explore ~~The~~strategic ~~majority~~alternatives ofto ~~this~~enhance ~~decrease~~shareholder ~~was~~value, ~~due~~including but not limited to the ~~expenditures~~raising ~~associated~~of ~~with~~capital ~~legal~~through ~~fees~~the sale of securities or assets of the Company, ~~outside~~a ~~services~~recapitalization, strategic acquisitions, and ~~facilities~~the ~~expense~~combination, ~~incurred~~sale asor merger of ~~March 31,~~the ~~2005~~Company with another entity. InThere ~~both~~can ~~periods,~~be weno ~~used~~assurance ~~cash~~that ~~flows~~the exploration toof ~~fund~~strategic ~~operating~~alternatives will result in a transaction. We do not intend to disclose ~~losses,~~developments ~~which~~with ~~were~~respect ~~partially~~to ~~offset~~the byexpiration ~~non-cash~~of ~~expense~~strategic ~~for~~alternatives ~~depreciation~~unless and ~~share-based~~until the Board of ~~compensation~~Directors ~~expense~~has approved a specific transaction.

Cash flows used in ~~investing~~operations ~~activities~~were ~~increased to~~ $~~272~~2,~~600~~473,000 for the six months ended March 31, ~~2006,~~ ~~from~~2007 compared to $541,~~300~~674,500 for the six months ended March 31, ~~2005~~2006. ~~This~~The majority of this increase ~~reflects~~was ~~the~~due ~~substantial~~to the ~~investment~~costs inassociated ~~our~~with ~~manufacturing~~severance ~~tooling~~payments. ~~and~~In ~~the~~both ~~improvements~~periods, towe ~~our~~used ITcash ~~communications~~flows ~~system~~to asfund operating ~~mentioned~~losses, inwhich ~~the~~were ~~preceding~~partially ~~paragraphs~~offset by non-cash expense for depreciation and share-based compensation expense.

~~Financing activities provided $4,072,900 (net) from the February 2006 financing as well as the~~16 ~~exercise of stock options during the six months ended March 31, 2006.~~

Cash flows used in investing activities decreased to $21,000 for the six months ended March 31, 2007 from $272,600 for the six months ended March 31, 2006. This decrease reflects fewer purchases of equipment in 2007.

Cash proceeds from financing activities for the six months ended March 31, 2007 was $7,400 from the exercise of common stock options, compared to $4,072,800 for the six months ended March 31, 2006.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements are non-cancelable operating leases entered into in the ordinary course of business,. asThe ~~discussed~~table inunder ~~our~~the ~~Annual~~following ~~Report~~caption on“Contractual ~~Form~~Obligations” ~~10-K~~shows the ~~for~~amount ~~the~~of ~~year~~our ~~ended September 30,~~operating ~~2005~~lease payments by year.

Contractual Obligations

AsThe offollowing ~~March 31,~~summarizes ~~2006,~~our ~~there~~contractual ~~are~~obligations noat ~~material~~March 31, ~~changes~~2007 inand ~~our~~the effect these contractual obligations asare ~~disclosed~~expected ~~in our~~to ~~Annual~~have ~~Report~~ on ~~Form~~our ~~10-K~~liquidity ~~for~~and ~~the~~cash ~~year~~flows ~~ended~~in ~~September 30,~~future ~~2005~~periods.


	PAYMENTS DUE BY PERIOD
	TOTAL		1 YEAR OR LESS		1-3 YEARS		3-5 YEARS
Operating lease commitments	$	372,200	$	113,000	$	230,200	$	29,000

Critical Accounting Policies and Estimates

~~Medwave~~Management’s discussion and analysis of the Company’s financial ~~statements~~condition and ~~accompanying~~results ~~notes~~of ~~are~~operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. ~~GAAP).~~The ~~Preparing~~Company’s most critical accounting policies have a significant impact on the preparation of these condensed financial statements. ~~requires~~These ~~management~~polices toinclude ~~make~~ estimates and ~~assumptions~~significant judgments that affect the reported ~~amounts~~ amounts of assets, liabilities, ~~revenue~~revenues and expense, and ~~expenses~~related disclosures of contingent assets and liabilities. ~~These~~The Company continues to evaluate its estimates and ~~assumptions~~judgments ~~are~~on ~~affected~~an byon-going basis. By their nature, these policies require management’s ~~application~~to make its most difficult and subjective judgments, often as a result of ~~accounting~~the ~~policies~~need to make estimates on matters that are inherently uncertain. ~~Critical~~In the case of the Company’s critical accounting policies, ~~for~~these ~~Medwave include~~estimates ~~revenue~~and ~~recognition,~~judgments ~~share-~~are based ~~compensation~~on its historical experience, ~~impairment~~terms of ~~long-lived~~existing ~~assets~~contracts, the Company’s observance of trends in the industry, information provided by its customers, and ~~allowance~~information available ~~for~~from other sources, as appropriate. The Company believes the following accounting ~~doubtful~~policies ~~accounts~~and estimates require management to make the most difficult judgments in the preparation of the Company’s financial statements and accordingly are critical.

16Revenue Recognition. Revenue from the sales of products is recognized when products are shipped to customers provided that there exists persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. The Company accounts for shipping and handling fees passed on to customers as sales. The corresponding costs are recorded as cost of sales. Revenue from multi-year contracts is deferred until obligations under those contracts are met throughout the duration of the contract. Certain contracts include a right of return provision under which revenue is deferred until the right of return expires or a reserve for estimated returns can be established by management.

~~Revenue~~Inventory ~~Recognition~~Valuation. The Company values its inventory at the lower of cost or market on the first-in, first-out (FIFO) method of actual cost or the current estimated market value. It regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve month period and future sales forecasts. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact of the value of its inventory and its reported operating results.

Warranty Reserves. The Company’s ~~recognizes~~warranties ~~revenue~~require ~~upon~~it ~~product~~to ~~shipment,~~repair ~~provided~~or ~~there~~replace ~~exists~~defective ~~persuasive~~products returned ~~evidence~~to ~~of an~~it ~~arrangement,~~during the ~~fee~~applicable iswarranty ~~fixed~~period orat ~~determinable~~no cost to the customer. It records an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and ~~collectibility~~repair ofcosts at the ~~related~~time ~~receivable~~of issale. A significant increase in product return rates, or a ~~reasonably~~significant ~~assured.~~increase ~~Revenue~~in ~~from~~the ~~multi-year~~costs ~~contracts~~to isrepair ~~deferred~~products, ~~until~~could ~~obligations~~have ~~under~~a ~~those~~material adverse impact on ~~contracts~~future ~~are~~operating ~~met~~results ~~throughout~~for the ~~duration~~period ofor ~~the~~periods ~~contract~~in which such returns or additional costs materialize and thereafter.

~~Share-Based~~Income ~~Compensation~~Taxes. The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets may be reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

~~Effective~~Significant ~~October 1,~~management ~~2005,~~judgment ~~the~~is ~~Company~~required ~~adopted~~in determining the ~~provisions~~provision offor ~~Statement~~income oftaxes, ~~Financial Accounting~~the ~~Standards~~deferred ~~(SFAS) 123(R),~~tax ~~Share-Based~~assets ~~Payment,~~and ~~which~~liabilities ~~establishes~~and ~~accounting~~any ~~for~~valuation ~~equity~~allowance ~~instruments exchanged~~recorded ~~for~~against ~~employee~~deferred ~~services~~tax assets. ~~Under~~The ~~the~~valuation ~~provisions~~allowance ~~of SFAS 123(R), share-based compensation cost~~ is ~~measured at the grant date,~~ based on the ~~fair~~Company’s ~~value~~estimates of ~~the~~taxable ~~award,~~income and ~~is recognized as an~~the ~~expense~~period over ~~the~~which ~~employee’s~~its ~~requisite~~deferred ~~service~~tax ~~period~~assets ~~(generally~~will ~~the~~be ~~vesting period of the equity grant)~~recoverable. ~~Prior~~In ~~to October 1, 2005,~~ the ~~Company~~event ~~accounted~~that ~~for~~actual ~~share-based compensation to employees~~results indiffer ~~accordance~~from ~~with~~these ~~Accounting~~estimates ~~Principles~~or ~~Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company also followed~~ the ~~disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation. The~~ Company ~~elected~~adjusts tothese ~~adopt~~estimates ~~the~~in ~~modified prospective~~future ~~transition method as provided by SFAS 123(R) and~~periods, ~~accordingly,~~it ~~financial~~may ~~statement~~need ~~amounts for the prior periods presented in the Form 10-Q have not been restated~~ to ~~reflect~~establish ~~the~~an ~~fair value~~additional ~~method~~valuation ofallowance ~~expensing~~or ~~share-based~~reduce ~~compensation.~~its ~~The~~current ~~term~~valuation ~~“employee”~~allowance ~~as related to the~~which ~~calculation~~could ofmaterially ~~share-based~~impact ~~compensation~~its ~~includes~~tax ~~Medwave’s employees and non-employee directors~~provision.

~~The Company estimates the fair value of stock options using the Black~~Stock-~~Scholes~~Based ~~valuation model. Key~~Compensation input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the six months ended March 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Effective October 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected forfeiture rate, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the three months and six months ended March 31, 2007. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Impairment of Long-Lived Assets

The Company ~~will~~evaluates ~~record~~the ~~impairment~~recoverability ~~losses~~of onits long-lived assets, ~~used~~ in ~~operations~~accordance ~~when~~with ~~indicators~~SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 requires recognition of impairment ~~are~~of ~~present~~long-lived ~~and~~assets in the event the net book value of such assets exceeds the estimated future undiscounted cash flows ~~estimated~~attributable to besuch ~~generated~~assets. byIf ~~those~~impairment ~~assets~~is ~~are~~indicated, ~~less~~the ~~than~~asset ~~the~~is ~~assets’~~written ~~carrying~~down ~~amount.~~to

its estimated fair value based on a discounted cash flow analysis. The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows of the asset as compared to the recorded value of the asset.

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~~uncollectable. The Company includes any reserves for specific accounts receivable balances that ~~are~~ are determined to be ~~uncollectible~~uncollectable, along with a general reserve, in the overall allowance for ~~doubtful~~ 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, ~~2006~~2007 is adequate. However, actual write-offs may exceed the recorded allowance.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

~~Due~~There tohave ~~the~~been ~~fact~~no ~~that~~material ~~all~~changes ofsince ~~our~~the ~~international~~end ~~sales~~of ~~are~~the ~~transacted~~preceding infiscal ~~U.S.~~year ~~dollars, we are not exposed~~ to the ~~market~~date ~~risks~~of ~~associated with foreign currency exchange and fluctuations. In~~ the ~~future,~~interim ifbalance wesheet ~~enter~~provided ~~into contacts or sales with international customers that expose us to currency fluctuations, we will address the risk at that time~~herein.

ITEM 4. Controls and Procedures

AsEvaluation ~~required by Rules 13a-15 and 15d-15~~ of ~~the~~Disclosure ~~Securities~~Controls 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~~Procedures ~~Executive Officer has concluded that such disclosure controls and procedures are effective.~~

~~There~~As ~~was~~of nothe ~~change~~end inof the period covered by this report, an evaluation had been performed under the supervision and with the participation of the Company’s ~~internal~~management, ~~control~~including ~~over~~its principal executive officer and principal financial ~~reporting~~officer, ~~that~~of ~~occurred~~the ~~during~~effectiveness of the design and operation of the ~~quarter~~Company’s ~~ended~~disclosure ~~March 31,~~controls ~~2006~~and procedures. Based upon that ~~has~~evaluation, ~~materially~~the ~~affected~~Company’s management, orincluding isits ~~reasonably~~principal ~~likely~~executive ~~to materially~~officer ~~affect~~and principal financial officer, concluded that the Company’s ~~internal~~disclosure ~~control~~controls ~~over~~and ~~financial~~procedures ~~reporting~~were effective as of March 31, 2007 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarterly period ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 21A. ~~Unregistered~~Risk ~~Sales of Equity Securities and Use of Proceeds~~Factors.

OnThe ~~February 21,~~matters ~~2006,~~discussed ~~certain~~in ~~accredited~~this ~~investors~~Form ~~purchased~~10-Q aninclude ~~aggregate~~forward-looking ofstatements ~~1,617,614~~that ~~unregistered~~involve risks or ~~shares~~uncertainties. ofThese ~~our~~statements ~~common~~are ~~stock~~neither atpromises anor ~~price~~guarantees, ofbut ~~$2.74~~are ~~per~~based ~~share~~on ~~and~~various assumptions ~~warrants~~by tomanagement ~~purchase~~regarding ~~common~~future ~~stock~~circumstances ~~that are~~many ~~exercisable~~of ~~beginning~~which ~~August 21,~~we ~~2006~~have ~~for~~little ~~404,403~~or ~~shares~~no control over. A number of ~~our~~important ~~common~~risks ~~stock~~and atuncertainties, anincluding ~~exercise~~those identified under the caption ~~price~~“Risk ofFactors” ~~$3.29~~in ~~per~~our ~~share.~~Annual ~~This~~Report ~~financing~~on ~~resulted~~Form in10-K ~~aggregate~~for ~~proceeds~~the ofyear $4ended September 30,~~432,252.~~ ~~The~~2006 and ~~approximately~~subsequent ~~$4,070,754~~filings ~~net~~with ~~proceeds~~the ~~from~~SEC, ~~this~~as ~~financing~~well ~~are~~as ~~being~~risks ~~used~~and touncertainties ~~fund~~discussed ~~our~~elsewhere ~~growth~~in ~~and~~this ~~continued~~Form ~~market~~10-Q, ~~development.~~could ~~This~~cause ~~sale~~our ofactual ~~unregistered~~results ~~shares~~to ofdiffer ~~common~~materially ~~stock~~from ~~and~~those ~~warrants~~in ~~was~~the forward-looking ~~made~~statements. inIn ~~reliance~~addition onto ~~the~~those ~~exemption~~statements ~~from~~set ~~registration~~forth ~~provided~~in byour ~~Rule 506~~Annual ~~promulgated~~Report ~~under~~on ~~the Securities~~Form ~~Act.~~10-K, ~~There~~we ~~were~~set forth nothe ~~underwriters~~following ~~employed~~additional inrisks ~~connection~~and ~~with~~uncertainties ~~this~~related ~~financing~~to our business.

Ramon Burton, our Chief Financial Officer, recently submitted his resignation which may adversely impact our business.

Our former Chief Financial Officer, Ramon Burton, resigned effective April 24, 2007. Mr. Burton had served as our principal financial officer for reporting purposes under Securities and Exchange Commission rules and regulations. Mr. Burton’s resignation may adversely affect our internal controls as well as our ability to execute our business strategy, manage our growth or compete effectively. Upon Mr. Burton’s resignation, Frank Katarow, our interim Chief Executive Officer, began to again serve as our principal financial officer. We cannot assure you that we will be able to replace Mr. Burton with an equally skilled and experienced professional.

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

On ~~February~~March 219, ~~2006~~2007, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders elected DrWilliam D. ~~Solomon~~ ~~Aronson~~Corneliuson to the Board of Directors to serve for a three-year ~~term~~ term as a Class III Director. There were 1113,~~475~~104,~~416~~280 shares of common stock entitled to vote and a total of 7 10,~~568~~825,~~283~~119 shares (6582.956%) were represented at the meeting. 710,~~513,228~~613.917 votes were cast for ~~Dr.~~ ~~Aronson~~Mr. Corneliuson, ~~and 55~~211,~~055~~202 votes were cast to withhold authority for Mr. Corneliuson and 2,279,161 shares were not voted. Dr. Solomon Aronson, James C. Hawley, and Frank Katarow continue to serve as directors of the Company.

1820

ITEM 6. Exhibits

(A) EXHIBITS:

Exhibit
Number		Description
3.1		~~Amended~~Certificate ~~and Restated Articles~~ of Incorporation (1)
3.2		Amendment to Articles of Incorporation (2)
3.3		Bylaws (1)
3.3		Amended and Restated Bylaws (1)
4.1		Shareholders Rights Plan dated September 29, 2003 (2)
3.4		Amendments to Bylaws (2)
10.1		2007 Retention Program (3)
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)
10.1		Form of Securities Purchase Agreement dated February 21, 2006 by and among Medwave, Inc. and the Investors named therein (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)
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~~Form ~~Statement~~8-A12G filed on ~~Form~~August ~~SB-2~~4, ~~Registration No~~2003. ~~33-96878C.~~
(2)		Incorporated by reference to Medwave, Inc.’s ~~Registration~~Form ~~Statement~~8-A12G filed on ~~Form~~October S-3, ~~Registration No~~2003. ~~333-103477.~~
(3)		Incorporated by reference to Medwave, Inc.’s Current Report on Form 8-~~A12G~~K filed on ~~October~~April 320, ~~2003~~2007.
(4)		~~Incorporated~~Filed ~~by reference to Medwave, Inc~~herewith.~~’s Current Report on Form 8-K filed on February 27, 2006.~~
(5)		Filed herewith.

1921

SIGNATURES

Pursuant to 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 4, 2006		Medwave, Inc.
Date: May 29, 2007	Medwave, Inc.
	By:	/s/ Frank A. Katarow	~~By:~~	~~/s/ Timothy J. O’Malley~~
				Timothy J. O’Malley
		Frank A. Katarow
				President and Chief Executive Officer
		Chief Executive Officer (interim) (Principal Executive Officer and Principal Accounting Officer)
				(Principal Executive Officer and Principal Financial Officer)

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