UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨ 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 000-52985

SANUWAVE Health, Inc.

(Exact name of registrant as specified in its charter)

Nevada	20-1176000
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11680 Great Oaks Way, Suite 350 Alpharetta, GA	30022
(Address of principal executive offices)	(Zip Code)

(770) 419-7525

(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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company  x
(Do not check if a smaller reporting company)

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

As of May 11, 2012, there were issued and outstanding 20,907,536 shares of the registrant’s common stock, $.001 par value.

 SANUWAVE Health, Inc.

Table of Contents

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II – OTHER INFORMATION
Item 6.	Exhibits	22

-1-

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q of SANUWAVE Health, Inc. and its subsidiaries (“SANUWAVE” or the “Company”) contains forward-looking statements.  All statements in this Quarterly Report on Form 10-Q, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding the Company’s future financial results, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends.  These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements.  Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology.  Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission, specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 14, 2012 and in the Company’s Quarterly Reports on Form 10-Q.  Other risks and uncertainties are and will be disclosed in the Company’s prior and future Securities and Exchange Commission filings. These and many other factors could affect the Company’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.  The Company undertakes no obligation to revise or update any forward-looking statements.  The following information should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 14, 2012.

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” are to the consolidated business of the Company.

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

SANUWAVE HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(Unaudited)			(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2,421,809		$	3,909,383
Accounts receivable - trade, net of allowance for doubtful accounts of $72,332 in 2012 and $74,852 in 2011		126,131			81,565
Inventory (Note 6)		358,341			396,284
Prepaid expenses		171,705			162,975
Due from Pulse Veterinary Technologies, LLC		-			27,837
TOTAL CURRENT ASSETS		3,077,986			4,578,044
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Note 7)		46,941			51,206
OTHER ASSETS		3,321			3,192
INTANGIBLE ASSETS, at cost, less accumulated amortization (Note 8)		1,457,093			1,533,782
TOTAL ASSETS	$	4,585,341		$	6,166,224
LIABILITIES
CURRENT LIABILITIES
Accounts payable	$	604,104		$	756,657
Accrued employee compensation		790,892			632,333
Accrued expenses (Note 9)		174,810			190,583
Interest payable, related parties (Note 11)		80,071			81,864
Capital lease payable, current portion (Note 13)		4,663			4,576
Liabilities related to discontinued operations		655,061			655,061
TOTAL CURRENT LIABILITIES		2,309,601			2,321,074
NON-CURRENT LIABILITIES
Notes payable, related parties (Note 11)		5,372,743			5,372,743
Capital lease payable, non-current portion (Note 13)		7,685			8,884
TOTAL NON-CURRENT LIABILITIES		5,380,428			5,381,627
TOTAL LIABILITIES		7,690,029			7,702,701
COMMITMENTS AND CONTINGENCIES (Note 13)		-			-
STOCKHOLDERS' DEFICIT
PREFERRED STOCK, par value $0.001, 5,000,000 shares authorized; no shares issued and outstanding		-			-
COMMON STOCK, par value $0.001, 50,000,000 shares authorized; 20,907,536 issued and outstanding in 2012 and 2011 (Note 4)		20,908			20,908
ADDITIONAL PAID-IN CAPITAL		63,203,153			62,940,977
ACCUMULATED OTHER COMPREHENSIVE INCOME		15,394			10,466
RETAINED DEFICIT		(66,344,143	)		(64,508,828	)
TOTAL STOCKHOLDERS' DEFICIT		(3,104,688	)		(1,536,477	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	4,585,341		$	6,166,224

 See accompanying notes to unaudited condensed

 consolidated financial statements.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2012			2011
REVENUES	$	238,540		$	251,753
COST OF REVENUES		71,772			93,298
GROSS PROFIT		166,768			158,455
OPERATING EXPENSES
Research and development		603,797			749,299
General and administrative		1,237,540			1,382,185
Depreciation		5,210			6,237
Amortization		76,689			76,689
TOTAL OPERATING EXPENSES		1,923,236			2,214,410
OPERATING LOSS		(1,756,468	)		(2,055,955	)
OTHER INCOME (EXPENSE)
Interest expense, net		(78,856	)		(236,280	)
Income (loss) on foreign currency exchange		9			(3,591	)
Transitional services provided to Pulse Veterinary Technologies, LLC		-			112,500
TOTAL OTHER INCOME (EXPENSE)		(78,847	)		(127,371	)
LOSS BEFORE INCOME TAXES		(1,835,315	)		(2,183,326	)
INCOME TAX EXPENSE		-			-
NET LOSS		(1,835,315	)		(2,183,326	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		4,928			10,998
TOTAL COMPREHENSIVE LOSS	$	(1,830,387	)	$	(2,172,328	)
LOSS PER SHARE:
Net loss - basic	$	(0.09	)	$	(0.14	)
Net loss - diluted	$	(0.09	)	$	(0.14	)
Weighted average shares outstanding - basic		20,907,536			16,143,655
Weighted average shares outstanding - diluted		20,907,536			16,143,655

 See accompanying notes to unaudited condensed

 consolidated financial statements.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,835,315	)	$	(2,183,326	)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization		76,689			76,689
Depreciation		5,210			6,237
Change in allowance for doubtful accounts		(2,520	)		44,302
Stock-based compensation		262,176			152,448
Accrued interest		-			159,273
Changes in assets - (increase)/decrease
Accounts receivable - trade		(42,046	)		(100,803	)
Inventory		37,943			40,838
Prepaid expenses		(8,730	)		(37,467	)
Due from Pulse Veterinary Technologies, LLC		27,837			(126,479	)
Other		(129	)		(45	)
Changes in liabilities - increase/(decrease)
Accounts payable		(152,553	)		(267,968	)
Accrued employee compensation		158,559			151,686
Accrued expenses		(15,773	)		64,832
Interest payable, related parties		(1,793	)		(2,906	)
NET CASH USED BY OPERATING ACTIVITIES		(1,490,445	)		(2,022,689	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(945	)		-
NET CASH USED BY INVESTING ACTIVITIES		(945	)		-
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from unit options exercised, related parties		-			2,463,008
Proceeds from unit options exercised		-			1,437,326
Payment of principal on capital lease		(1,112	)		-
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(1,112	)		3,900,334
EFFECT OF EXCHANGE RATES ON CASH		4,928			10,998
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,487,574	)		1,888,643
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		3,909,383			417,457
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,421,809		$	2,306,100
SUPPLEMENTAL INFORMATION
Cash paid for interest, related parties	$	81,864		$	81,864
Cash paid for capital lease interest	$	247		$	-

 See accompanying notes to unaudited condensed

 consolidated financial statements.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

1.            Nature of the Business

SANUWAVE Health, Inc. and subsidiaries (the “Company”) is an emerging global regenerative medicine company focused on the development and commercialization of noninvasive, biological response activating devices for the repair and regeneration of tissue, musculoskeletal and vascular structures.  The Company’s portfolio of products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration.  The Company intends to apply its Pulsed Acoustic Cellular Expression (PACE®) technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.  The Company currently does not have any commercial products in the United States.  Revenues are from sales of the European Conformity Marking (“CE Mark”) devices and accessories in Europe, Canada and Asia.

2.            Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X.  Accordingly, these condensed consolidated financial statements do not include all the information and footnotes required by United States generally accepted accounting principles for complete financial statements. The financial information as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 is unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2012.

The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

For further information and a summary of significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2012.  Please also refer to Note 5 to the condensed consolidated financial statements in this Form 10-Q regarding the Company’s adoption of recent accounting pronouncements.

3.            Going concern

The Company incurred a net loss of $1,835,315 for the three months ended March 31, 2012 and a net loss of $10,238,797 for the year ended December 31, 2011.  The Company had cash and cash equivalents of $2,421,809 at March 31, 2012.  These operating losses create an uncertainty about the Company’s ability to continue as a going concern.  The continuation of the Company’s business is dependent upon raising additional financial support. Management’s plans are to obtain additional financial support which may include: raising additional capital through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt, an investment by a strategic partner in a specific clinical indication or market opportunity; selling all or a portion of the Company’s assets, liquidating assets, or seeking relief through a filing under the U.S. Bankruptcy Code. These possibilities, to the extent available, may be on terms that result in significant dilution to the Company’s existing shareholders.  Although no assurances can be given, management of the Company believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding for the Company to continue as a going concern.  The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this report.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

4.            Equity transactions

Private placement and note exchange

On April 8, 2011, the Company completed a private placement to 28 institutional and individual “accredited investors” (as that term is defined in the Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”)) of 2,804,593 shares of common stock, $0.001 par value per share (the “Common Stock”), at a purchase price of $3.25 per share, for gross proceeds of $9,114,927. The net proceeds received by the Company were $8,467,121, net of offering costs of $647,806.As part of the private placement, the investors were issued five-year warrants to purchase up to 2,804,593 shares of Common Stock at an exercise price of $4.00 per share.  In addition, the placement agent for the private placement was issued a five-year warrant to purchase 93,080 shares of Common Stock at an exercise price of $4.00 per share.  The warrants vested upon issuance and expire after five years.

For each of the warrants, the holder will be able to exercise the warrant on a so-called cashless basis at any time following the one-year anniversary of the closing of the private placement if a registration statement covering the shares of Common Stock underlying such warrants is not effective.

The Company filed a registration statement with respect to the resale of the shares of Common Stock sold to the investors and shares of Common Stock issuable upon exercise of the warrants with the SEC and kept the registration statement effective until all registrable securities were sold or may be sold pursuant to Rule 144 under the Securities Act.  The registration statement is no longer effective as the shares have been held for over one year and the Company believes that the shares may be sold pursuant to Rule 144 under the Securities Act.

On April 4, 2011, Prides Capital Fund I, LP and NightWatch Capital Partners II, LP (the “Noteholders”), holders of certain notes payable (the “Notes”) and related parties of the Company, exchanged the unpaid principal and interest balance of the Notes, which totaled $4,413,908, in consideration for the issuance of 1,358,126 shares of Common Stock.  In connection with this transaction, the Company issued to the Noteholders warrants to purchase an aggregate of 679,064 shares of Common Stock at an exercise price of $4.00 per share.  Each warrant represents the right to purchase one share of Common Stock.  The warrants vested upon issuance and expire after five years.  In accordance with ASC 470, “Debt”, in April 2011, the Company recorded a loss from extinguishment of debt of $1,318,781, which was the difference between the estimated fair value of the Common Stock and warrants on the date of exchange of $9,330,326 and the fair value of the Notes (assuming the conversion feature was exercised by the Noteholders) of $8,011,545.

Unit offerings and promissory notes

During the year ended December 31, 2010, the Company issued ten promissory notes totaling $2,450,000.  On October 12, 2010, in conjunction with an offering of securities (the “Offering”) of the Company pursuant to an exemption from registration under the Securities Act, the Company amended the terms of the ten outstanding promissory notes such that the unpaid principal and interest on each note was exchanged into the number of Units (as described below) equal to (i) the unpaid principal and interest on each such note, divided by (ii) 2.  In accordance with ASC 470, “Debt”, the Company recorded a loss from extinguishment of debt of $2,693,896 which was the difference between the estimated fair value of the Units on the date of exchange of $5,211,556 as compared to the carrying value of the promissory notes of $2,517,660.

Each “Unit” in the Offering consisted of: (i) one share of Common Stock; (ii) a two-year common stock purchase warrant (the “Class D Warrant”) to purchase one share of Common Stock, at an exercise price of $2.00; and (iii) an option (the “Option”), which, as amended, expired on January 31, 2011, to purchase the same number of Units as granted pursuant to this transaction, at the purchase price of $2.00 per Unit.  The unpaid principal and interest on the notes totaled $2,517,660, and this sum was exchanged into a total of 1,258,830 Units which consisted of 1,258,830 shares of Common Stock, 1,258,830 Class D Warrants and 1,258,830 Options.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

4.            Equity transactions (continued)

The chairman of the board of directors of the Company exchanged promissory notes totaling $1,790,504 and the brother of a member of the board of directors of the Company exchanged promissory notes totaling $522,504 in the Offering.

On September 30, 2010, in conjunction with an offering of securities of the Company pursuant to an exemption from registration under the Securities Act, the Company issued 150,000 Units to certain accredited investors for an aggregate total purchase price of $300,000.  On October 1, 2010, November 19, 2010, and December 7, 2010 in conjunction with offerings of securities of the Company exempt from registration under the Securities Act, the Company issued 250,000, 142,500 and 382,500 Units to accredited investors for $500,000, $285,000 and $765,000, respectively.  Each Unit was sold to the new investors at a purchase price of $2.00 per Unit.  As a result of the offerings, the Company sold 925,000 Units, which consisted of 925,000 shares of Common Stock, 925,000 Class D Warrants and 925,000 Options.  This included 175,000 Units purchased by the brother of a member of the board of directors of the Company for a total purchase price of $350,000.

As of December 31, 2010, the Option holders exercised 101,163 Options for total gross proceeds of $202,326 to the Company.  In connection with the exercise of the Options, the Company issued 101,163 shares of Common Stock and 101,163 Class D Warrants.  Between January 1 and January 31, 2011, Option holders exercised 1,950,167 Options for total gross proceeds of $3,900,334 to the Company.  In connection with the exercise of Options in January 2011, the Company issued 1,950,167 shares of Common Stock and 1,950,167 Class D Warrants.  The Option holders included the chairman of the board of directors of the Company who exercised 545,252 Options and the brother of a member of the board of directors of the Company who exercised 686,252 Options. The 132,500 Options that remained unexercised at January 31, 2011 expired by their terms.

5.            Recently Issued Accounting Standards

There have been no recently issued accounting standards that have an impact on our condensed consolidated financial statements.

6.            Inventory

Inventory consists of the following:

	March 31,			December 31,
	2012			2011
Inventory - finished goods	$	368,439		$	412,291
Inventory - parts		109,402			113,593
Total		477,841			525,884
Provision for losses and obsolescence		(119,500	)		(129,600	)
Net inventory	$	358,341		$	396,284

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

7.            Property and equipment

Property and equipment consists of the following:

	March 31,			December 31,
	2012			2011
Machines and equipment	$	233,793		$	232,848
Office and computer equipment		224,600			224,600
Leasehold improvements		67,421			67,421
Furniture and fixtures		24,613			24,613
Vehicles		22,531			22,531
Software		41,872			41,872
Other assets		2,378			2,378
Total		617,208			616,263
Accumulated depreciation		(570,267	)		(565,057	)
Net property and equipment	$	46,941		$	51,206

The aggregate depreciation related to property and equipment charged to operations was $5,210 and $6,237 for the three months ended March 31, 2012 and 2011, respectively.

8.            Intangible assets

Intangible assets consist of the following:

	March 31,			December 31,
	2012			2011
Patents, at cost	$	3,502,135		$	3,502,135
Less accumulated amortization		(2,045,042	)		(1,968,353	)
Net intangible assets	$	1,457,093		$	1,533,782

The aggregate amortization charged to operations was $76,689 and $76,689 for the three months ended March 31, 2012 and 2011, respectively.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

9.            Accrued expenses

Accrued expenses consist of the following:

	March 31,		December 31,
	2012		2011
Accrued legal professional fees	$	78,000	$	61,000
Accrued audit and tax preparation		44,174		75,516
Accrued other		52,636		54,067
	$	174,810	$	190,583

 10.         Income taxes

The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions.  The Company is no longer subject to United States federal and state and non-United States income tax examinations by tax authorities for years before 2006.

At March 31, 2012, the Company had federal net operating loss (“NOL”) carryforwards of $48,915,087 for tax years through the year ended December 31, 2011, that will begin to expire in 2025.  The use of deferred tax assets, including federal net operating losses, is limited to future taxable earnings.  Based on the required analysis of future taxable income under the provisions of ASC 740, Income Taxes (formerly SFAS No. 109), the Company’s management believes that there is not sufficient evidence at March 31, 2012 indicating that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in years beyond 2012.  As a result, a valuation allowance was provided for the entire net deferred tax asset related to future years, including NOL carryforwards.

The Company’s ability to use its NOL carryforwards could be limited and subject to annual limitations.  In connection with future offerings, the Company may realize a “more than 50% change in ownership” which could further limit its ability to use its NOL carryforwards accumulated to date to reduce future taxable income and tax liabilities.  Additionally, because United States tax laws limit the time during which NOL carryforwards may be applied against future taxable income and tax liabilities, the Company may not be able to take advantage of all or portions of its NOL carryforwards for federal income tax purposes.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

11.          Notes payable, related parties

The notes payable consist of the following:

	March 31,		December 31,
	2012		2011
Notes payable, unsecured, bearing interest at 6% to HealthTronics, Inc., a shareholder of the Company.  The notes were issued in conjunction with the Company's purchase of the orthopedic division of HealthTronics, Inc. on August 1, 2005.  Quarterly interest through June 30, 2010, was accrued and added to the principal balance.  Interest is paid quarterly in arrears beginning September 30, 2010.  All remaining unpaid accrued interest and principal is due August 1, 2015.  Accrued interest currently payable totaled $80,071 and $81,864 at March 31, 2012 and December 31, 2011, respectively.  Accrued interest not payable until August 1, 2012 totaled $1,372,743 at March 31, 2012 and December 31, 2011.	$	5,372,743	$	5,372,743
Less current portion		-		-
Non-current portion	$	5,372,743	$	5,372,743

On April 4, 2011, the Company amended the terms of outstanding notes with Prides Capital Fund I, LP and NightWatch Capital Partners II, LP such that the unpaid principal and interest balance on the notes, totaling $4,413,908, was cancelled in consideration of the issuance of 1,358,126 shares of Common Stock of the Company.  In addition, the Company, in connection with this transaction, issued to the noteholders warrants to purchase an aggregate of 679,064 shares of Common Stock at an exercise price of $4.00 per share.  In accordance with ASC 470, “Debt”, in April 2011, the Company recorded a loss from extinguishment of debt of $1,318,781, which was the difference between the estimated fair value of the Common Stock and warrants on the date of exchange of $9,330,326 and the fair value of the notes (assuming the conversion feature was exercised by the noteholders) of $8,011,545.

Interest expense on notes payable to related parties totaled $80,071 and $238,231 for the three months ended March 31, 2012 and 2011, respectively.

12.          Earnings (loss) per share

The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share (formerly SFAS No. 128, Earnings Per Share).  Under the provisions of ASC 260, basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding for the period.  Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. To the extent that securities are “anti-dilutive,” they are excluded from the calculation of diluted net income (loss) per share.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

12.          Earnings (loss) per share (continued)

As a result of the net loss for the three months ended March 31, 2012 and 2011, respectively, all potentially dilutive shares were anti-dilutive and therefore excluded from the computation of diluted net loss per share.  The anti-dilutive equity securities totaled 14,436,697 shares and 10,950,307 shares at March 31, 2012 and 2011, respectively.

13.          Commitments and contingencies

Operating Leases

The Company leases office and warehouse space.  Rent expense for the three months ended March 31, 2012 and 2011, was $86,798 and $86,434, respectively.

Capital Leases

The Company leases certain office equipment under an agreement classified as a capital lease. The leased assets serve as security for the lease.  The accumulated depreciation of such equipment at March 31, 2012 and December 31, 2011 totaled $2,830 and $1,617, respectively. The net book value of such equipment at March 31, 2012 and December 31, 2011 totaled $11,722 and $12,935, respectively.

Litigation

The Company is involved in various legal matters that have arisen in the ordinary course of business.  While the ultimate outcome of these matters is not presently determinable, it is the opinion of management that the resolution will not have a material adverse effect on the financial position or results of operations of the Company.

HealthTronics, Inc., along with the Company, are defendants in an alleged breach of contract lawsuit dated April 21, 2006 brought in the Miami-Dade County Circuit Court, Florida by a former limited partner of a former limited partnership of the Company, Bone & Joint Treatment Centers of America.  Bone & Joint Treatment Centers of America, the plaintiff, is seeking greater than $3 million.  The lawsuit went to trial and the Company received a summary judgment in its favor in December 2011.  On January 5, 2012, the plaintiff filed an appeal of the summary judgment. HealthTronics, Inc. has been responsible for the defense of the lawsuit on behalf of the Company and believes the case is unfounded and is contesting the claims vigorously.

14.          401(k) plan

The Company sponsors a 401(k) plan that covers all employees who meet the eligibility requirements.  The Company matched 50% of employee contributions up to 6% of their compensation effective until January 31, 2012.  Effective February 1, 2012, the Company amended the 401(k) plan to make the Company matching contribution discretionary and discontinued the Company match.  The Company contributed $9,664 and $17,857 to the plan for the three months ended March 31, 2012 and 2011, respectively.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

15.          Stock-based compensation

On November 1, 2010, the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (the “Amended Plan”).  The Amended Plan permits grants of awards to selected employees, directors and advisors of the Company in the form of restricted stock or options to purchase shares of Common Stock.  The Amended Plan is currently administered by the board of directors of the Company.  The Amended Plan gives broad powers to the board of directors of the Company to administer and interpret the particular form and conditions of each option.  Stock options granted under the Amended Plan are non-statutory options which generally vest over a period of up to four years, and have a ten-year term.  The options are granted at an exercise price determined by the board of directors of the Company to be the fair market value of the common stock on the date of the grant.  The Amended Plan reserves 5,000,000 shares of Common Stock for grant.

The Company recognized as compensation cost for all outstanding stock options, restricted stock and warrants granted to employees and directors, $262,176 and $152,448 for the three months ended March 31, 2012 and 2011, respectively.

A summary of option activity as of March 31, 2012 and December 31, 2011, and the changes during the three months ended March 31, 2012, is presented as follows:

				Weighted
				Average
				Exercise Price
	Options			per share
Outstanding as of December 31, 2011		4,365,546		$	2.82
Granted		100,000		$	0.44
Exercised		-		$	-
Forfeited or expired		(54,000	)	$	2.73
Outstanding as of March 31, 2012		4,411,546		$	2.77
Exercisable		3,064,574		$	2.96

The weighted average remaining contractual term for outstanding and exercisable stock options was 6.0 years as of March 31, 2012, and 6.3 years as of December 31, 2011.

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SANUWAVE HEALTH, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

15.          Stock-based compensation (continued)

A summary of the Company’s nonvested options as of March 31, 2012 and December 31, 2011, and changes during the three months ended March 31, 2012, is presented as follows:

				Weighted
				Average
				Exercise Price
	Options			per share
Outstanding as of December 31, 2011		1,314,722		$	2.49
Granted		100,000		$	0.44
Vested		(51,250	)	$	2.29
Forfeited or expired		(16,500	)	$	3.19
Outstanding as of March 31, 2012		1,346,972		$	2.33

16.          Warrants

A summary of the warrant activity as of March 31, 2012 and December 31, 2011, and the changes during the three months ended March 31, 2012, is presented as follows:

	Class A		Class B		Class D		Class E
	Warrants		Warrants		Warrants		Warrants
Outstanding as of December 31, 2011		1,106,627		1,106,627		4,235,160		3,576,737
Issued		-		-		-		-
Exercised		-		-		-		-
Cancelled		-		-		-		-
Outstanding as of March 31, 2012		1,106,627		1,106,627		4,235,160		3,576,737

The Class A, Class B and Class E Warrants expire five years from date of issuance and the Class D Warrants expire two years from date of issuance.  The Class A and Class E Warrants have an exercise price of $4.00 per share, the Class B Warrants have an exercise price of $8.00 per share, and the Class D Warrants have an exercise price of $2.00 per share.

The exercise price and the number of shares covered by the warrants will be adjusted if the Company has a stock split, if there is a recapitalization of the Company’s Common Stock, or if the Company consolidates with or merges into another company.

17.          Subsequent events

The Company has evaluated subsequent events through the date of issuance of the condensed consolidated financial statements.

In April 2012, the shareholders of the Company approved increasing the number of authorized shares of Common Stock to 155,000,000.  The Company filed a Definitive Schedule 14C with the SEC on April 16, 2012 and sent a copy to shareholders of record on that date.  The Company expects to file its amended articles of incorporation with the state of Nevada in May 2012.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of and for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the SEC on March 14, 2012.

Overview

We are an emerging global regenerative medicine company focused on the development and commercialization of noninvasive, biological response activating devices for the repair and regeneration of tissue, musculoskeletal and vascular structures.  Our portfolio of products and product candidates activate biologic signaling and angiogenic responses, including new vascularization and microcirculatory improvement, helping to restore the body’s normal healing processes and regeneration.  We intend to apply our Pulsed Acoustic Cellular Expression (PACE) technology in wound healing, orthopedic/spine, plastic/cosmetic and cardiac conditions.

We believe we have demonstrated that our PACE technology is safe and effective in stimulating healing in chronic conditions of the foot and the elbow through our United States Food and Drug Administration (“FDA”) Class III Premarket Approval (“PMA”) Ossatron® device, and in the stimulation of bone and chronic tendonitis regeneration in the musculoskeletal environment through the utilization of our Ossatron, Evotron®, and orthoPACE® devices in Europe.  Our lead product candidate for the global wound care market, dermaPACE®, has received the European CE Mark allowing for commercial use on acute and chronic defects of the skin and subcutaneous soft tissue.We currently do not have any commercial products in the United States.  Revenues are from sales of CE Marked devices and accessories in Europe, Canada and Asia.

We are now entirely focused on developing our PACE technology to stimulate healing in:

· wound conditions, including diabetic foot ulcers, venous ulcers, pressure sores, burns and other skin eruption conditions;

· orthopedic/spine applications, such as speeding the healing of fractures (including nonunion or delayed-union conditions), improving bone density in osteoporosis, fusing bones in the extremities and spine, eliminating chronic pain in joints from trauma or arthritis, and other potential sports injury applications;

· plastic/cosmetic applications such as cellulite smoothing, graft and transplant acceptance, skin tightening, scarring and other potential aesthetic uses; and

· cardiac applications for removing plaque due to atherosclerosis and improving heart muscle performance.

Recent Developments

Our lead device product for the global wound care market, dermaPACE, has completed its pivotal Phase III, investigational device exemption (IDE) trial in the United States for the treatment of diabetic foot ulcers. The primary study goal was to establish superiority in diabetic foot ulcer healing rates using the dermaPACE treatment compared to Sham-control, when both are combined with the current standard of care.  The standard of care included wet-to-dry dressings, the most widely used primary dressing material in the United States, and offloading with a walking boot for ulcers located on the plantar surface of the foot.

A total of 206 patients entered the dermaPACE study at 24 sites.  The patients in the study were followed for a total of 24 weeks.  The study’s primary endpoint, wound closure, was defined as “successful” if the skin was 100% reepithelialized at 12 weeks without drainage or dressing requirements confirmed at two consecutive study visits.

A summary of the key study findings were as follows:

· Patients treated with dermaPACE showed a strong positive trend in the primary endpoint of 100% wound closure. Treatment with dermaPACE increased the proportion of diabetic foot ulcers that closed within 12 weeks by 36%, although the rate of complete wound closure between dermaPACE and Sham-control at 12 weeks in the ITT population was not statistically significant at the 95% confidence level used throughout the study (p=0.363). There were 22 out of 107 (21%) dermaPACE subjects who achieved complete wound closure at 12 weeks compared with 15 out of 99 (15%) Sham-control subjects.

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· In addition to the originally proposed 12-week efficacy analysis, the FDA expressed interest in seeing the efficacy analysis carried over the full 24 weeks of the study. In response, we conducted a series of secondary analyses of the primary endpoint of complete wound closure at 12 weeks and at each subsequent study visit out to 24 weeks.  The primary efficacy endpoint of complete wound closure reached statistical significance at 20 weeks in the ITT population with 36% of dermaPACE subjects achieving complete wound closure compared with 23% of Sham-control subjects (p=0.047); in the EE population 38% of dermaPACE subjects achieved complete wound closure beginning at 20 weeks, compared with 21% of Sham-control subjects (p=0.018); at 24 weeks dermaPACE achieved 40% complete wound closure in the ITT population (p=0.054) and 41% complete wound closure in the EE population (p=0.022).

· Subjects treated with dermaPACE achieved a significant increase in the rate of complete wound closure or ≥90% wound area reduction by or at 12 weeks (p<0.05).

· Within 6 weeks following the initial dermaPACE procedure, and consistently throughout the 24-week period, dermaPACE significantly reduced the size of the target ulcer compared with subjects randomized to receive Sham-control (p<0.05).

· Of the subjects who achieved complete wound closure at 12 weeks, the recurrence rate at 24 weeks was only 4.5% in the dermaPACE group compared with 20% in the Sham-control group.

· Importantly, there were no meaningful statistical differences in the adverse event rates between the dermaPACE treated patients and the Sham-control group.  There were no issues regarding the tolerability of the treatment which suggests that a second course of treatment, if needed, is a clinically viable option.

We filed with the FDA the third and final module of the dermaPACE PMA application in June 2011. In December 2011, we received a major deficiency letter from the FDA regarding the FDA’s review of the dermaPACE PMA. The FDA issues a major deficiency letter to the applicant when the PMA lacks significant information necessary for FDA to complete its review or to determine whether there is reasonable assurance that the device is safe and effective for its intended use. The FDA comments on the application in detail and requests the applicant to amend the application to respond to the cited deficiencies and provide the necessary information.

In its December 2011 letter, the FDA cited, among other deficiencies, the dermaPACE study’s previously disclosed failure to meet the study’s primary endpoint of 100% wound closure compared with Sham-control at the 12-week time point. Among the letter’s recommendations to address the deficiency is for us to design and conduct another clinical trial using the findings from any subgroup(s) that may support the safety and effectiveness of the dermaPACE device. We have evaluated the comments in the FDA’s letter and after further analyses of the clinical data and informal, non-binding interaction with the FDA, we now expect to conduct additional clinical work to provide support for the FDA to approve the dermaPACE PMA. We have finalized our clinical study plan and submitted to the FDA a supplemental application for an additional clinical trial. 

The FDA has granted conditional approval of our IDE supplement for an additional clinical trial.  We estimate the clinical trial could be completed and submitted in support of a PMA application for dermaPACE in as early as 20 months from trial initiation, assuming such data to be collected meets the agreed upon statistical and clinical plan of success. We worked closely with the FDA to develop the protocol and statistical plan that were submitted in the IDE Supplement. A substantial component of this work involved using Bayesian statistical principles to define the dermaPACE treatment benefit established in our previously conducted pivotal study. Bayesian designs are supported by the FDA where there is strong prior evidence that can be incorporated into the clinical study design. By incorporating the prior positive information regarding complete wound closure after one treatment cycle to bear on the design of the additional study, substantially fewer patients should be required than would otherwise be the case while still ensuring adequate statistical power. This approach will save significant time and preserve scientific rigor.

Importantly, the study design allows for controlled interim monitoring of the data by an independent Data Monitoring Committee (DMC) to determine whether study success has been achieved.  The first analysis for success is projected to occur after 90 patients (approximately 45 per arm) have completed the 12-week primary efficacy evaluation period. If study data achieves pre-defined statistical and clinical success criteria associated with wound closure favoring dermaPACE, then the clinical trial can be stopped, and we will submit an amendment to the current PMA for approval. The clinical trial plan incorporates the same primary efficacy endpoint of complete wound closure at 12 weeks as was utilized in the recently completed pivotal trial.  Similar to the previous trial, four (4) dermaPACE procedures will be administered during the first two weeks following subject enrollment. However, up to four (4) additional dermaPACE procedures can now be delivered bi-weekly between weeks 4 and 10 which we believe will increase the between-group difference in complete wound closure in favor of dermaPACE from that observed in the first clinical trial. We have already identified clinical study sites and are in the process of qualifying them for participation.  Patient enrollment is expected to begin once Institutional Review Board (IRB) approvals and appropriate funding to conduct the study are in place, which is forecasted to occur as early as the third quarter of this year.

As previously announced, we have retained Canaccord Genuity Inc., a leading investment bank, to explore capital fund raising and/or strategic options to fund this new clinical work.

Financial Overview

Our independent registered public accounting firm in 2011 has issued a “going concern” statement in its report on our consolidated financial statements for the year ended December 31, 2011, stating that we had a net loss and negative cash flows from operations in fiscal 2011, and that we have an accumulated deficit.  Accordingly, those conditions raise substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements do not include any adjustments that might result from this going concern uncertainty.

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Since our inception in 2005, we have funded our operations from the sale of capital stock, the issuance of notes payable to related parties, the issuance of promissory notes, the sale of our veterinary division in June 2009, and product sales.  At March 31, 2012, the balance of cash and cash equivalents totaled $2,421,809.

We expect to continue to incur significant research and development expenses as a result of new and ongoing clinical and pre-clinical studies in the United States and in Europe, as well as expenses associated with regulatory and patent filings.  In addition, we anticipate that our general and administrative expenses will continue to support our operations, facilities and other administrative activities related to our efforts to bring our product candidates to commercialization.  We will require additional capital to continue to implement our business strategies.  There can be no assurance that we will be successful in raising such capital.  See “Liquidity and Capital Resources.”

Since our inception, we have incurred losses from operations each year.  As of March 31, 2012, we had an accumulated deficit of $66.3 million.  Although the size and timing of our future operating losses are subject to significant uncertainty, we expect that operating losses will continue over the next few years as we continue to fund our research and development activities, clinical trials and the FDA approval process and as we prepare for a future sales network to market our products.

We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to the numerous risks and uncertainties associated with developing products, including the uncertainty of:

· the scope, rate of progress and cost of our clinical trials;

· future clinical trial results;

· the cost and timing of regulatory approvals;

· the establishment of successful marketing, sales and distribution of our products;

· the cost and timing associated with establishing reimbursement for our products;

· the timing and results of our pre-clinical research programs;

· the effects of competing technologies and market developments; and

· the industry demand and patient wellness behavior.     

Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our operations, financial position and liquidity.  A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 14, 2012.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.  The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses, fair valuation of inventory, fair valuation of stock related to stock-based compensation and income taxes.  We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.   Our actual results may differ from these estimates under different assumptions or conditions.  The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements.  The results of our operations for any historical period are not necessarily indicative of the results of our operations for any future period.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements filed with our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 14, 2012, we believe that the following accounting policies relating to revenue recognition, research and development costs, inventory valuation, stock-based compensation and income taxes are significant; therefore, they are important to aid investors in fully understanding and evaluating our reported financial results.

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Revenue Recognition

Sales of medical devices, including related applicators and applicator kits, are recognized when shipped to the customer.  Shipments under agreements with distributors are invoiced at a fixed price, are not subject to return, and payment for these shipments is not contingent on sales by the distributor.  We recognize revenue on shipments to distributors in the same manner as with other customers.  Fees from services performed are recognized when the service is performed.

Research and Development Costs

We expense costs associated with research and development activities as incurred.  We evaluate payments made to suppliers and other vendors and determine the appropriate accounting treatment based on the nature of the services provided, the contractual terms, and the timing of the obligation. Research and development costs include payments to third parties that specifically relate to our products in clinical development, such as payments to contract research organizations, clinical investigators, clinical related consultants, contract manufacturer development costs and insurance premiums for clinical studies.  In addition, employee costs (salaries, payroll taxes, benefits and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, quality control, and research and development departments are classified as research and development costs.

Inventory Valuation

We value our inventory at the lower of our actual cost or the current estimated market value.  We regularly review existing inventory quantities and expiration dates of existing inventory to evaluate a provision for excess, expired, obsolete and scrapped inventory based primarily on our historical usage and anticipated future usage.  Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have an impact on the value of our inventory and our reported operating results.

Inventory is carried at the lower of cost or market, which is valued using first in, first out (“FIFO”), and consists primarily of devices and the component material for assembly of finished products, less reserves for obsolescence.

Stock-based Compensation

On November 1, 2010, the board of directors of the Company approved the Amended and Restated 2006 Stock Incentive Plan of SANUWAVE Health, Inc. effective as of January 1, 2010 (previously defined as the “Amended Plan”).  The Amended Plan provides that stock options, and other equity interests or equity-based incentives, may be granted to key personnel, directors and advisors at an exercise price equal to the fair market value of the Common Stock at the time the option is granted, which is approved by the Company’s board of directors. The maximum term of any option granted pursuant to the Amended Plan is ten years from the date of grant.

In accordance with ASC 718, Compensation – Stock Compensation (formerly included in SFAS No. 123(R),Accounting for Stock-Based Compensation), the fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.  The expected terms of options granted represent the period of time that options are estimated to be outstanding and are derived from the contractual terms of the options.  We amortize the fair value of each option over each option’s vesting period.

Income Taxes

We account for income taxes utilizing the asset and liability method prescribed by the provisions ofASC 740, Income Taxes (formerly SFAS No. 109, Accounting for Income Taxes).  Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A valuation allowance is provided for the deferred tax assets related to future years, including loss carryforwards, if there is not sufficient evidence to indicate that the results of operations will generate sufficient taxable income to realize the net deferred tax asset in future years.

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We have adopted a provision of ASC 740, Income Taxes (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)).  ASC 740 specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return.  ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions would “more-likely-than-not” be sustained if challenged by the applicable tax authority.  Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year.

Results of Operations for the Three Months ended March 31, 2012 and 2011 (Unaudited)

Revenues and Cost of Revenues

Revenues for the three months ended March 31, 2012 were $238,540, compared to $251,753 for the same period in 2011, a decrease of $13,213, or 5%.  Revenues for sale of new devices to our European distributors were lower in 2012 offset partially by increased sales of higher margin refurbishment applicators as compared to the same period in 2011.

Cost of revenues for the three months ended March 31, 2012 was $71,772, compared to $93,298 for the same period in 2011.  Gross profit as a percentage of revenues was 70% for the three months ended March 31, 2012, as compared to 63% for the same period in 2011.  The increase in gross profit as a percentage of revenues was due to increased sales of higher margin applicators and wound kits in 2012, as compared to 2011, due to more devices being in service in 2012 as compared to 2011.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2012 were $603,797, compared to $749,299 for the same period in 2011, a decrease of $145,502, or 19%.  Research and development costs include payments to third parties that specifically relate to our products in clinical development, such as payments to contract research organizations, clinical investigators, clinical related consultants, contract manufacturer development costs and insurance premiums for clinical studies.  In addition, employee costs (salaries, payroll taxes, benefits, and travel) for employees of the regulatory affairs, clinical affairs, quality assurance, quality control, and research and development departments are classified as research and development costs.  Research and development expenses decreased in 2012 due to lower expenses related to clinical results analysis and related expenses.  Consulting expenses related to clinical results analysis were higher in 2011 as we prepared for the submission to the FDA in June 2011 of the PMA for dermaPACE for treating diabetic foot ulcers in the United States.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2012 were $1,237,540, compared to $1,382,185 for the same period in 2011, a decrease of $144,645, or 10%.   General and administrative expenses include the non-cash costs for stock-based compensation of $262,176 and $152,448 for the three months ended March 31, 2012 and 2011, respectively.  The increase in non-cash compensation costs for stock compensation of $109,728 was primarily due to the November 2011 employee stock options granted and the March 2012 options granted to members of our medical advisory board.

Excluding the non-cash costs for stock-based compensation, general and administrative expenses were $975,364 for the three months ended March 31, 2012, as compared to $1,229,737 for the same period in 2011, a decrease of $254,373, or 21%.  The decrease in general and administrative expenses is primarily due to decreased investor relations expenses and decreased legal costs for patent defense activities.

Other Income (Expense)

In June 2009, we sold our veterinary division to Pulse Veterinary Technologies, LLC (“Pulse Vet”).  Under the terms of the asset purchase agreement, we continued to provide transitional production services at the direction of Pulse Vet for a fee until these transitional services were transitioned to Pulse Vet.  Pulse Vet took over production services effective November 1, 2011.  The income for these transitional services was zero and $112,500 for the three months ended March 31, 2012 and 2011, respectively, a decrease of $112,500 or 100%.  The decrease was due to the termination of the agreement effective October 31, 2011.

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Interest expense, net, for the three months ended March 31, 2012 was $78,856, compared to $236,280 for the same period in 2011, a decrease of $157,424, or 67%.  The decrease was due to no interest expense for the three months ended March 31, 2012 on certain notes payable to related parties as a result of the note exchange for Common Stock and warrants on April 4, 2011.

Provision for Income Taxes

At March 31, 2012, we had federal net operating loss carryforwards of $48,915,087 for tax years through the year ended December 31, 2011 that will begin to expire in 2025.  Our ability to use these net operating loss carryforwards to reduce our future federal income tax liabilities could be subject to annual limitations.  Additionally, because United States tax laws limit the time during which net operating loss carryforwards may be applied against future taxable income and tax liabilities, we may not be able to take advantage of our net operating loss carryforwards for federal income tax purposes.

Net Loss

Net loss for the three months ended March 31, 2012 was $1,835,315, or ($0.09) per basic and diluted share, compared to a net loss of $2,183,326, or ($0.14) per basic and diluted share, for the three months ended March 31, 2011.  We anticipate that our operating losses will continue over the next several years as we continue to fund our research and development activities and clinical trials, and as we prepare for a future sales network to market our products.

Liquidity and Capital Resources

The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources to continue our research and development efforts, including clinical trials.  Because of the significant time it will take for our products to complete the clinical trial process, and for us to obtain approval from regulatory authorities and successfully commercialize our products, we will require substantial additional capital resources.  We incurred a net loss of $1,835,315 for the three months ended March 31, 2012 and a net loss of $10,238,797 for the year ended December 31, 2011.  These operating losses create uncertainty about our ability to continue as a going concern.  As of March 31, 2012, we had cash and cash equivalents of $2,421,809.  We may raise additional capital through the issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt, or an investment by a strategic partner in a specific clinical indication or market opportunity, or we may sell all or a portion of the Company’s assets, liquidate assets, or seek relief through a filing under the U.S. Bankruptcy Code. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders.  Additional financing may not be available on acceptable terms, if at all.  Capital may become difficult or impossible to obtain due to poor market or other conditions outside of our control.  Our consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.

We may also attempt to raise additional capital if there are favorable market conditions or other strategic considerations even if we have sufficient funds for planned operations.  To the extent that we raise additional funds by issuance of equity securities, our shareholders will experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility.  To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our intellectual property or grant licenses on terms that are not favorable to us.  In addition, payments made by potential collaborators or licensors generally will depend upon our achievement of negotiated development and regulatory milestones.  Failure to achieve these milestones would harm our future capital position.

For the three months ended March 31, 2012, net cash used by operating activities was $1,490,445, primarily consisting of compensation costs, research and development activities and general corporate operations.  The net cash used by operating activities included $168,326 for the reduction in accounts payable and accrued expenses during the period.  Cash and cash equivalents decreased by $1,487,574 for the three months ended March 31, 2012.

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For the three months ended March 31, 2011, net cash used by operating activities was $2,022,689, primarily consisting of compensation costs, clinical trials, research and development activities and general corporate operations.  The net cash used by operating activities included $203,136 for the reduction in accounts payable and accrued expenses during the period.  Net cash provided by financing activities for the three months ended March 31, 2011 was $3,900,334, which consisted of the proceeds from the exercise of unit options.  Cash and cash equivalents increased by $1,888,643 for the three months ended March 31, 2011.

Segment and Geographic Information

We have determined that we are principally engaged in one operating segment.  The Company’s revenues are generated from sales in Europe, Canada and Asia.

Other Comprehensive Income (Loss)

FASB ASC 220, Comprehensive Income (formerly SFAS No. 130, Reporting Comprehensive Income), establishes standards for reporting and display of comprehensive income (loss) and its components in the condensed consolidated financial statements.  Our other comprehensive income (loss) as defined by ASC 220 is the total of net income (loss) and all other changes in equity resulting from non-owner sources, including unrealized gains (losses) on foreign currency translation adjustments.

Contractual Obligations

Our major outstanding contractual obligations relate to our operating leases for our facilities, purchase and supplier obligations for product component materials and equipment, and our notes payable.  We have disclosed these obligations in our most recent Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.

Effects of Inflation

Because our assets are, to an extent, liquid in nature, they are not significantly affected by inflation.  However, the rate of inflation affects such expenses as employee compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market.  To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our condensed consolidated financial condition and results of operations.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting, except as discussed above.

PART II — OTHER INFORMATION

Item 6.      EXHIBITS

Exhibit No.                      Description

2.1 Agreement and Plan of Merger, dated as of September 25, 2009, by and between Rub Music Enterprises, Inc., RME Delaware Merger Sub, Inc. and SANUWAVE, Inc. (Incorporated by reference to Form 8-K filed with the SEC on September 30, 2009).

3.1 Articles of Incorporation (Incorporated by reference to the Form 10-SB filed with the SEC on December 18, 2007).

3.2 Certificate of Amendment to the Articles of Incorporation (Incorporated by reference to Appendix A to the Definitive Schedule 14C filed with the SEC on October 16, 2009).

3.3 Bylaws (Incorporated by reference to the Form 10-SB filed with the SEC on December 18, 2007).

31.1* Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2* Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1* Section 1350 Certification of the Chief Executive Officer.

32.2* Section 1350 Certification of the Chief Financial Officer.

101.INS** XBRL Instance

101.SCH** XBRL Taxonomy Extension Schema

101.CAL** XBRL Taxonomy Extension Calculation

101.DEF** XBRL Taxonomy Extension Definition

101.LAB** XBRL Taxonomy Extension Labels

101.PRE** XBRL Taxonomy Extension Presentation

______________________________________________________________

*   Filed herewith

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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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.

Dated: May 14, 2012

SANUWAVE HEALTH, INC.

By:        /s/ Christopher M. Cashman                                       

Christopher M. Cashman

Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signatures	Capacity	Date
By: /s/ Christopher M. Cashman Name: Christopher M. Cashman	Chief Executive Officer and President; Director	May 14, 2012
	(principal executive officer)
By: /s/ Barry J. Jenkins Name: Barry J. Jenkins	Chief Financial Officer (principal financial and accounting officer)	May 14, 2012
By: /s/ John F. Nemelka Name: John F. Nemelka	Director	May 14, 2012
By: /s/ Thomas H. Robinson Name: Thomas H. Robinson	Director	May 14, 2012
By: /s/ Kevin A. Richardson, II Name: Kevin A. Richardson, II	Director	May 14, 2012

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