Cardiac Science 10-Q 2007 Q1 Quarterly report

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, 2007

OR

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

Commission File Number 000-51512

Cardiac Science Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation) 94-3300396
(IRS Employer Identification No.)

3303 Monte Villa Parkway
Bothell, Washington 98021
(Address of principal executive offices)

(425) 402-2000
(Registrant’s telephone number)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     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.    þ    Yes      o    No

     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   þ     Non-accelerated filer   o

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

     The number of shares outstanding of the registrant’s common stock as of May 2, 2007 was 22,686,587.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3.	Defaults Upon Senior Securities		26
Item 4.	Submission of Matters to a Vote of Security Holders		26
Item 5.	Other Information		26
Item 6.	Exhibits		27
SIGNATURE			28
EXHIBIT 10.61
EXHIBIT 10.62
EXHIBIT 10.66
EXHIBIT 10.67
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Page 2 of 28

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(In thousands)	2007			2006
ASSETS
Current Assets:
Cash and cash equivalents	$	12,091		$	9,819
Short-term investments		149			547
Accounts receivable, net of allowance for doubtful accounts of $636 and $907, respectively		27,229			26,971
Inventories		18,237			17,617
Deferred income taxes, net		3,927			3,902
Prepaid expenses and other current assets		2,705			2,121
Total current assets		64,338			60,977
Other assets		208			209
Machinery and equipment, net of accumulated depreciation and amortization of $10,933 and $10,245, respectively		5,543			5,956
Deferred income taxes, net		40,600			40,525
Intangible assets, net of accumulated amortization of $6,979 and $6,111, respectively		31,001			31,869
Investment in unconsolidated entities		431			496
Goodwill		107,613			107,613
Total assets	$	249,734		$	247,645
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	13,944		$	11,761
Accrued liabilities		9,137			9,890
Warranty liability		2,608			2,532
Deferred revenue		7,246			7,111
Total current liabilities		32,935			31,294
Other liabilities		524			679
Total liabilities		33,459			31,973
Minority interest		53			75
Commitments and contingencies
Shareholders’ Equity:
Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares issued or outstanding as of March 31, 2007 and December 31, 2006, respectively		—			—
Common stock (65,000,000 shares authorized), $0.001 par value, 22,647,705 and 22,598,014 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		222,045			221,213
Accumulated other comprehensive income (loss)		(21	)		20
Accumulated deficit		(5,802	)		(5,636	)
Total shareholders’ equity		216,222			215,597
Total liabilities and shareholders’ equity	$	249,734		$	247,645

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

Page 3 of 28

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2007			2006
Revenues:
Products	$	37,691		$	34,569
Service		3,979			4,546
Total revenues		41,670			39,115
Cost of Revenues:
Products		18,837			17,680
Service		2,953			3,042
Total cost of revenues		21,790			20,722
Gross profit		19,880			18,393
Operating Expenses:
Research and development		2,982			2,970
Sales		8,842			7,543
Marketing		2,266			1,840
General and administrative		6,200			5,811
Total operating expenses		20,290			18,164
Operating income (loss)		(410	)		229
Other Income (Expense):
Interest income (expense), net		22			(50	)
Other income, net		125			231
Total other income		147			181
Income (loss) before income tax benefit (expense) and minority interest		(263	)		410
Income tax benefit (expense)		75			(159	)
Income (loss) before minority interest		(188	)		251
Minority interest		22			13
Net income (loss)	$	(166	)	$	264
Net income (loss) per share — basic	$	(0.01	)	$	0.01
Net income (loss) per share — diluted	$	(0.01	)	$	0.01
Weighted average shares outstanding — basic		22,611,743			22,430,814
Weighted average shares outstanding — diluted		22,611,743			22,607,617

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

Page 4 of 28

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
(In thousands)	2007			2006
Operating Activities:
Net income (loss)	$	(166	)	$	264
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,606			1,557
Deferred income taxes		(75	)		63
Stock-based compensation		613			449
Minority interest		(22	)		(13	)
Loss on disposal of equipment		3			—
Changes in operating assets and liabilities, net of business acquired:
Accounts receivable, net		(258	)		34
Inventories		(607	)		2,054
Prepaid expenses and other assets		(584	)		616
Accounts payable		2,175			118
Accrued liabilities		(638	)		(1,597	)
Warranty liability		76			11
Deferred revenue		135			13
Net cash flows provided by operating activities		2,258			3,569
Investing Activities:
Purchases of short-term investments		(149	)		—
Maturities of short-term investments		547			—
Purchases of machinery and equipment		(328	)		(396	)
Payments related to the purchase of Cardiac Science, Inc.		(270	)		(773	)
Net cash flows used in investing activities		(200	)		(1,169	)
Financing Activities:
Proceeds from exercise of stock options and issuance of shares under employee purchase plan		214			223
Net cash flows provided by financing activities		214			223
Net change in cash and cash equivalents		2,272			2,623
Cash and cash equivalents, beginning of period		9,819			3,546
Cash and cash equivalents, end of period	$	12,091		$	6,169

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

Page 5 of 28

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

     Organization and Description of Business

          Cardiac Science Corporation was incorporated in Delaware on February 24, 2005 as CSQ Holding Company to effect the business combination of Quinton Cardiology Systems, Inc. (“Quinton”) and Cardiac Science, Inc. (“CSI”), the “merger transaction.” The merger transaction was consummated on September 1, 2005. In connection with the merger transaction, the outstanding shares of common stock of Quinton and CSI were cancelled and stockholders of Quinton and CSI were issued common stock of Cardiac Science Corporation in consideration of their shares of Quinton and CSI common stock.

          The Company develops, manufactures and markets a family of advanced cardiac monitoring and therapeutic cardiology devices and systems, including automated external defibrillators (“AEDs”), electrocardiographs, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, patient monitor defibrillators and cardiology data management systems. The Company also sells a variety of related products and consumables and provides a comprehensive portfolio of training, maintenance and support services. The Company markets its products under the Burdick, Powerheart and Quinton brand names.

     Basis of Presentation

          The condensed financial statements present the financial condition and results of operations of the Company on a consolidated basis. All intercompany accounts and transactions have been eliminated. The condensed consolidated balance sheet dated March 31, 2007, the condensed consolidated statements of operations for the three month periods ended March 31, 2007 and 2006 and the condensed consolidated statements of cash flows for the three month periods ended March 31, 2007 and 2006 have been prepared by the Company and are unaudited. The condensed consolidated balance sheet dated December 31, 2006 was derived from the Company’s audited financial statements. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The notes to the audited consolidated financial statements included in Cardiac Science Corporation’s annual report on Form 10-K for the fiscal year ended December 31, 2006 provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this report. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company for the interim periods presented, have been made. The results of operations for such interim periods are not necessarily indicative of the results for the full year or any future period.

     Use of Estimates

          The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. These estimates include the allocation of the purchase price, collectibility of accounts receivable, the recoverability of inventory, the adequacy of warranty liabilities, the valuation of stock awards, intra-period tax allocation, the realizability of investments, the realizability of deferred tax assets and valuation and useful lives of tangible and intangible assets, including goodwill, among others. The market for the Company’s products is characterized by intense competition, rapid technological development and frequent new product introductions, all of which could affect the future realizability of the Company’s assets. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

     Net Income (Loss) Per Share

          In accordance with Statement of Financial Accounting Standard No. 128, “Computation of Earnings Per Share,” (“SFAS 128”) basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of shares issuable upon the exercise of stock options, non-vested stock awards, warrants and issuance of shares under the Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Common equivalent shares are excluded from the calculation if their effect is antidilutive.

Page 6 of 28

          The following table sets forth the computation of basic and diluted net income per share:

	Three Months Ended
	March 31,
(in thousands, except share data)	2007			2006
Numerator:
Net income (loss)	$	(166	)	$	264
Denominator:
Weighted average shares for basic calculation		22,611,743			22,430,814
Incremental shares from employee stock options and ESPP		—			176,803
Weighted average shares for diluted calculation		22,611,743			22,607,617

          The following table sets forth the number of antidilutive shares issuable upon exercise of stock options, non-vested stock awards, ESPP and warrants excluded from the computation of diluted income per share:

	Three Months Ended
	March 31,
	2007		2006
Antidilutive shares issuable upon exercise of stock options		3,189,836		1,921,343
Antidilutive shares issuable upon exercise of warrants		330,609		330,909
Antidilutive shares related to non-vested stock awards and ESPP		268,330		—
Total		3,788,775		2,252,252

     Customer and Vendor Concentrations

          The following table summarizes the customers accounting for 10% or more of total revenues:

	Three Months Ended
	March 31,
Customer	2007			2006
Customer 1		11	%		*
Customer 2		*			13	%

* Did not exceed 10%.

          The following table summarizes the vendors accounting for 10% or more of purchases:

	Three Months Ended
	March 31,
Vendor	2007			2006
Vendor 1		10	%		*
Vendor 2		*			13	%

* Did not exceed 10%.

          Although components are available from other sources, a key vendor’s inability or unwillingness to supply components in a timely manner or on terms acceptable to the Company could adversely affect the Company’s ability to meet customers’ demands.

     Taxes Collected from Customers and Remitted to Governmental Authorities

          The Company uses the net method (excluded from revenue) for reporting taxes that are assessed by a governmental authority that are directly imposed on revenue-producing transactions, i.e. sales, use and value-added taxes.

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     Reclassifications

          Certain reclassifications of prior period balances have been made for consistent presentation with the current period. Theses reclassifications had no impact on net income (loss) or shareholders’ equity as previously reported.

     Recent Accounting Pronouncements

          In September 2006, the Financial Standards Accounting Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will adopt the new requirements beginning in the first quarter of 2008. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). Under the provisions of SFAS 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a contract-by-contract basis. Changes in fair value will be recognized in earnings each reporting period. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will adopt the new requirements beginning in the first quarter of 2008. The Company is currently assessing the impact of this Statement on its consolidated financial statements.

     2. Merger Transaction with Cardiac Science, Inc.

          On September 1, 2005, the Company, Quinton and CSI completed the merger transaction which was accounted for as an acquisition of CSI by Quinton under the purchase method of accounting. Quinton was the acquiring entity for financial reporting purposes based on the criteria for determining the acquirer set forth in SFAS No. 141, “Business Combinations” (“SFAS 141”). Under the purchase method of accounting, the total estimated purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed in connection with the merger transaction, based on their fair values as of the closing date. The excess of purchase price over the tangible and identifiable intangible assets acquired net of liabilities assumed is allocated to goodwill. Valuation specialists have conducted valuations in order to assist management in determining the fair values of the intangible and certain tangible assets acquired. The work performed by valuation specialists has been considered in management’s estimates of fair values.

          As a result of the merger transaction, there has been an ownership change within the meaning of Sections 382 and 383 of the Internal Revenue Code. As a result of such ownership change, the amount of taxable income in any year (or portions of a year) subsequent to the ownership change that may be offset by Quinton’s and CSI’s net operating losses (“NOL“s) from periods prior to the date of such ownership change generally cannot exceed the Section 382 limitation. Based on currently available information, the Company does not expect that the ownership change will materially affect the ultimate availability of Quinton’s NOLs or tax credit carryforwards to reduce tax liabilities in future taxable periods. The ownership change reduces the availability of a significant portion of CSI’s NOLs, and its tax credit carryforwards, to reduce future income tax liabilities.

          The purchase consideration of $181,075,000 was allocated to CSI assets and liabilities and consisted of the following:

• 11,467,753 shares of common stock valued at approximately $146,911,000 issued to CSI stockholders and senior note holders. The fair value of common stock issued is based on a per share value of $12.81, which is equal to Quinton’s average closing price per share as reported on The Nasdaq National Market for a five trading day period (two days before and after February 28, 2005), the announcement date of the merger transaction, adjusted by the Quinton exchange ratio.

• Cash payment of $20,000,000 to the CSI senior note holders.

• 1,229,881 vested options to purchase shares of common stock issued to CSI option holders, valued at $7,402,000 calculated using the Black-Scholes option-pricing model.

• 330,909 exercisable warrants to purchase shares of common stock issued to certain CSI warrant holders, valued at $1,320,000 calculated using the Black-Scholes option-pricing model.

• $3,198,000 in accrued liabilities related to estimated exit and severance costs.

• $2,244,000 in estimated transaction related costs of Quinton.

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          The following table summarizes total purchase consideration:

	(in thousands)
Cash	$	20,000
Shares		146,911
Options		7,402
Warrants		1,320
Accrued liabilities		3,198
Transaction costs		2,244
Total	$	181,075

          The following table summarizes the fair values of assets acquired and liabilities assumed at September 1, 2005, the date on which the merger transaction was completed, with certain fair values adjusted in the twelve months ended August 31, 2006 as additional information became available. The initial allocations of purchase cost were recorded at fair value based upon the best information available to management and were finalized when the Company obtained information related to pre-acquisition contingencies which were identified at September 1, 2005. The fair values of property and equipment and intangible assets and liabilities were valued by an independent third party. During the nine months ended September 30, 2006, certain purchase accounting adjustments related to uncertainties of income tax matters resulting from the business combination and adjustments to other assets and liabilities were made as a result of obtaining information which the Company had previously arranged to obtain. Accordingly, there was a decrease to goodwill of approximately $3,602,000. The Company does not expect additional goodwill adjustments after the allocation period ended at September 1, 2006, with the exception of income taxes.

          The adjusted allocation of the purchase price is as follows:

	(in thousands)
Cash and cash equivalents	$	6,295
Accounts receivable, net of allowance for doubtful accounts		7,098
Inventories		11,826
Net deferred tax assets, current		3,106
Prepaid expenses and other current assets		2,548
Machinery and equipment		3,979
Net deferred tax assets, non-current		29,725
Other long-term assets		661
Intangible assets		31,360
Goodwill		98,990
Total assets acquired		195,588
Liabilities assumed		(14,513	)
Net assets acquired	$	181,075

          The adjustments made to goodwill for the year ended December 31, 2006 were as follows:

	Year ended
(in thousands)	December 31, 2006
Goodwill, as reported December 31, 2005	$	102,592
Increase in accounts receivable, net of allowance for doubtful accounts		(44	)
Decrease in inventories		1,513
Decrease in net deferred tax assets, current		4,593
Increase in prepaid expenses and other current assets		(1,135	)
Increase in net deferred tax assets, non-current		(8,225	)
Decrease in liabilities assumed		(304	)
Goodwill, end of period	$	98,990

          CSI’s finished goods inventories acquired as a part of the merger transaction were recorded at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort, and raw materials inventories were recorded at estimated replacement cost. The purchase price allocated to inventories at September 1, 2005 exceeded CSI’s net book value by approximately $1,850,000. The increase in finished goods inventory value is being recorded as cost of revenues over the period that the related inventory is sold, of which approximately $1,600,000 was charged to cost of sales during the year ended December 31, 2005 and $250,000 during the quarter ended March 31, 2006.

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          Intangible assets recorded in the business combination consist of the Cardiac Science trade name of $11,380,000, developed technology of $11,330,000 and customer relationships of $8,650,000. Management has not assigned value to any in-process research and development.

          The estimate of useful lives of each intangible asset was based on an analysis by management of all pertinent factors. These factors include the expected use of the asset by the Company, the expected useful life of another asset or a group of assets to which the useful life of an asset may relate, any legal, regulatory, or contractual provisions that may limit the useful life, any legal, regulatory, or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost, the effects of obsolescence, demand, competition, and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.

          Management estimated intangible asset useful lives as eight years for developed technology and five years for customer based intangibles, resulting in a weighted average useful life of acquired amortizable intangible assets of 6.7 years as of the acquisition date. Estimated annual expense for amortization of identifiable intangible assets approximates $3,146,000 for the first five years and $1,416,000 for the next three years.

          Management has concluded that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the Cardiac Science trade name and accordingly has considered the useful life of the trade name to be indefinite.

          Goodwill relating to previous CSI acquisitions of approximately $38,100,000 is expected to be deductible for tax purposes.

3. Segment Reporting

          The Company follows the provisions of SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) which established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments to be reported in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by the Company’s chief operating decision makers, or decision making group, to perform resource allocations and performance assessments.

          The Company’s chief operating decision makers are the Chief Executive Officer and other senior executive officers of the Company. Based on evaluation of the Company’s financial information, management believes that the Company operates in one reportable segment with its various cardiology products and services.

          The Company’s chief operating decision makers evaluate revenue performance of product lines, both domestically and internationally. However, operating, strategic and resource allocation decisions are based primarily on the Company’s overall performance in its operating segment.

          The following table summarizes revenues by product line:

	Three Months Ended
	March 31,
(in thousands)	2007		2006
Cardiac monitoring products	$	16,653	$	19,849
Defibrillation products		21,038		14,720
Service		3,979		4,546
Total	$	41,670	$	39,115

          The following table summarizes revenues, which are attributed based on the geographic location of the customers:

	Three Months Ended
	March 31,
(in thousands)	2007		2006
Domestic	$	31,448	$	30,353
Foreign		10,222		8,762
Total	$	41,670	$	39,115

          All intangible assets are domestic. Long-lived assets located outside of the United States are not material.

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4. Restructuring Costs

          The merger transaction resulted in excess facilities and redundant employee positions. The Company accrued $1,418,000 of restructuring costs as part of the merger transaction purchase price for lease exit costs associated with the Irvine, California and Minnetonka, Minnesota facilities and other operating leases. In addition, a restructuring liability with an estimated fair value of $1,291,000 was acquired in the merger transaction for facilities in Solon and Warrensville, Ohio, which had been previously vacated by CSI.

          Accrued exit costs relating to the Irvine, California lease were paid mainly in the first quarter of 2006. Accrued amounts for other vacated facilities will be paid over the lease terms of the Minnetonka, Minnesota and Solon and Warransville, Ohio facilities, which end in August 2007 and January 2009, respectively.

          Of the restructuring costs accrued at March 31, 2007, $524,000 was included in Other Liabilities and $781,000 was included in Accrued Liabilities. The remaining employee severance and retention costs will be paid out through August 2007.

	Balance at									Balance at
	December 31,				Cash					March 31,
(in thousands)	2006		Additions		Expenditures			Adjustments		2007
Vacated facilities	$	1,384	$	—	$	(174	)	$	—	$	1,210
Employee severance and retention costs		266		—		(171	)		—		95
Total	$	1,650	$	—	$	(345	)	$	—	$	1,305

5. Inventories

          Inventories are valued at the lower of cost, on an average cost basis, or market and were comprised of the following:

	March 31,		December 31,
(in thousands)	2007		2006
Raw materials	$	13,502	$	13,887
Finished goods		4,735		3,730
Total inventories	$	18,237	$	17,617

6. Credit Facility

          Quinton established a line of credit in December 2002, which was assumed by the Company in the merger transaction. The credit agreement was amended in September 2005, and expires in September 2007. Borrowings under the line of credit are currently limited to the lesser of $20,000,000 or an amount based on eligible accounts receivable and inventories. Substantially all of the Company’s assets are pledged as collateral for the line of credit. This line of credit bears interest based at a rate equal to the lender’s prime rate, provided that the interest rate in effect shall not be less than 6.25% on any day. In addition, unused balances under this facility bear monthly fees equal to 0.25% per annum on the difference between the maximum credit limit and the sum of (i) the average daily principal balance during the month and (ii) the face amount of any letters of credit.

          As of March 31, 2007, the Company had capacity to borrow $20,000,000 based on eligible accounts receivable and eligible inventory, less letters of credit outstanding of $295,000. The credit facility contains standard negative covenants and restrictions on actions by the Company, including but not limited to, activity related to common stock repurchases, liens, investments, capital expenditures, indebtedness, restricted payments including cash payments of dividends, and fundamental changes in, or disposition of assets. Certain of these actions may be taken with the consent of the lender. In addition, the credit agreement requires that the Company meet certain financial covenants, namely a minimum tangible net worth measure, an adjusted quick ratio and certain reporting requirements. At March 31, 2007, the Company was in compliance with all covenants under the credit facility. At March 31, 2007 and December 31, 2006, the Company did not have any borrowings under this line of credit.

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7. Warranty Liability

          Changes in the warranty liability for the three months ended March 31, 2007 were as follows:

	Three months ended
(in thousands)	March 31, 2007
Warranty liability, beginning of the period	$	2,532
Charged to product cost of revenues		639
Warranty expenditures		(563	)
Warranty liability, end of the period	$	2,608

8. Stock-Based Compensation Plans

          The Company maintains several stock equity incentive plans under which it may grant non-qualified stock options, incentive stock options and non-vested stock awards to employees, non-employee directors and consultants. The Company also has an ESPP.

          The fair value of each option grant and ESPP purchase is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions, and the fair value of the non-vested stock awards is calculated based on the market value of the shares awarded at date of grant:

	Three Months Ended			Three Months Ended
	March 31, 2007			March 31, 2006
Stock options plans:
Volatility		49.6	%		56.0	%
Expected term (years)		6.25			6.25
Risk-free interest rate		4.8	%		4.6	%
Expected dividend yield		—			—
Fair value of options granted	$	5.06		$	6.49
Employee stock purchase plan:
Volatility		37.0	%		34.0	%
Expected term (years)		0.5			0.5
Risk-free interest rate		4.5	%		4.4	%
Expected dividend yield		—			—
Fair value of employee stock purchase rights	$	2.14		$	2.37
Non-vested stock:
Fair value of non-vested stock awards granted	$	9.07		$	10.12

          The following shares of common stock have been reserved for issuance under the Company’s stock-based compensation plans as of March 31, 2007:

Outstanding shares - 2002 Plan	2,164,881
Outstanding shares - 1997 Plan	1,024,955
Stock options available for grant	876,185
Outstanding non-vested stock awards	194,172
Employee stock purchase plan shares available for issuance	722,472
Total common shares reserved for future issuance	4,982,665

          2002 Plan —In February 2002, Quinton’s board of directors adopted and Quinton’s shareholders approved the 2002 Stock Incentive Plan (the “2002 Plan”), which became effective upon completion of Quinton’s initial public offering in May 2002 and was assumed by the Company in connection with the merger transaction. The 2002 Plan replaced Quinton’s 1998 Equity Incentive Plan (the “1998 Plan”) for purposes of all future incentive stock awards. The 2002 Plan allows the Company to issue awards of incentive or nonqualified stock options, shares of common stock or units denominated in common stock, all of which may be subject to restrictions. The 2002 Plan authorizes annual increases in shares for issuance equal to the lesser of (i) 526,261 shares, (ii) 3% of the number of shares of common stock outstanding on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, and (iii) a lesser amount established by the Company’s board of directors. Any

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shares from increases in previous years that are not issued will continue to be included in the aggregate number of shares available for future issuance.

          The following table summarizes information about the 2002 Plan option activity during the three months ended March 31, 2007:

	Shares
	Subject to
	Options
Outstanding, December 31, 2006		2,180,550
Granted		32,500
Exercised		(25,540	)
Cancelled		(22,629	)
Outstanding, March 31, 2007		2,164,881
Exercisable, March 31, 2007		1,143,875

          1997 Plan —The Company assumed CSI’s 1997 Stock Option/Stock Issuance Plan (the “1997 Plan”) in connection with the merger transaction. The 1997 Plan provides for the granting of incentive or nonqualified stock options, subject to the limitations under applicable Nasdaq rules described below, to employees of the Company, including officers, and nonqualified stock options to employees, including officers and directors of the Company, as well as to certain consultants and advisors. Shares authorized under the 1997 Plan are subject to adjustment upon the occurrence of certain events, including, but not limited to, stock dividends, stock splits, combinations, mergers, consolidations, reorganizations, reclassifications, exchanges, or other capital adjustments. Shares that are forfeited or repurchased or otherwise cease to be subject to awards without shares being issued under the 1997 Plan will again be available for issuance under the 1997 Plan.

          The following table summarizes information about the 1997 Plan option activity during the three months ended March 31, 2007:

	Shares
	Subject to
	Options
Outstanding, December 31, 2006		1,159,505
Cancelled		(134,550	)
Outstanding, March 31, 2007		1,024,955
Exercisable, March 31, 2007		52,500

          Non-vested Stock Awards —The stock award program offers employees the opportunity to earn shares of the Company’s stock over time, rather than options that give employees the right to purchase stock at a set price. Non-vested stock awards require no payment from the employee, with the exception of employee related federal taxes.

          The following table summarizes information about the non-vested stock awards activity during the year ended March 31, 2007:

	Shares
Non-vested balance, December 31, 2006		159,409
Granted		41,450
Vested		(3,601	)
Cancelled		(3,086	)
Non-vested balance, March 31, 2007		194,172

          Employee Stock Purchase Plan —The Company has an Employee Stock Purchase Plan (“ESPP”) which was established by Quinton in 2002 and was assumed by the Company in connection with the merger transaction. The ESPP permits eligible employees to purchase common stock through payroll deductions. Shares of our common stock may presently be purchased by employees at three month intervals at 85% of the fair market value on first day of the offering period or the last day of each three month purchase period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period, not to exceed 525 shares during an offering period. The Company initially reserved 175,420 shares for issuance under the ESPP. In addition, the ESPP authorizes annual increases in shares for issuance

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equal to the lesser of (i) 175,420 shares, (ii) 2% of the number of shares of common stock outstanding on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year, and (iii) a lesser amount established by the Company’s board of directors. Any shares from increases in previous years that are not actually issued will continue to be included in the aggregate number of shares available for future issuance.

          The Company issued 20,842 and 23,901 shares of common stock during the three months ended March 31, 2007 and 2006, respectively, in connection with the ESPP and received total proceeds of $145,000 and $190,000, respectively.

9. Comprehensive Income (Loss)

          The Company records all changes in equity during the period from non-owner sources as other comprehensive income or loss, such as unrealized gains and losses on the Company’s available-for-sale securities. Comprehensive income, net of any related tax effects, was as follows:

	Three months ended
	March 31,
(in thousands)	2007			2006
Net income (loss)	$	(166	)	$	264
Other comprehensive income (loss), net of related tax effects of $25 and $3 respectively		(41	)		14
Total comprehensive income (loss)	$	(207	)	$	278

10. Commitments and Contingencies

     Other Commitments

          As of March 31, 2007, the Company had purchase obligations of approximately $32,307,000 consisting of outstanding purchase orders issued in the normal course of business.

     Guarantees and Indemnities

          During its normal course of business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the Company’s customers and suppliers in connection with the sales of its products, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. Historically, the Company has not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

     Legal Proceedings

          In March 2004, William S. Parker brought suit against CSI for patent infringement in the United States District Court for the Eastern District of Michigan. The Parker patent generally covers the use of a synthesized voice to instruct a person to perform certain tasks. The Complaint alleges that certain of the Company’s AEDs infringe the patent. The patent is now expired. The Company has filed an Answer to the Complaint stating the patent is not infringed and is otherwise invalid and unenforceable. The patent was submitted for reexamination before the United States Patent and Trademark Office and emerged from reexamination in December 2005. In January 2006, the District Court issued an order lifting the stay in the litigation. Currently, the litigation is proceeding through discovery. At this stage, the Company is unable to predict the outcome of this litigation. The Company has not established an accrual for this matter because it has determined that a loss is not probable. The Company intends to continue to defend against this suit vigorously.

          The Company is subject to various other legal proceedings arising in the normal course of business. In the opinion of management, the ultimate resolution of these proceedings is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 11. Income Taxes

          The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109” (“FIN 48”) on January 1, 2007. FIN 48 clarifies the accounting for uncertainly in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). The interpretation established guidelines for recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. As a result of the implementation of FIN 48, the Company did not remove any tax exposure liabilities at March 31, 2007.

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          The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions as well as federal, state and foreign filings related to Quinton and CSI. As a result of the net operating loss carryforwards, substantially all tax years are open for U.S. federal and state income tax matters. Foreign tax filings are open for years 2001 forward.

          The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. At March 31, 2007, the Company had no accrued interest related to uncertain tax positions and no accrued penalties.

Note 12. Subsequent Events

          On April 24, 2007, the Company entered into a Settlement Agreement with Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation (collectively, “Philips”) in connection with the Company’s previously disclosed patent litigation with Philips. Under the Settlement Agreement, the parties agreed to release and discharge their respective claims that were the subject of the lawsuit and to a dismissal of the lawsuit with prejudice. The Company and Philips have covenanted not to sue each other for infringement claims with respect to their respective current products, and also to develop a dispute resolution mechanism to resolve any future disputes relating to future products. Pursuant to the Settlement Agreement, the Company and Philips entered into a Cross-License Agreement pursuant to which the Company and Philips cross-licensed, on a perpetual, non-exclusive, royalty-free basis, patents that were the subject of the lawsuit. In addition, Philips has licensed to the Company certain additional patents that were not a part of the suit on a fully-paid, perpetual, non-exclusive basis. As consideration for the license of these additional patents, the Company has agreed to pay Philips $1,000,000. Based on information available as of the date of this filing, the Company has reviewed the multiple elements of the Settlement Agreement and made a preliminary estimate of the fair value of the settlement and cross-license components using a relief from royalty approach. Based on this assessment, the Company determined that the settlement and cross-license did not result in a loss that would be required to be included in the Company’s results of operations for the first quarter of 2007.

          On April 30, 2007, the Company entered into a Settlement Agreement and Mutual Release (“Agreement”) with the Institute of Applied Management and Law, Inc. (“IAML”) in connection with the Company’s previously disclosed arbitration against CSI for alleged failure to perform on a marketing agreement. The Agreement is intended to be a complete and final resolution and settlement of respective differences, positions and claims. As consideration for the Agreement, the Company has agreed to pay IAML $500,000, which has been included as part of general and administrative expenses in the first quarter of 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          This Quarterly Report on Form 10-Q contains forward-looking statements relating to Cardiac Science Corporation. Except for historical information, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward looking. The words “believe,” “expect,” “intend,” “anticipate,” “will,” “may,” variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. These forward-looking statements reflect management’s current expectations and involve risks and uncertainties. Our actual results could differ materially from results that may be anticipated by such forward-looking statements due to uncertainties, including the risk that:

          Our accounting for the recent Settlement Agreement with Philips is subject to uncertainties

          We were involved in a lawsuit with Philips. In the lawsuit, we asserted infringement claims against Philips relating to certain of our AED patents, and Philips asserted counterclaims against us relating to certain of Philips AED patents. On April 24, 2007, the parties entered into a Settlement Agreement relating to this litigation. Under the Settlement Agreement, the parties agreed to release and discharge their respective claims that were the subject of the lawsuit and to dismiss the lawsuit with prejudice. In addition, the parties agreed not to sue each other for infringement claims relating to their respective current products and to develop a dispute resolution mechanism to resolve any disputes relating to future products. Finally, pursuant to the Settlement Agreement we entered into a Cross-License Agreement with Philips under which CSC cross-licensed, on a perpetual, non-exclusive, royalty-free basis, patents that were the subject of the lawsuit and Philips licensed to us, on a fully-paid, perpetual, non-exclusive basis, certain patents that were not part of the lawsuit.

          In accordance with SFAS No. 5, “Accounting for Contingencies”, we had not previously recorded any gain or loss contingency relating to the Philips lawsuit. We concluded that the settlement of the Philips lawsuit on April 24, 2007 was a subsequent event and we were required to consider all material information relating to the settlement in determining applicable estimates used in preparing the financial statements for the quarter ended March 31, 2007. Under Accounting Principals

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Board Opinion No. 29, “Accounting for Nonmonetary Transactions,” (“APB 29”), as amended by SFAS No. 153, “Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29,” (“SFAS 153”), we were required to make individual estimates related to the multiple elements within the settlement and cross-license agreement in order to determine the net impact on our financial statements for the first quarter of 2007. Because the Philips settlement was entered into after the close of the quarter and shortly before this Quarterly Report on Form 10-Q was filed, we had limited time to evaluate the various elements of the settlement and cross-license in order to thoroughly assess the net impact of the settlement for purposes of preparing our financial statements for the first quarter of 2007. However, based on the information available and analyses performed prior to filing this Quarterly Report on Form 10-Q, we determined that the settlement and cross-license did not result in a loss that would be required to be included in our results of operations for the first quarter of 2007.

          We are in the process of further evaluating the various elements of the settlement and cross license. Based on this, it is possible that as a result of additional information and analyses, we may conclude that different estimates relating to the financial impact of the settlement and cross-license are required. In such event, any change in our estimates could be material, and may negatively impact our results of operations and financial position in future periods.

          The principal factors that could cause or contribute to such differences include, but are not limited to, those listed above and the other factors discussed in the section entitled “Risk Factors” in Part 1 — Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006 and those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements to reflect events or circumstances that may subsequently arise. Readers are urged to review and consider carefully the various disclosures made in this report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

          You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Operating results for the three month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” contained in the Cardiac Science Corporation Annual Report on Form 10-K for the year ended December 31, 2006.

     Business Overview

          Cardiac Science Corporation was incorporated in Delaware on February 24, 2005 as CSQ Holding Company to effect the business combination of Quinton Cardiology Systems, Inc. (“Quinton”) and Cardiac Science, Inc. (“CSI”), which we refer to as the “merger transaction.” The merger transaction was consummated on September 1, 2005. In connection with the merger transaction, the outstanding shares of common stock of Quinton and CSI were cancelled and stockholders of Quinton and CSI were issued common stock of Cardiac Science Corporation in consideration of their shares of Quinton and CSI common stock.

          Stockholders of Quinton received 0.77184895 share of our common stock for each common share of Quinton held, representing approximately 48.8% of our total outstanding common stock as of the date of closing, and holders of CSI common stock received 0.10 share of our common stock for each common share of CSI held, which, together with 2,843,915 shares of our common stock issued to the holders of senior notes and related warrants of CSI in connection with the merger transaction, represented approximately 51.2% of our total outstanding common stock as of the date of closing. In addition, we assumed each outstanding option and other warrant to purchase common stock issued by Quinton and CSI.

          For accounting purposes, the merger transaction was treated as an acquisition by Quinton of CSI as of September 1, 2005. Since we are deemed to be the successor to Quinton for accounting purposes, our consolidated financial statements represent the historical statements of Quinton and include CSI’s results of operations since September 1, 2005. All share and per share data have been retroactively adjusted to reflect the conversion of Quinton shares into Cardiac Science Corporation shares at the exchange ratio set forth in the merger agreement.

          We develop, manufacture and market a family of advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators (“AEDs”), electrocardiographs, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, patient monitor defibrillators and cardiology data management systems. We also sell a variety of related products and consumables and provide a comprehensive portfolio of training, maintenance and support services. We market our products under the Burdick, Powerheart and Quinton brand names.

     Critical Accounting Estimates and Policies

          To prepare financial statements that conform with U.S. generally accepted accounting principles, we must select and apply accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues

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and expenses, and related disclosure of contingent assets and liabilities. We base our accounting estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Critical Accounting Estimates

          There are certain critical accounting estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate,and changes in the estimate or different estimates that we reasonably could have selected would have had a material impact on our financial condition or results of operations.

          Stock-based Compensation.As of January 1, 2006, we account for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”). Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating future volatility, expected term and the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

          Purchase Price Allocations.In connection with the merger transaction in September 2005, we have allocated the purchase price plus transaction costs and the fair value of liabilities assumed to the estimated fair values of CSI assets acquired. The purchase price allocation estimates were made based on our estimates of fair values. Had these estimates been different, reported amounts allocated to assets and liabilities and results of operations subsequent to the acquisitions could be materially impacted.

          Under the purchase method of accounting, the total estimated purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed in connection with the merger transaction, based on their fair values as of the closing date. The excess of purchase price over the tangible and identifiable intangible assets acquired net of liabilities assumed is allocated to goodwill. Valuation specialists have conducted valuations in order to assist management in determining the fair values of the identifiable intangible and certain tangible assets acquired. The work performed by valuation specialists has been considered in management’s estimates of fair values. The initial allocations of purchase cost were recorded at fair value based upon the best information available to management and were finalized by September 1, 2006 with the exception of income taxes.

          Accounts Receivable.Accounts receivable represent a significant portion of our assets. We must make estimates of the collectibility of accounts receivable. We analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Different estimates regarding the collectibility of accounts receivable may have a material impact on the timing and amount of reported bad debt expense and on the carrying value of accounts receivable.

          Inventories.Inventories represent a significant portion of our assets. We value inventories at the lower of cost, on an average cost basis, or market. We regularly perform a detailed analysis of our inventories to determine whether adjustments are necessary to reduce inventory values to estimated net realizable value. We consider various factors in making this determination, including the salability of individual items or classes of items, recent sales history and predicted trends, industry market conditions and general economic conditions. Different estimates regarding the net realizable value of inventories could have a material impact on our reported net inventory and cost of sales, and thus could have a material impact on the financial statements as a whole.

          Goodwill.Goodwill represents the excess of cost over the estimated fair value of net assets acquired in connection with acquisitions of our medical treadmill product line, Burdick and CSI. We test goodwill for impairment on an annual basis, and between annual tests in certain circumstances, for each reporting unit identified for purposes of accounting for goodwill. A reporting unit represents a portion of our business for which we regularly review certain discrete financial information and operational results. We have determined that we have two reporting units, consisting of our general cardiology products,

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which include our product service business, and the Shanghai-Quinton joint venture, both of which operate in the cardiology market and have similar economic and operating characteristics.

          Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit, and potentially result in recognition of an impairment of goodwill, which would be reflected as a loss on our statement of operations and as a reduction in the carrying value of goodwill.

          Intangible Assets.Our intangible assets are comprised primarily of trade names, developed technology and customer relationships, all of which were acquired in our acquisition of Burdick in 2003 and the merger transaction with CSI in 2005. We use our judgment to estimate the fair value of each of these intangible assets. Our judgment about fair value is based on our expectation of future cash flows and an appropriate discount rate. We also use our judgment to estimate the useful lives of each intangible asset.

          We believe the Burdick and Cardiac Science trade names have indefinite lives and, accordingly, we do not amortize the trade names. We evaluate this conclusion annually or more frequently if events and circumstances indicate that the asset might be impaired and make a judgment about whether there are factors that would limit our ability to benefit from the trade name in the future. If there were such factors, we would start amortizing the trade name over the expected remaining period in which we believed it would continue to provide benefit. With respect to our developed technology and customer relationship intangible assets, we also evaluate the remaining useful lives annually.

          We periodically evaluate whether our intangible assets are impaired. For our trade names, this evaluation is performed annually, or more frequently if events occur that suggest there may be an impairment loss, and involves comparing the carrying amount to our estimate of fair value. For our developed technology and customer relationship intangible assets, this evaluation would be performed if events occur that suggest there may be an impairment loss. If we conclude that any of our intangible assets is impaired, we would record this as a loss on our statement of operations and as a reduction to the intangible asset.

          Valuation of Long-Lived Assets.We review long-lived assets, such as property, plant, and equipment, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized on our statement of operations and as a reduction to value of the asset group on our balance sheet if it is concluded that the fair value of the asset group is less than its carrying value. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

          Warranty.We provide warranty service covering the systems we sell. We estimate and accrue for future costs of providing warranty service, which relate principally to the hardware components of the systems, when the systems are sold. Our estimates are based in part on our warranty claims history and our cost to perform warranty service. Differences could result in the amount of the recorded warranty liability and cost of sales if we made different judgments or used different estimates.

          Deferred Tax Assets and Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to determine our income taxes. This process involves calculating our current tax obligation or refund and assessing the nature and measurements of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. In each period, we assess the likelihood that our deferred tax assets will be recovered from existing deferred tax liabilities or future taxable income. If required, we will recognize a valuation allowance to reduce such deferred tax assets to amounts that are more likely than not to be ultimately realized. To the extent that we establish a valuation allowance or change this allowance in a period, we adjust our tax provision or tax benefit in the statement of operations. We use our judgment to determine our provision or benefit for income taxes, and any valuation allowance recorded against our net deferred tax assets.

          Litigation and Other Contingencies.We regularly evaluate our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses related to such exposures requires significant judgment about the potential range of outcomes. As additional information about current or future litigation or other contingencies becomes available, we will assess

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whether such information warrants the recording of additional expense relating to these contingencies. A loss contingency, to be recorded as an expense, must generally be both probable and measurable.

          Fair Value of Legal Settlements.In connection with the Settlement Agreement with Philips, we were required to consider all material information relating to the various elements within the settlement. Under APB 29, as amended by SFAS 153, the fair value of consideration received and consideration transferred was estimated using a relief from royalty approach. The estimates used in this calculation were based on the best information available to management at the time of this filing. When additional information becomes available we will update our estimates accordingly.

          Software Revenue Recognition.We account for the licensing of software in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 (“SOP 97-2”), “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”). The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. Customers may receive certain elements of our products over a period of time. These elements include post-delivery telephone support and the right to receive unspecified upgrades/enhancements (on a when-and-if available basis), the fair value of which is recognized over the product’s estimated life cycle. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and changes to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue.

          Sales Returns.The Company provides a reserve against revenue for estimated product returns. The amount of this reserve is evaluated quarterly based upon historical trends.

     Critical Accounting Policies

          Revenue Recognition.Revenue from sales of hardware products is generally recognized when title transfers to the customer, typically upon shipment. Some of our customers are distributors that sell goods to third party end users. Except for certain identified distributors where collection may be contingent on distributor resale, we recognize revenue on sales of products made to distributors when title transfers to the distributor and all significant obligations have been satisfied. In making a determination of whether significant obligations have been met, we evaluate any installation or integration obligations to determine whether those obligations are inconsequential or perfunctory. In cases where the remaining installation or integration obligation is not determined to be inconsequential or perfunctory, we defer the portion of revenue associated with the fair value of the installation and integration obligation until these services have been completed.

          Distributors do not have price protection and generally do not have product return rights, except in cases upon termination of the distributor agreement or if product is defective. For certain identified distributors where collection may be contingent on the distributor’s resale, revenue recognition is deferred and recognized on a “sell through” or cash basis. The determination of whether sales to distributors are contingent on resale is subjective because we must assess the financial wherewithal of the distributor to pay regardless of resale. For sales to distributors, we consider several factors, including past payment history, where available, trade references, bank account balances, Dun & Bradstreet reports and any other financial information provided by the distributor, in assessing whether the distributor has the financial wherewithal to pay regardless of, or prior to, resale of the product and that collection of the receivable is not contingent on resale.

          We offer limited volume price discounts and rebates to certain distributors. Volume price discounts are on a per order basis based on the size of the order and are netted against the revenue recorded at the time of shipment. We have no arrangements that provide for volume discounts based on meeting certain quarterly or annual purchase levels. Rebates are paid quarterly or annually and are accrued for as incurred.

          With respect to arrangements where software is considered more than incidental to the product, the vendor specific objective evidence of undelivered support is deferred and the residual fair value of delivered software is recognized. Revenue from software implementation services is recognized as the services are provided (based on vendor specific objective evidence of fair value). When significant implementation activities are required, we recognize revenue from software and services upon installation. We occasionally sell software and hardware upgrades on a stand alone basis.

          We consider program management packages and training and other services as separate units of accounting and apply the provisions of Emerging Issues Task Force (“EITF”) consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) when sold with an AED based on the fact that the items have value to the customer on a stand alone basis and could be acquired from another vendor. Fair value is determined to be the price at which they are sold to customers on a stand alone basis. Training revenue is deferred and recognized at the time the training occurs. AED program management services revenue, pursuant to agreements that exist with some customers pursuant to annual or multi-year terms, are deferred and amortized on a straight-line basis over the related contract period.

          We offer optional extended service contracts to customers. Fair value is determined to be the price at which they are sold to customers on a stand alone basis. Service contract revenues are recognized on a straight-line basis over the term of the extended service contracts, which generally begin after the expiration of the original warranty period. For services performed, other than pursuant to warranty and extended service contract obligations, revenue is recognized when the service is performed and collection of the resulting receivable is reasonably assured.

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          Accounting for Stock-Based Compensation.Prior to the January 1, 2006 adoption of the Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. Accordingly, because the stock option grant price equaled the market price on the date of grant, and any purchase discounts under our stock purchase plans were within statutory limits, no compensation expense was recognized by for stock-based compensation. As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), stock-based compensation was included as a pro forma disclosure in the notes to the consolidated financial statements.

          Effective January 1, 2006 we adopted the fair value recognition provisions of SFAS 123R, and applied the provisions of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), using the modified-prospective transition method. Under this transition method, stock-based compensation expense is recognized in the consolidated financial statements for granted stock options and for expense related to the Employee Stock Purchase Plan (“ESPP”), since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Further, as required under SFAS 123R, forfeitures are estimated for share-based awards that are not expected to vest. Compensation expense for non-vested stock awards is based on the market price on the grant date and is recorded equally over the vesting period. Results for prior periods have not been restated, as provided for under the modified-prospective transition method.

Results of Operations

     Highlights of Results for the Three Months Ended March 31, 2007

• Revenue of $41.7 million increased by approximately 7% over the first quarter of 2006, which included overall AED growth of 43% and domestic AED growth of 59%, partially offset by a decline of 16% in cardiac monitoring revenue and 13% in service revenue.

• Gross margin improved to approximately 47.7% from approximately 47.0% for the comparable period in the prior year.

• Defibrillation revenue increased by 43% over the reported amount for the comparable period in the prior year.

• Cash generated by operations was $2.3 million.

• IAML settlement was recorded.

     Looking Forward

          We expect continued revenue growth in the foreseeable future. We expect modest growth, over time, in our cardiac monitoring product revenue as we increase our sales in both the domestic and international markets. Although we may experience continued decline in cardiac monitoring sales in the near future, we do not expect significant sustained reductions in sales of cardiac monitoring products in the foreseeable future. We expect significant growth, over time, in sales of our defibrillation products as we continue to participate in the growing overall AED market. Sales of both cardiac monitoring and defibrillation products in any given period may fluctuate, however, due to timing of orders and other factors. We expect modest growth in service revenue over the longer term.

          A number of factors will affect our gross margin in the foreseeable future and our gross margin may fluctuate from period to period and over time, as a result. Factors that may cause changes in our gross margins from period to period include, but are not limited to, fluctuations in sales mix, competitive impact on AED pricing, the effect of product cost reductions and other factors. We expect continued growth in gross profit from our product and service lines as our revenues increase in upcoming quarters.

          As revenues increase, we expect our operating expenses to increase also, though at a slower rate than our overall revenue rate. We are devoting substantial resources to the continued development of new versions of our products to meet the changing requirements of our customers. As a result, our research and development expenses are expected to increase in the future. In addition, we intend to expand our sales and marketing activities both domestically and internationally, in order to increase sales of our products and services. We expect that sales and marketing expenses will increase as we expand our sales efforts in both domestic and international locations, hire additional marketing personnel and initiate additional marketing programs. Finally, we expect general and administrative expenses to increase in the future as we continue to develop our

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corporate infrastructure in support of the growth of our business. However, we expect a significant decline in legal expenses in the second half of 2007 due to the settlement of two legal cases in April. In addition to these operating expenses, we expect stock-based compensation expense to continue to be a significant ongoing expense.

     Revenues

          We derive our revenues primarily from the sale of our cardiology products and related consumables, and to a lesser extent, from services. We categorize our revenues as (1) cardiac monitoring products, which includes capital equipment, software products and related accessories and supplies; (2) defibrillation products, which includes our AEDs, hospital defibrillators and related accessories; and (3) service, which includes service contracts, CPR/AED training services, AED program management services, equipment maintenance and repair, replacement part sales and other services. We derive a portion of our service revenue from sales of separate extended maintenance arrangements. We defer and recognize these revenues over the applicable maintenance period.

          Revenues for the three months ended March 31, 2007 and 2006 were as follows:

	Three Months						Three Months
	Ended			% Change			Ended
(dollars in thousands)	March 31, 2007			2006 to 2007			March 31, 2006
Defibrillation products	$	21,038			42.9	%	$	14,720
% of revenue		50.5	%					37.7	%
Cardiac monitoring products		16,653			(16.1	%)		19,849
% of revenue		40.0	%					50.7	%
Service		3,979			(12.5	%)		4,546
% of revenue		9.5	%					11.6	%
Total revenues	$	41,670			6.5	%	$	39,115

          Defibrillation products revenue increased significantly for the three month period ended March 31, 2007 from the comparable period in 2006 due to higher sales both internationally and domestically as we continue to leverage our public access programs in various cities, gain traction with our schools initiatives and take advantage of competitive opportunities in the market. Domestic defibrillation sales increased by 59% and international sales increased 27%, as our sales in Japan increased back to historical levels. We believe that the worldwide market for AEDs is growing and expect continued growth in sales of defibrillator products in the foreseeable future.

          Cardiac monitoring products revenue decreased by 16% for the three month period ended March 31, 2007 from the comparable period in 2006, which was a strong quarter for cardiac monitoring sales. Sales for the three month period ended March 31, 2007 were sequentially flat relative to the preceding two quarters. The softness in our cardiac monitoring revenue is due primarily to increased competition and delays in some of our product launches. However, we have restructured our domestic sales organization in an effort to provide a wider range of products to our distribution partners. We believe this restructuring, in combination with planned new product introductions, will ultimately reverse the trend of relatively flat revenues in this channel over the last three quarters. Sales of cardiac monitoring products were strong in areas outside of the United States.

          Service revenue decreased for the three month period ended March 31, 2007 from the comparable period in 2006 primarily due to the discontinuation of certain non-core service contracts acquired in our merger with Cardiac Science, Inc. in the second quarter of 2006.

     Gross Profit

          Gross profit is the proportion of money left over from revenues after subtracting the cost of revenues. Cost of revenues consists primarily of the costs associated with manufacturing, assembling and testing our products, overhead costs, compensation, including stock-based compensation and other costs related to manufacturing support and logistics. We rely on third parties to manufacture certain of our product components. Accordingly, a significant portion of our cost of revenues consists of payments to these manufacturers. Cost of service revenue consists of customer support costs, training and professional service expenses, parts and compensation. Our hardware products include a warranty period that includes factory repair services or replacement parts. We accrue estimated expenses for warranty obligations at the time products are shipped.

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          Gross profit for the three months ended March 31, 2007 and 2006 was as follows:

	Three Months Ended			% Change			Three Months Ended
(dollars in thousands)	March 31, 2007			2006 to 2007			March 31, 2006
Products	$	18,854			11.6	%	$	16,889
% of products revenue		50.0	%					48.9	%
Service		1,026			(31.8	%)		1,504
% of service revenue		25.8	%					33.1	%
Total gross profit	$	19,880			8.1	%	$	18,393
% of total revenue		47.7	%					47.0	%

          Gross profit from products increased for the three month period ended March 31, 2007 from the comparable period in 2006 due principally to a shift in overall product mix to a higher proportion of defibrillation products, for which gross margin is generally higher than for cardiac monitoring products. Gross profit for the three month period ended March 31, 2006 included a charge of $0.2 million reflecting an upward adjustment to CSI’s inventory valuation over historical cost at the merger date in order to record this inventory at fair value.

          Gross profit from service decreased for the three month period ended March 31, 2007 from the comparable period in 2006 due principally to lower revenues on service contracts that were acquired in the merger with Cardiac Science, Inc. These contracts expired in the first half of 2006.

     Operating Expenses

          Operating expenses consisted of expenses related to research and development, sales, marketing and other expenses required to run our business, including stock-based compensation.

          Research and development expenses consisted primarily of salaries and related expenses for development and engineering personnel, fees paid to consultants, and prototype costs related to the design, development, testing and enhancement of products. We expense research and development costs as incurred. Several components of our research and development effort require significant funding, the timing of which can cause significant quarterly variability in our expenses.

          Sales expenses consisted primarily of salaries, commissions and related expenses for personnel engaged in sales and sales support functions.

          Marketing expenses consisted primarily of salaries and related expenses for personnel engaged in marketing functions as well as costs associated with promotional and other marketing activities.

          General and administrative expenses consisted primarily of employee salaries and related expenses for executive, finance, accounting, information technology, regulatory and human resources personnel as well as professional fees, legal fees, including fees associated with our ongoing litigation, and other corporate expenses.

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          Operating expenses for the three months ended March 31, 2007 and 2006 were as follows:

	Three Months						Three Months
	Ended			% Change			Ended
(dollars in thousands)	March 31, 2007			2006 to 2007			March 31, 2006
Research and development (including stock-based compensation expense of $79 and $77)	$	2,982			0.4	%	$	2,970
% of total revenue		7.2	%					7.6	%
Sales (including stock-based compensation expense of $162 and $107)		8,842			17.2	%		7,543
% of total revenue		21.2	%					19.3	%
Marketing (including stock-based compensation expense of $72 and $50)		2,266			23.2	%		1,840
% of total revenue		5.4	%					4.7	%
General and administrative (including stock-based compensation expense of $216 and $156)		6,200			6.7	%		5,811
% of total revenue		14.9	%					14.9	%
Total operating expenses	$	20,290			11.7	%	$	18,164
% of total revenue		48.7	%					46.4	%

          The slight increase in research and development expenses for the three month period ended March 31, 2007 from the comparable period in 2006 was due primarily to continued development of new versions of our products. We expect that research and development expenses will generally increase in the future as we continue updating our product.

          The increase in sales expenses for the three month period ended March 31, 2007 from the comparable period in 2006 was due primarily to higher staffing levels to promote growth as well as higher commissions on the sale of defibrillation products, which increased 43% from the comparable period in 2006.

          The increase in marketing expenses for the three month period ended March 31, 2007 from the comparable period in 2006 was due primarily to investments in marketing programs and activities to facilitate future growth.

          The increase in general and administrative expenses for the three month period ended March 31, 2007 from the comparable period in 2006 was due primarily to increased expenses associated with litigation spending on our three significant cases which totaled $1.7 million during the three month period ended March 31, 2007, including $0.5 million relating to the settlement of the case with IAML. Spending on these same cases for the three month period ended March 31, 2006 amounted to $0.7 million. Excluding litigation expenses, general and administrative expenses would have declined from period to period due mostly to decreases in consulting and temporary help.

     Other Income and Expense

          Other income, net was $0.1 million for the three month period ended March 31, 2007 and consisted primarily of income related to sub-lease agreements at facilities acquired as part of the merger. Interest income increased as a result of increased average cash balances for the three month period ended March 31, 2007 over the comparable period in 2006.

     Income Taxes

          In the first quarter of 2007, we recorded a tax benefit of $0.1 million compared to an expense of $0.2 million in the first quarter of 2006. Our effective tax rate for the three month period ended March 31, 2007 was 29%, compared to an effective rate of 39% for the same period in the prior year. This decrease was primarily due to estimates of 2007 pre-tax income, certain differences between book and tax income and various state and federal tax credits. We estimate the effective rate for the year will be approximately 29%.

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     Liquidity and Capital Resources

          Cash flows for the three months ended March 31, 2007 and 2006 were as follows:

	Three Months						Three Months
	Ended			% Change			Ended
(dollars in thousands)	March 31, 2007			2006 to 2007			March 31, 2006
Casl flow provided by operating activities	$	2,258			(36.7	%)	$	3,569
Cash flow used in investing activities		(200	)		82.9	%		(1,169	)
Cash flow provided by financing activities		214			(4.0	%)		223
Total change in cash	$	2,272			13.4	%	$	2,623

          Cash flows provided by operating activities of $2.3 million for the three month period ended March 31, 2007 resulted from our net loss of $0.2 million plus net non-cash items included in this net loss of $2.1 million, and a net reduction in working capital of $0.3 million. The decrease in cash provided by operating activities relative to the comparable period in 2006 was due primarily to increased liabilities to vendors for operating expenses during the current period as well as a significant decrease in inventory levels during the comparable period in 2006.

          Net cash flows used in investing activities for the three month period ended March 31, 2007 consisted of payments for capital expenditures and purchases of short-term investments, partially offset by proceeds from maturities of short-term investments. In addition, net cash flows used in investing activities in 2007 included payments of acquisition costs related to the merger transaction of $0.3 million. Net cash flows used in investing activities in 2006 included payments of acquisition costs related to the merger transaction of $0.8 million.

          Net cash flows provided by financing activities for the three month periods ended March 31, 2007 and 2006, respectively, consisted of proceeds from exercises of stock options and issuances of common stock under our ESPP.

          As of March 31, 2007, our cash and cash equivalents totaled $12.1 million and we had short-term investments of $0.1 million. We anticipate that our existing cash and cash equivalents and future expected operating cash flow will be sufficient to meet operating expenses, working capital requirements, capital expenditures and other obligations for at least 12 months.

          We have a line of credit with Silicon Valley Bank. Borrowings under the line of credit are currently limited to the lesser of $20.0 million or an amount based on eligible accounts receivable and inventories. Substantially all of our assets are pledged as collateral for the line of credit. This line of credit bears interest based at a rate equal to the lender’s prime rate, provided that the interest rate in effect shall not be less than 6.25% on any day. In addition, unused balances under this facility bear monthly fees equal to 0.25% per annum on the difference between the maximum credit limit and the sum of (i) the average daily principal balance during the month and (ii) the face amount of any letters of credit. As of March 31, 2007, we had the capacity to borrow $20.0 million based on eligible accounts receivable and eligible inventory, less letters of credit outstanding of $0.3 million.

          We anticipate that our existing cash and cash equivalents and future expected operating cash flow will be sufficient to meet operating expenses, working capital requirements, capital expenditures and other obligations for at least 12 months. We may be affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. For more information on the factors that may impact our financial results, please see the Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007. In addition, we are continually considering other acquisitions that complement or expand our existing business or that may enable us to expand into new markets. Future acquisitions may require additional debt, equity financing or both. We may not be able to obtain any additional financing, or may not be able to obtain additional financing on acceptable terms.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          We develop products in the U.S. and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since the majority of our revenues are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets.

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Item 4. Controls and Procedures

          Our chief executive officer and chief financial officer evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In addition, our chief executive officer and chief financial officer concluded as of the end of the period covered by this quarterly report on Form 10-Q that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

          There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

          On April 24, 2007, the Company entered into a Settlement Agreement with Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation (collectively, “Philips”) in connection with the Company’s previously disclosed patent litigation with Philips. Under the Settlement Agreement, the parties agreed to release and discharge their respective claims that were the subject of the lawsuit and to a dismissal of the lawsuit with prejudice. The Company and Philips have covenanted not to sue each other for infringement claims with respect to their respective current products, and also to develop a dispute resolution mechanism to resolve any future disputes relating to future products. Pursuant to the Settlement Agreement, the Company and Philips entered into a Cross-License Agreement pursuant to which the Company and Philips cross-licensed, on a perpetual, non-exclusive, royalty-free basis, patents that were the subject of the lawsuit. In addition, Philips has licensed to the Company certain additional patents that were not a part of the suit on a fully-paid, perpetual, non-exclusive basis. As consideration for the license of these additional patents, the Company has agreed to pay Philips $1,000,000. Based on information available as of the date of this filing, the Company has reviewed the multiple elements of the Settlement Agreement and made a preliminary estimate of the fair value of the settlement and cross-license components using a relief from royalty approach. Based on this assessment, the Company determined that the settlement and cross-license did not result in a loss that would be required to be included in the Company’s results of operations for the first quarter of 2007.

          On April 30, 2007, the Company entered into a Settlement Agreement and Mutual Release (“Agreement”) with the Institute of Applied Management and Law, Inc. (“IAML”) in connection with the Company’s previously disclosed arbitration against CSI for alleged failure to perform on a marketing agreement. The Agreement is intended to be a complete and final resolution and settlement of respective differences, positions and claims. As consideration for the Agreement, the Company has agreed to pay IAML $500,000, which has been included as part of general and administrative expenses in the first quarter of 2007.

          In March 2004, William S. Parker brought suit against CSI for patent infringement in the United States District Court for the Eastern District of Michigan. The Parker patent generally covers the use of a synthesized voice to instruct a person to perform certain tasks. The Complaint alleges that certain of the Company’s AEDs infringe the patent. The patent is now expired. The Company has filed an Answer to the Complaint stating the patent is not infringed and is otherwise invalid and unenforceable. The patent was submitted for reexamination before the United States Patent and Trademark Office and emerged from reexamination in December 2005. In January 2006, the District Court issued an order lifting the stay in the litigation. Currently, the litigation is proceeding through discovery. At this stage, the Company is unable to predict the outcome of this litigation. The Company has not established an accrual for this matter because it has determined that a loss is not probable. The Company intends to continue to defend against this suit vigorously.

          We are subject to various other legal proceedings arising in the normal course of business. In the opinion of management, the ultimate resolution of these proceedings is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

          Information regarding risk factors appears in the first paragraph in Part I — Item 2 of this Form 10-Q and in Part I — Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

          None.

Item 3. Defaults Upon Senior Securities

          None.

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

          None.

Item 5. Other Information

          None.

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Item 6. Exhibits

No.	Description
10.61	Amended and Restated Employment Agreement dated as of September 20, 2006 between Cardiac Science Corporation and Garry Norris.
10.62	Cardiac Science Corporation Senior Executives — 2007 Base Compensation.
10.63*	Cardiac Science Corporation Management Incentive Plan (MIP) — 2007.
10.64*	2007 Compensation Incentive Plan for Kurt Lemvigh.
10.65*	2007 Compensation Incentive Plan for Darryl R. Lustig.
10.66†	OEM Supply and Purchase Agreement between Cardiac Science, Inc. and Nihon Kohden Corporation dated March 1, 2002.
10.67†	Amendment No. 1 to OEM Supply and Purchase Agreement dated March 16, 2005 between Cardiac Science, Inc. and Nihon Kohden Corporation.
31.1	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-51512) filed on March 19, 2007.
†	Portions of this exhibit are omitted and were filed separated with the Securities and Exchange Commission pursuant to Cardiac Science Corporation’s application requesting confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

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SIGNATURE

     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.

CARDIAC SCIENCE CORPORATION
By:	/s/ Michael K. Matysik
	Michael K. Matysik Senior Vice President and Chief Financial Officer (Principal Financial Officer)
	Date: May 10, 2007

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