Cardiac Science 10-Q 2007 Q2 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 June 30, 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	94-3300396
(State of Incorporation)	(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 August 2, 2007 was 22,710,517.

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		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.	Defaults Upon Senior Securities		25
Item 4.	Submission of Matters to a Vote of Security Holders		25
Item 5.	Other Information		25
Item 6.	Exhibits		25
SIGNATURE			26
EXHIBIT 10.68
EXHIBIT 10.69
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Page 2 of 26

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(In thousands)	2007			2006
ASSETS
Current Assets:
Cash and cash equivalents	$	13,821		$	9,819
Short-term investments		395			547
Accounts receivable, net of allowance for doubtful accounts of $612 and $907, respectively		27,331			26,971
Inventories		20,190			17,617
Deferred income taxes, net		3,813			3,902
Prepaid expenses and other current assets		3,138			2,121
Total current assets		68,688			60,977
Other assets		208			209
Machinery and equipment, net of accumulated depreciation and amortization of $11,680 and $10,245, respectively		5,287			5,956
Deferred income taxes, net		38,573			40,525
Intangible assets, net of accumulated amortization of $7,936 and $6,111, respectively		37,044			31,869
Investment in unconsolidated entities		738			496
Goodwill		107,613			107,613
Total assets	$	258,151		$	247,645
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	14,316		$	11,761
Accrued liabilities		10,907			9,890
Warranty liability		2,905			2,532
Deferred revenue		7,706			7,111
Total current liabilities		35,834			31,294
Other liabilities		366			679
Total liabilities		36,200			31,973
Minority interest		37			75
Commitments and contingencies
Shareholders’ Equity:
Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares issued or outstanding as of June 30, 2007 and December 31, 2006, respectively		—			—
Common stock (65,000,000 shares authorized), $0.001 par value, 22,709,390 and 22,598,014 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		223,013			221,213
Accumulated other comprehensive income		173			20
Accumulated deficit		(1,272	)		(5,636	)
Total shareholders’ equity		221,914			215,597
Total liabilities and shareholders’ equity	$	258,151		$	247,645

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

Page 3 of 26

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands, except share and per share data)	2007			2006			2007			2006
Revenues:
Products	$	40,787		$	35,007		$	78,478		$	69,576
Service		4,102			4,214			8,081			8,760
Total revenues		44,889			39,221			86,559			78,336
Cost of Revenues:
Products		19,949			17,511			38,786			35,191
Service		3,174			3,120			6,127			6,162
Total cost of revenues		23,123			20,631			44,913			41,353
Gross profit		21,766			18,590			41,646			36,983
Operating Expenses:
Research and development		3,090			2,875			6,072			5,845
Sales and marketing		11,445			9,914			22,553			19,297
General and administrative		4,933			4,662			9,445			9,754
Litigation and related expenses		2,029			1,254			3,717			1,973
Licensing income and litigation settlement		(6,000	)		—			(6,000	)		—
Total operating expenses		15,497			18,705			35,787			36,869
Operating income (loss)		6,269			(115	)		5,859			114
Other Income (Expense):
Interest income (expense), net		74			(5	)		96			(55	)
Other income, net		327			274			452			505
Total other income		401			269			548			450
Income before income tax expense and minority interest		6,670			154			6,407			564
Income tax expense		(2,155	)		(49	)		(2,080	)		(208	)
Income before minority interest		4,515			105			4,327			356
Minority interest		15			13			37			26
Net income	$	4,530		$	118		$	4,364		$	382
Net income per share — basic	$	0.20		$	0.01		$	0.19		$	0.02
Net income per share — diluted	$	0.19		$	0.01		$	0.19		$	0.02
Weighted average shares outstanding — basic		22,689,932			22,486,564			22,651,053			22,458,843
Weighted average shares outstanding — diluted		23,283,471			22,522,902			23,187,206			22,565,413

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

Page 4 of 26

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2007			2006			2007			2006
Operating Activities:
Net income	$	4,530		$	118		$	4,364		$	382
Adjustments to reconcile net income to net cash provided by operating activities:
Licensing income and litigation settlement		(6,000	)		—			(6,000	)		—
Depreciation and amortization		1,706			1,543			3,312			3,100
Deferred income taxes		2,027			49			1,952			112
Stock-based compensation		562			567			1,175			1,016
Minority interest		(16	)		(13	)		(38	)		(26	)
Loss on disposal of equipment		1			—			4			—
Changes in operating assets and liabilities, net of business acquired:
Accounts receivable, net		(102	)		864			(360	)		898
Inventories		(1,934	)		(280	)		(2,541	)		1,774
Prepaid expenses and other assets		(432	)		370			(1,016	)		986
Accounts payable		372			760			2,547			878
Accrued liabilities		1,904			(751	)		1,266			(2,348	)
Warranty liability		297			52			373			63
Deferred revenue		460			(104	)		595			(91	)
Net cash flows provided by operating activities		3,375			3,175			5,633			6,744
Investing Activities:
Purchases of short-term investments		(395	)		—			(544	)		—
Maturities of short-term investments		149			—			696			—
Purchase of patents as part of litigation settlement		(1,000	)		—			(1,000	)		—
Purchases of machinery and equipment		(494	)		(400	)		(822	)		(796	)
Payments related to the purchase of Cardiac Science, Inc.		(292	)		(441	)		(562	)		(1,214	)
Net cash flows used in investing activities		(2,032	)		(841	)		(2,232	)		(2,010	)
Financing Activities:
Proceeds from exercise of stock options and issuance of shares under employee purchase plan		387			243			601			466
Net cash flows provided by financing activities		387			243			601			466
Net change in cash and cash equivalents		1,730			2,577			4,002			5,200
Cash and cash equivalents, beginning of period		12,091			6,169			9,819			3,546
Cash and cash equivalents, end of period	$	13,821		$	8,746		$	13,821		$	8,746

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

Page 5 of 26

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 June 30, 2007, the condensed consolidated statements of operations for the three and six-month periods ended June 30, 2007 and 2006 and the condensed consolidated statements of cash flows for the three and six-month periods ended June 30, 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 in acquisitions, collectibility of accounts receivable, the recoverability of inventory, the adequacy of warranty liabilities, the valuation of stock awards, the fair value of patent rights, 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 Per Share

          In accordance with Statement of Financial Accounting Standard No. 128, “Computation of Earnings Per Share” (“SFAS 128”) basic income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income 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 26

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except share data)	2007		2006		2007		2006
Numerator:
Net income	$	4,530	$	118	$	4,364	$	382
Denominator:
Weighted average shares for basic calculation		22,689,932		22,486,564		22,651,053		22,458,843
Incremental shares from employee stock options and ESPP		593,539		36,338		536,153		106,570
Weighted average shares for diluted calculation		23,283,471		22,522,902		23,187,206		22,565,413

          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				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Antidilutive shares issuable upon exercise of stock options		2,531,423		2,306,074		2,860,630		2,113,709
Antidilutive shares issuable upon exercise of warrants		328,609		330,909		329,609		330,909
Antidilutive shares related to non-vested stock awards and ESPP		165,156		—		216,743		—
Total		3,025,188		2,636,983		3,406,982		2,444,618

     Accounting for Licensing Income and Litigation Settlement

          During the second quarter of fiscal 2007, the Company entered into a Settlement Agreement with Koninklijke Philips Electronics N.V. (“Philips”) pursuant to which the parties agreed to dismiss all pending claims between the parties in consideration for cross-licenses of certain patents between the parties and a $1,000,000 payment from the Company to Philips. The transaction was valued in accordance with Accounting Principals 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”). The fair value of the intangible assets acquired of $7,000,000 and royalty income received of $5,500,000 was measured based upon estimated future royalty streams that would have been due to both parties for the use of their patents. The Company determined that because there are no future activities or obligations required by the Company with respect to the patent rights granted to Philips the $5,500,000 was realized and earned at completion of the transaction. This fair value was then limited to the net present value of the payment streams. The Company also recorded a gain on the transaction of $500,000, included in Licensing Income and Litigation Settlement, because the fair value of the intangible assets received in the transaction was estimated to exceed the fair value of the intangible assets given up and, in the case of the Company, the cash paid. The intangible assets’ value will be amortized to income based upon the remaining economic life of the patents of 13 years, which will approximate $500,000 annually.

     Litigation and Related Expenses

          Litigation and related expenses included settlement costs and legal fees related primarily to the three cases which were settled between April and July. These expenses were included in general and administrative expenses in previous periods and have been reclassified to their own line item.

          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 litigation and related expenses in the first quarter of 2007.

          On July 26, 2007, the Company entered into a settlement agreement with William S. Parker (“Parker”) in connection with the Company’s previously disclosed patent litigation, providing for a full release of the Company from all claims made in the lawsuit. Costs relating to this settlement have been included in the Company’s operating results for the quarter ending June 30, 2007.

     Customer and Vendor Concentrations

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
Customer	2007		2006			2007			2006
Customer 1		*		14	%		10	%		12	%
Customer 2		*		*			*			10	%

* Did not exceed 10%.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Vendor	2007			2006			2007			2006
Vendor 1		14	%		11	%		12	%		*
Vendor 2		*			14	%		*			14	%

* 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.

     Reclassifications

          Certain reclassifications of prior period balances have been made for consistent presentation with the current period. These 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.

          The total purchase price was allocated to CSI’s net tangible and identifiable intangible assets, based on their fair values as of the closing date. The total purchase price of CSI was approximately $181,075,000, which consisted of 11,467,753 shares of the Company’s common stock valued at $146,911,000 issued to CSI stockholders and senior note holders, cash payments totaling $20,000,000 to the CSI senior note holders, $7,402,000 for 1,229,881 vested options to purchase shares of common stock issued to CSI option holders, $1,320,000 for 330,909 exercisable warrants to purchase shares of common stock issued to certain CSI warrant holders, $3,198,000 for exit and severance costs and $2,244,000 for transaction costs. In allocating the purchase price based on fair values, the Company recorded $50,725,000 in net tangible assets, $31,360,000 in identifiable intangible assets and $98,990,000 in goodwill.

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

Page 8 of 26

filed with the SEC. 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				Six Months Ended
	June 30,				June 30,
(in thousands)	2007		2006		2007		2006
Cardiac monitoring products	$	16,704	$	17,727	$	33,356	$	37,576
Defibrillation products		24,083		17,280		45,122		32,000
Service		4,102		4,214		8,081		8,760
Total	$	44,889	$	39,221	$	86,559	$	78,336

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2007		2006		2007		2006
Domestic	$	35,143	$	29,247	$	66,591	$	59,600
Foreign		9,746		9,974		19,968		18,736
Total	$	44,889	$	39,221	$	86,559	$	78,336

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

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 June 30, 2007, $366,000 was included in Other Liabilities and $722,000 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			June 30,
(in thousands)	2006		Expenditures			2007
Vacated facilities	$	1,384	$	(373	)	$	1,011
Employee severance and retention costs		266		(189	)		77
Total	$	1,650	$	(562	)	$	1,088

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5. Inventories

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

	June 30,		December 31,
(in thousands)	2007		2006
Raw materials	$	14,832	$	13,887
Finished goods		5,358		3,730
Total inventories	$	20,190	$	17,617

6. Intangible Assets

          The following table sets forth the balances of intangible assets at June 30, 2007 (in thousands):

				Accumulated
	Useful life	Cost		Amortization			Net
Intangible assets not subject to amortization:
Burdick trade name		$	3,400	$	—		$	3,400
Cardiac Science trade name			11,380		—			11,380
Total intangible assets not subject to amortization			14,780		—			14,780
Intangible assets subject to amortization:
Cardiac Science customer relationships	5 years		8,650		(3,172	)		5,478
Cardiac Science developed technology	8 years		11,330		(2,596	)		8,734
Burdick distributor relationships	10 years		1,400		(630	)		770
Burdick developed technology	7 years		860		(553	)		307
Patents and patent applications	5-10 years		960		(895	)		65
Patent rights	13 years		7,000		(90	)		6,910
Total intangible assets subject to amortization			30,200		(7,936	)		22,264
Total		$	44,980	$	(7,936	)	$	37,044

          Included in intangible assets at June 30, 2007 are $7,000,000 of patents recorded at fair value, based on a third party valuation, which were licensed to the Company from Philips in connection with our settlement and license agreement completed in April of 2007.

          The Company’s estimated expense for the amortization of intangibles for each full year ended December 31 is summarized as follows (in thousands):

2007	$	3,816
2008		3,957
2009		3,957
2010		3,258
2011		2,105
Thereafter		6,995

7. Credit Facility

          Borrowings under the line of credit, which expires in September 2007, 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 current 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 June 30, 2007, the Company had capacity to borrow $20,000,000 based on eligible accounts receivable and eligible inventory, less letters of credit outstanding of $234,000. 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

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adjusted quick ratio and certain reporting requirements. At June 30, 2007, the Company was in compliance with all covenants under the credit facility. At June 30, 2007 and December 31, 2006, the Company did not have any borrowings under this line of credit.

8. Warranty Liability

     Changes in the warranty liability for the six months ended June 30, 2007 were as follows:

	Six months ended
(in thousands)	June 30, 2007
Warranty liability, beginning of the period	$	2,532
Charged to product cost of revenues		1,523
Warranty expenditures		(1,150	)
Warranty liability, end of the period	$	2,905

9. Stock-Based Compensation Plans

          The Company maintains several 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						Six months ended
	June 30,						June 30,
	2007			2006			2007			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	%		37.0	%		34.0	%
Expected term (years)		0.5			0.5			0.5			0.5
Risk-free interest rate		4.5	%		4.4	%		4.5	%		4.4	%
Expected dividend yield		—			—			—			—
Fair value of employee stock purchase rights	$	2.14		$	2.37		$	2.14		$	2.37
Non-vested stock:**
Fair value of non-vested stock awards granted	$	—		$	9.62		$	9.07		$	9.98

*	Stock options were not issued in the three months ended June 30, 2007 and 2006.
**	Non-vested stock were not issued in the three months ended June 30, 2007.

          The following shares of common stock have been reserved for issuance under the Company’s stock-based compensation plans as of June 30, 2007:

Outstanding shares - 2002 Plan	2,073,517
Outstanding shares - 1997 Plan	975,955
Stock options available for grant	946,047
Outstanding non-vested stock awards	187,724
Employee stock purchase plan shares available for issuance	701,237
Total common shares reserved for future issuance	4,884,480

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          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 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 and six months ended June 30, 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
Granted		—
Exercised		(40,450	)
Cancelled		(50,914	)
Outstanding, June 30, 2007		2,073,517
Exercisable, June 30, 2007		1,571,754

          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 and six months ended June 30, 2007:

	Shares
	Subject to
	Options
Outstanding, December 31, 2006		1,159,505
Cancelled		(134,550	)
Outstanding, March 31, 2007		1,024,955
Cancelled		(49,000	)
Outstanding, June 30, 2007		975,955
Exercisable, June 30, 2007		923,455

          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.

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          The following table summarizes information about the non-vested stock awards activity during the three and six months ended June 30, 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
Granted		—
Vested		—
Cancelled		(6,448	)
Non-vested balance, June 30, 2007		187,724

          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 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 21,235 and 23,819 shares of common stock during the three months ended June 30, 2007 and 2006, respectively, and 42,077 and 47,720 shares of common stock during the six months ended June 30, 2007 and 2006, respectively, in connection with the ESPP and received total proceeds of $147,000, $178,000, $292,000 and $368,000, respectively.

10. Comprehensive Income

          The Company records all changes in equity during the period from non-owner sources as other comprehensive income, 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					Six months ended
	June 30,					June 30,
(in thousands)	2007		2006			2007		2006
Net income	$	4,530	$	118		$	4,364	$	382
Other comprehensive income (loss), net of related tax effects of $(114), $2, $(89) and $5 respectively		194		(21	)		153		(7	)
Total comprehensive income	$	4,724	$	97		$	4,517	$	375

11. Commitments and Contingencies

     Other Commitments

          As of June 30, 2007, the Company had purchase obligations of approximately $35,880,000 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.

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     Legal Proceedings

          The Company is subject to various 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 12. 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 record any tax exposure liabilities at June 30, 2007.

          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 June 30, 2007, the Company had no accrued interest related to uncertain tax positions and no accrued penalties.

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 various uncertainties.

          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 disclose and describe 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 and six month periods ended June 30, 2007 are not necessarily indicative of future results including the full fiscal year. You should also refer to our Annual Consolidated Financial Statements, Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 16, 2007.

     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

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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 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”), and applied the provisions of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). 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.

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          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 our 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, 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, liabilities and 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, patent rights and customer relationships, all of which were acquired in our acquisition of Burdick in 2003, the merger transaction with CSI in 2005 and Philips cross-licensing agreement in 2007. 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 intangible assets related to developed technology, customer relationship and patent rights, 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 many of the products and 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

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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 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.

          Licensing Income and Litigation Settlement.During the second quarter of fiscal 2007, we entered into a Settlement Agreement with Koninklijke Philips Electronics N.V. (“Philips”) pursuant to which the parties agreed to dismiss all pending claims between the parties in consideration for cross-licenses of certain patents between the parties and a $1.0 million payment from us to Philips. The transaction was valued in accordance with Accounting Principals 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”). The fair value of the intangible assets acquired of $7.0 million and royalty income received of $5.5 million was measured based upon estimated future royalty streams that would have been due to both parties for the use of their patents. This fair value was then limited to the net present value of the payment streams. We also recorded a gain on the transaction of $0.5 million, included in Licensing Income and Litigation Settlement, because the fair value of the intangible assets received in the transaction was estimated to exceed the fair value of the intangible assets given up and, in our case, the cash paid. The intangible assets’ value will be amortized to income based upon the remaining economic life of the patents of 13 years, which will approximate $0.5 million annually.

          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.We provide 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 if the product is defective upon shipment or shipped in error, and in some cases upon termination of the distributor agreement. For certain identified distributors where collection may be contingent on the distributor’s resale, revenue recognition is deferred and

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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.

          Accounting for Stock-Based Compensation.Prior to the January 1, 2006 adoption of FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), we accounted for stock-based compensation using the intrinsic value method prescribed in 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 provided in SFAS 123R.

Results of Operations

     On April 26, 2007, we announced we had reached a settlement of all outstanding claims in the patent litigation suits with Koninklijke Philips Electronics N.V. (“Philips”). The parties entered into a Settlement Agreement to resolve both lawsuits and all claims between the parties. The terms of these agreements require the dismissal of all pending legal actions between the parties, cross licenses of various patents between the two companies and the payment of $1.0 million by us to Philips.

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     Highlights of Results for the Three and Six Months Ended June 30, 2007

• We generated revenue of $44.9 million, an increase of approximately 14.5% over the three month period ended June 30, 2006, which included overall AED growth of 39% and domestic AED growth of 83%.

• We resolved all significant legal matters.

• We generated diluted earnings per share of $0.19, including $0.12 net benefit related to licensing income from litigation settlement.

• We generated cash from operations of $3.4 million, despite significant spending on litigation.

     Looking Forward

          We expect continued revenue growth 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. We expect modest growth in our cardiac monitoring product revenue as we increase our sales in both the domestic and international markets. 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.

          We expect continued growth in gross profit from our product and service lines as our revenues increase in upcoming quarters. However, 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. 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.

          As revenues increase, we expect our operating expenses to increase, 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 slightly in the future as we continue to develop our corporate infrastructure in support of the growth of our business. However, we expect a significant decline in litigation and related expenses in the second half of 2007 due to the recent settlement of all of our most significant litigation cases. 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 and six months ended June 30, 2007 and 2006 were as follows:

	Three Months						Three Months
	Ended			% Change			Ended			Six Months Ended			% Change			Six Months Ended
(dollars in thousands)	June 30, 2007			2006 to 2007			June 30, 2006			June 30, 2007			2006 to 2007			June 30, 2006
Defibrillation products	$	24,083			39.4	%	$	17,280		$	45,122			41.0	%	$	32,000
% of revenue		53.7	%					44.1	%		52.2	%					40.8	%
Cardiac monitoring products		16,704			(5.8	%)		17,727			33,356			(11.2	%)		37,576
% of revenue		37.2	%					45.2	%		38.5	%					48.0	%
Service		4,102			(2.7	%)		4,214			8,081			(7.8	%)		8,760
% of revenue		9.1	%					10.7	%		9.3	%					11.2	%
Total revenues	$	44,889			14.5	%	$	39,221		$	86,559			10.5	%	$	78,336

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     Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006

          Defibrillation products revenue increased significantly for the three month period ended June 30, 2007 from the comparable period in 2006 due to higher sales 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 83% and international sales remained relatively flat as our sales in Japan decreased 26% but were substantially offset by a 37% increase in sales in the rest of our international markets. We believe the decrease in Japan is a temporary decline, due to timing of shipments, and 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 5.8% for the three month period ended June 30, 2007 from the comparable period in 2006. Sales for the three month period ended June 30, 2007 were sequentially flat relative to the preceding three quarters. The decrease 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 in the future, will ultimately reverse the trend of relatively flat revenues in this channel we have experienced over the last three quarters.

          Service revenue decreased for the three month period ended June 30, 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.

     Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006

          Defibrillation products revenue increased significantly for the six month period ended June 30, 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 71% and international sales increased 10%, as our sales in Japan increased back to historical levels.

          Cardiac monitoring products revenue decreased by 11.2% for the six month period ended June 30, 2007 from the comparable period. The decrease in our cardiac monitoring revenue is due primarily to increased competition and delays in some of our product launches.

          Service revenue decreased for the six month period ended June 30, 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 revenues less the cost of revenues. Cost of revenues consists primarily of the costs associated with manufacturing, assembling and testing our products, amortization of certain intangibles, 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 revenues 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 and six months ended June 30, 2007 and 2006 was as follows:

	Three Months Ended			% Change			Three Months Ended			Six Months Ended			% Change			Six Months Ended
(dollars in thousands)	June 30, 2007			2006 to 2007			June 30, 2006			June 30, 2007			2006 to 2007			June 30, 2006
Products	$	20,838			19.1	%	$	17,496		$	39,692			15.4	%	$	34,385
% of products revenue		51.1	%					50.0	%		50.6	%					49.4	%
Service		928			(15.2	%)		1,094			1,954			(24.8	%)		2,598
% of service revenue		22.6	%					26.0	%		24.2	%					29.7	%
Total gross profit	$	21,766			17.1	%	$	18,590		$	41,646			12.6	%	$	36,983
% of total revenue		48.5	%					47.4	%		48.1	%					47.2	%

     Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006

          Gross profit from products increased for the three month period ended June 30, 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 and, to a lesser extent, to manufacturing efficiencies.

          Gross profit from service decreased for the three month period ended June 30, 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.

     Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006

          Gross profit from products increased for the six month period ended June 30, 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 six month period ended June 30, 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 six month period ended June 30, 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 and marketing expenses consisted primarily of salaries, commissions and related expenses for personnel engaged in sales, marketing and sales support 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 and legal fees, excluding fees associated with our litigation, and other corporate expenses.

          Licensing income and litigation settlement included non-cash income of $5.5 million for the license rights given to Philips as part of the litigation settlement and a non-cash gain on the transaction of $0.5 million. See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements.

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          Operating expenses for the three and six months ended June 30, 2007 and 2006 were as follows:

	Three Months						Three Months			Six Months						Six Months
	Ended			% Change			Ended			Ended			% Change			Ended
(dollars in thousands)	June 30, 2007			2006 to 2007			June 30, 2006			June 30, 2007			2006 to 2007			June 30, 2006
Research and development (including stock-based compensation expense of $81, $89, $160 and $166)	$	3,090			7.5	%	$	2,875		$	6,072			3.9	%	$	5,845
% of total revenue		6.9	%					7.3	%		7.0	%					7.5	%
Sales and marketing (including stock-based compensation expense of $195, $215, $429 and $372)		11,445			15.4	%		9,914			22,553			16.9	%		19,297
% of total revenue		25.5	%					25.3	%		26.1	%					24.6	%
General and administrative (including stock-based compensation expense of $210, $175, $426 and $331)		4,933			5.8	%		4,662			9,445			(3.2	%)		9,754
% of total revenue		11.0	%					11.9	%		10.9	%					12.5	%
Litigation and related expenses		2,029			61.8	%		1,254			3,717			88.4	%		1,973
% of total revenue		4.5	%					3.2	%		4.3	%					2.5	%
Licensing income and litigation settlement		(6,000	)		n/m			—			(6,000	)		n/m			—
% of total revenue		(13.4	%)					0.0	%		(6.9	%)					0.0	%
Total operating expenses	$	15,497			(17.2	%)	$	18,705		$	35,787			(2.9	%)	$	36,869
% of total revenue		34.5	%					47.7	%		41.3	%					47.1	%

     Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006

          The slight increase in research and development expenses for the three month period ended June 30, 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 and marketing expenses for the three month period ended June 30, 2007 from the comparable period in 2006 was due primarily to higher staffing levels to promote growth, higher commissions due to increased sales of domestic defibrillation products, which increased 83% from the comparable period in 2006, and investments in marketing programs and activities to facilitate future growth.

          The increase in general and administrative expenses for the three month period ended June 30, 2007 from the comparable period in 2006 was due primarily to increased expenses for tax services and other professional fees.

          Litigation and related expenses during the three month period ended June 30, 2007 totaled $2.0 million, comprised of settlement costs and legal fees related primarily to the three cases which were settled between April and July. Spending on these same cases for the three month period ended June 30, 2006 amounted to $1.3 million.

          Licensing income and litigation settlement included non-cash income of $5.5 million for the license rights given to Philips as part of the litigation settlement and a non-cash gain on the transaction of $0.5 million.

     Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006

          The slight increase in research and development expenses for the six month period ended June 30, 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 products.

          The increase in sales and marketing expenses for the six month period ended June 30, 2007 from the comparable period in 2006 was due primarily to higher staffing levels to promote growth, higher commissions on the sale of domestic defibrillation products, and investments in marketing programs and activities to facilitate future growth.

          The decrease in general and administrative expenses for the six month period ended June 30, 2007 from the comparable period in 2006 was due primarily to decreases in consulting services and temporary help.

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          Litigation and related expenses for the six month period ended June 30, 2007 totaled $3.7 million, comprised of settlement costs and legal fees related primarily to the three cases which were settled between April and July. Spending on these same cases for the six month period ended June 30, 2006 amounted to $2.0 million.

          Licensing income and litigation settlement included non-cash income of $5.5 million for the license rights given to Philips as part of the litigation settlement and a non-cash gain on the transaction of $0.5 million.

     Other Income and Expense

          Total other income was $0.4 million and $0.5 million for the three and six month periods ended June 30, 2007, respectively. Other income for the three and six month periods ended June 30, 2007 consisted primarily of income from sub-lease agreements at facilities acquired as part of the merger transaction of $0.1 million and $0.2 million, respectively, and royalties of $0.2 million and $0.2 million, respectively. Interest income increased as a result of increased average cash balances for the three and six month periods ended June 30, 2007 over the comparable period in 2006.

     Income Taxes

          In the three month period ended June 30, 2007, we recorded a tax expense of $2.2 million compared to an expense of $0.05 million in the three month period ended June 30, 2006. Our effective tax rate for the three month period ended June 30, 2007 and 2006 was 32%. Our effective tax rate for the six month period ended June 30, 2007 was 32%, compared to an effective rate of 37% 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 33%.

     Liquidity and Capital Resources

          Cash flows for the three and six months ended June 30, 2007 and 2006 were as follows:

	Three Months						Three Months			Six Months						Six Months
	Ended			% Change			Ended			Ended			% Change			Ended
(dollars in thousands)	June 30, 2007			2006 to 2007			June 30, 2006			June 30, 2007			2006 to 2007			June 30, 2006
Cash flow provided by operating activities	$	3,375			6.3	%	$	3,175		$	5,633			(16.5	%)	$	6,744
Cash flow used in investing activities		(2,032	)		(141.6	%)		(841	)		(2,232	)		(11.0	%)		(2,010	)
Cash flow provided by financing activities		387			59.3	%		243			601			29.0	%		466
Total change in cash	$	1,730			(32.9	%)	$	2,577		$	4,002			(23.0	%)	$	5,200

          Cash flows provided by operating activities of $3.4 million for the three month period ended June 30, 2007 resulted from our net income of $4.5 million less net non-cash items included in net income of $1.7 million, and a net increase in working capital of $0.6 million. Cash provided by operating activities relative to the comparable period in 2006 was relatively flat. Cash flows provided by operating activities of $5.6 million for the six month period ended June 30, 2007 resulted from our net income of $4.4 million plus net non-cash items included in this net income of $0.4 million, and a net increase in working capital of $0.8 million.

          Net cash flows used in investing activities for the three and six month periods ended June 30, 2007 consisted of a payment of $1.0 million in consideration of certain patent rights received as part of the Philips settlement agreement as well as 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 and $0.6 million, respectively, for the three and six month periods ended June 30, 2007. Net cash flows used in investing activities in 2006 included payments of acquisition costs related to the merger transaction of $0.4 million and $1.2 million, respectively, for the three and six month periods ended June 30, 2006.

          Net cash flows provided by financing activities for the three and six month periods ended June 30, 2007 and 2006, respectively, consisted of proceeds from exercises of stock options and sales of common stock under our ESPP.

          As of June 30, 2007, our cash and cash equivalents totaled $13.8 million and we had short-term investments of $0.4 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 current 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

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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 June 30, 2007, we had the capacity to borrow $20.0 million based on eligible accounts receivable and eligible inventory, less letters of credit outstanding of $0.2 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.

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 June 30, 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

          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

          At our Annual Meeting of Stockholders held on May 25, 2007, the following action was taken:

          Election of Directors for a three-year term expiring at the 2010 annual meeting:

	For		Withheld
Jue-Hsien Chern. Ph.D		17,319,976		391,906
Raymond W. Cohen		17,199,886		511,996
Ruediger Naumann-Etienne , Ph.D		17,418,843		293,039

          Current directors whose terms are continuing after the 2007 annual meeting are W. Robert Berg, John R. Hinson, Timothy C. Mickelson, Ray E. Newton, III, and Jeffrey F. O’Donnell, Sr.

Item 5. Other Information

          None.

Item 6. Exhibits

No.		Description
10.68		Settlement Agreement by and between Cardiac Science Corporation, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation, dated April 24, 2007 (certain exhibits have been omitted and will be provided to the Securities and Exchange Commission upon request).
10.69	*	Cross-License Agreement by and between Cardiac Science Corporation, Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation, dated April 24, 2007 (certain exhibits have been omitted and will be provided to the Securities and Exchange Commission upon request).
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.

*  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: August 9, 2007

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