Cardiac Science 10Q 2008 Q3 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 September 30, 2008


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 Yeso No

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting companyo

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

The number of shares outstanding of the registrant’s common stock as of November 3, 2008 was 22,937,397

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
(In thousands, except per share data)	2008		2007
ASSETS
Current Assets:
Cash and cash equivalents	$	32,595	$	20,159
Short-term investments		845		350
Accounts receivable, net of allowance for doubtful accounts of $613 and $500, respectively		30,278		29,439
Inventories		23,493		21,794
Deferred income taxes		9,556		9,558
Prepaid expenses and other current assets		2,901		2,509

Total current assets		99,668		83,809
Other assets		400		125
Machinery and equipment, net of accumulated depreciation and amortization of $14,815 and $13,065, respectively		5,677		5,056
Deferred income taxes		26,333		30,288
Intangible assets, net of accumulated amortization of $12,895 and $9,927, respectively		32,272		35,053
Investments in unconsolidated entities		725		727
Goodwill		107,613		107,613

Total assets	$	272,688	$	262,671


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	12,031	$	12,792
Accrued liabilities		11,392		11,075
Warranty liability		4,374		3,211
Deferred revenue		8,206		8,141

Total current liabilities		36,003		35,219
Other liabilities		—		54

Total liabilities		36,003		35,273
Minority interests		384		127
Commitments and contingencies
Shareholders’ Equity:

Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares issued or outstanding as of September 30, 2008 and December 31, 2007, respectively		—		—
Common stock (65,000,000 shares authorized), $0.001 par value, 22,936,193 and 22,781,648 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively		226,524		224,250
Accumulated other comprehensive income		105		167
Retained earnings		9,672		2,854

Total shareholders’ equity		236,301		227,271

Total liabilities and shareholders’ equity	$	272,688	$	262,671

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

Page 3 of 31

CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except share and per share data)	2008			2007			2008			2007
Revenues:
Products	$	49,387		$	41,145		$	140,984		$	119,623
Service		4,619			3,999			14,113			12,080

Total revenues		54,006			45,144			155,097			131,703

Cost of Revenues:
Products		24,799			19,749			69,260			58,535
Service		3,088			3,252			9,557			9,379

Total cost of revenues		27,887			23,001			78,817			67,914

Gross profit		26,119			22,143			76,280			63,789

Operating Expenses:
Research and development		4,103			3,391			11,762			9,463
Sales and marketing		12,934			11,913			38,170			34,466
General and administrative		5,096			4,462			15,568			13,907
Litigation and related expenses		—			91			—			3,808
Licensing income and litigation settlement		—			—			—			(6,000	)

Total operating expenses		22,133			19,857			65,500			55,644

Operating income		3,986			2,286			10,780			8,145

Other Income:
Interest income, net		156			103			434			199
Other income, net		20			406			106			858

Total other income		176			509			540			1,057

Income before income tax expense and minority interests		4,162			2,795			11,320			9,202
Income tax expense		(1,598	)		(1,023	)		(4,245	)		(3,103	)

Income before minority interests		2,564			1,772			7,075			6,099
Minority interests		(86	)		(13	)		(257	)		24

Net income	$	2,478		$	1,759		$	6,818		$	6,123


Net income per share — basic	$	0.11		$	0.08		$	0.30		$	0.27
Net income per share — diluted	$	0.11		$	0.08		$	0.29		$	0.26
Weighted average shares outstanding — basic		22,892,161			22,726,066			22,840,524			22,676,332
Weighted average shares outstanding — diluted		23,413,042			23,290,558			23,402,011			23,248,930

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

Page 4 of 31

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2008			2007			2008			2007
Operating Activities:
Net income	$	2,478		$	1,759		$	6,818		$	6,123
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		469			574			1,515			1,749
Depreciation and amortization		1,544			1,762			4,777			5,074
Licensing income and litigation settlement		—			—			—			(6,000	)
Deferred income taxes		1,493			912			3,955			2,864
Minority interests		86			62			257			24
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable, net		(526	)		243			(1,169	)		(117	)
Inventories		(929	)		(259	)		(1,678	)		(2,800	)
Prepaid expenses and other assets		(151	)		617			(445	)		(395	)
Accounts payable		(591	)		(1,881	)		(827	)		666
Accrued liabilities		1,113			(385	)		729			889
Warranty liability		825			264			1,163			637
Deferred revenue		555			33			65			628

Net cash provided by operating activities		6,366			3,701			15,160			9,342

Investing Activities:
Purchases of short-term investments		(845	)		(346	)		(845	)		(890	)
Maturities of short-term investments		—			395			350			1,091
Purchase of patents as part of litigation settlement		—			—			—			(1,000	)
Purchases of machinery and equipment		(983	)		(866	)		(2,425	)		(1,688	)
Proceeds from repayment of note		38			—			38			—
Cash paid for acquisitions		(156	)		(215	)		(580	)		(777	)

Net cash used in investing activities		(1,946	)		(1,032	)		(3,462	)		(3,264	)

Financing Activities:
Proceeds from exercise of stock options and issuance of shares under employee purchase plan		541			147			887			748
Minimum tax withholding on restricted stock awards		(87	)		(76	)		(149	)		(84	)

Net cash provided by financing activities		454			71			738			664

Net change in cash and cash equivalents		4,874			2,740			12,436			6,742
Cash and cash equivalents, beginning of period		27,721			13,821			20,159			9,819

Cash and cash equivalents, end of period	$	32,595		$	16,561		$	32,595		$	16,561

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

Page 5 of 31

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 (the “Company”) develops, manufactures, and markets a family of advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators (“AEDs”), electrocardiograph systems, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, and cardiology data management systems (informatics) that connect with hospital information (“HIS”), electronic medical record (“EMR”), and other information systems. The Company sells a variety of related products and consumables, and provides a portfolio of training, maintenance, and support services. The Company is the successor to the cardiac businesses that established the trusted Burdick^®, HeartCentrix^®, Powerheart^®, and Quinton^{^®}brands and is headquartered in Bothell, Washington. The Company distributes its products in more than 100 countries worldwide, with operations in North America, Europe, and Asia.

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 September 30, 2008, the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2008 and 2007 and the condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 2008 and 2007 have been prepared by the Company and are unaudited. The condensed consolidated balance sheet dated December 31, 2007 was derived from the Company’s audited financial statements. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007 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 consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America 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 collectability of accounts receivable, the recoverability of inventory, the adequacy of warranty liabilities, the valuation of stock awards, intra-period tax allocation, the realizability of investments, the realizability of deferred tax assets and valuation and useful lives of tangible and intangible assets, including goodwill and patent rights, 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, (“SFAS”), 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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except share data)	2008		2007		2008		2007
Numerator:
Net income	$	2,478	$	1,759	$	6,818	$	6,123

Denominator:
Weighted average shares for basic calculation		22,892,161		22,726,066		22,840,524		22,676,332
Incremental shares from employee stock options and ESPP		520,881		564,492		561,487		572,598

Weighted average shares for diluted calculation		23,413,042		23,290,558		23,402,011		23,248,930

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 net income per share:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Antidilutive shares issuable upon exercise of stock options		2,408,583		2,445,283		2,451,399		2,487,400
Antidilutive shares issuable upon exercise of warrants		245,109		250,109		246,109		303,109
Antidilutive shares related to non-vested stock awards and ESPP		391,967		145,722		308,544		145,233

Total		3,045,659		2,841,114		3,006,052		2,935,742

Customer and Vendor Concentrations

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Customer	2008			2007			2008			2007
Customer 1		24	%		13	%		19	%		11	%
Customer 2		*			*			11	%		*


*		Did not exceed 10%.

The loss of one of these customers could negatively impact our total revenues.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Vendor	2008			2007			2008			2007
Vendor 1		18	%		20	%		17	%		14	%

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.

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 or shareholders’ equity as previously reported.

Page 7 of 31

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement also establishes disclosure requirements designed to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The requirements of FSP FAS 142-3 are effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact FSP FAS 142-3 will have on the Company’s financial position and results of operations upon adoption.

In March of 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement 133” (“SFAS 161”). SFAS 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under FASB Statement 133, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. SFAS 161 is effective for fiscal years beginning after November 15, 2008. Adoption of SFAS 161 is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS 141R, “Business Combinations” (“SFAS 141R”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements of SFAS 141R are effective for periods beginning after December 15, 2008. The Company is required to and plans to adopt the provisions of SFAS 141R beginning in the first quarter of 2009. The Company is currently assessing the impact of the adoption of SFAS 141R. The impact will depend upon the acquisitions, if any, the Company consummates after the effective date.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interest in Consolidated Financial Statements”, an amendment of ARB 51 (“SFAS 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. The requirements of SFAS 160 are effective for periods beginning after December 15, 2008. The Company is currently assessing the impact SFAS 160 will have on the Company’s financial position and results operations upon adoption.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement 157” (“FSP FAS 157-2”), which allows for the deferral of the adoption date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company elected to defer the adoption of SFAS 157 for the assets and liabilities within the scope of FSP FAS 157-2. Refer to Note 13, Fair Value Measurements, of this Form 10-Q for our disclosures pursuant to the effective portion of SFAS 157. The adoption of SFAS 157 for those assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact on the Company’s financial position or results of operations.

2. Segment Reporting

The Company follows the provisions of SFAS 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 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.

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The following table summarizes revenues by product line:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2008		2007		2008		2007
Defibrillation products	$	34,071	$	25,430	$	92,371	$	70,553
Cardiac monitoring products		15,316		15,715		48,613		49,070
Service		4,619		3,999		14,113		12,080

Total	$	54,006	$	45,144	$	155,097	$	131,703

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2008		2007		2008		2007
Domestic	$	31,166	$	33,478	$	94,707	$	99,985
Foreign		22,840		11,666		60,390		31,718

Total	$	54,006	$	45,144	$	155,097	$	131,703

Foreign revenue includes $12,889,000 and $5,736,000 attributed to Japan for the three months ended September 30, 2008 and 2007, respectively and $29,797,000 and $14,656,000 for the nine months ended September 30, 2008 and 2007, respectively.

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

3. Restructuring Costs

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. 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.

At September 30, 2008, restructuring costs of $213,000 related to vacated facilities have been included in accrued liabilities on the accompanying unaudited condensed consolidated balance sheet and will be paid over the remaining lease terms ending in January 2009. Employee severance and retention costs were fully paid by August 2007.


	Balance at					Balance at
	December 31,		Cash			Sept 30,
(in thousands)	2007		Expenditures			2008
Vacated facilities	$	679	$	(466	)	$	213

Page 9 of 31

4. Inventories

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


	Sept 30,		December 31,
(in thousands)	2008		2007
Raw materials	$	18,910	$	16,543
Finished goods		4,583		5,251

Total inventories	$	23,493	$	21,794

5. Intangible Assets

The following table sets forth the balances of intangible assets at September 30, 2008 (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
Cardiac Science Deutschland trade name			187		—			187

Total intangible assets not subject to amortization			14,967		—			14,967

Intangible assets subject to amortization:
Cardiac Science customer relationships	5 years		8,650		(5,334	)		3,316
Cardiac Science developed technology	8 years		11,330		(4,367	)		6,963
Burdick distributor relationships	10 years		1,400		(805	)		595
Burdick developed technology	7 years		860		(706	)		154
Patents and patent applications	5-10 years		960		(920	)		40
Patent rights	13 years		7,000		(763	)		6,237

Total intangible assets subject to amortization			30,200		(12,895	)		17,305

Total		$	45,167	$	(12,895	)	$	32,272

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


2008	$	3,958
2009		3,958
2010		3,258
2011		2,104
2012		2,102
Thereafter		4,893

6. Credit Facility

The Company has a $10,000,000 line of credit with Silicon Valley Bank with minimal restrictions on the amount eligible for borrowing. Substantially all of our current assets are pledged as collateral for the line of credit. This line of credit bears interest, based on our quarterly adjusted EBITDA, at the lender’s prime rate or LIBOR plus 1.75%. At September 30, 2008 and 2007 the Company did not have any borrowings under this or any other line of credit.

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7. Warranty Liability

Changes in the warranty liability for the nine months ended September 30, 2008 were as follows:


	Nine months ended
(in thousands)	September 30, 2008
Warranty liability, beginning of the period	$	3,211
Charged to product cost of revenues		3,276
Warranty expenditures		(2,113	)

Warranty liability, end of the period	$	4,374

8. 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 Employee Stock Purchase Plan (“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						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Stock options plans:
Volatility		47.9	%		50.9	%		48.3	%		50.4	%
Expected term (years)		6.25			6.25			6.25			6.25
Risk-free interest rate		3.6	%		4.9	%		3.5	%		4.9	%
Expected dividend yield		—			—			—			—
Fair value of options granted	$	4.89		$	5.33		$	4.45		$	5.23

Employee stock purchase plan:
Volatility		27.0	%		37.0	%		27.0	%		37.0	%
Expected term (years)		0.5			0.5			0.5			0.5
Risk-free interest rate		4.5	%		4.5	%		4.5	%		4.5	%
Expected dividend yield		—			—			—			—
Fair value of employee stock purchase rights	$	2.01		$	2.14		$	2.01		$	2.14

Non-vested stock:
Fair value of non-vested stock awards granted	$	9.55		$	9.62		$	9.05		$	9.22

The Company estimates the expected term of “plain vanilla” share options using the “simplified method” in accordance with SEC Staff Accounting Bulletin 110, “Certain Assumptions Used in Valuation Methods” (“SAB 110”) and SFAS 123(R) “Share Based Payment” (“SFAS 123R”).

The following shares of common stock have been reserved for issuance under the Company’s stock-based compensation plans as of September 30, 2008:


Outstanding shares - 2002 Plan			2,010,277
Outstanding shares - 1997 Plan			836,312
Stock options available for grant			947,019
Outstanding non-vested stock awards			385,843
Employee stock purchase plan shares available for issuance			772,878

Total common shares reserved for future issuance			4,952,329

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2002 Plan —The Company’s 2002 Stock Incentive Plan (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 (including non-vested stock awards), 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 nine months ended September 30, 2008:


	Shares
	Subject to
	Options
Outstanding, December 31, 2007		2,106,842
Granted		52,500
Exercised		(4,041	)
Forfeited or expired		(27,451	)

Outstanding, March 31, 2008		2,127,850
Granted		12,500
Exercised		(5,541	)
Forfeited or expired		(30,289	)

Outstanding, June 30, 2008		2,104,520

Granted		15,000
Exercised		(57,272	)
Forfeited or expired		(51,971	)

Outstanding, September 30, 2008		2,010,277

Exercisable September 2008		1,588,765

Non-vested Stock Awards —As part of the 2002 Plan, the stock award program offers employees and directors the opportunity to earn shares of the Company’s stock over time, rather than options that give employees the right to purchase stock at a set price. Non-vested stock awards require no payment from the employee, with the exception of employee related federal taxes.

The following table summarizes information about the non-vested stock award activity during the three and nine months ended September 30, 2008:


	Shares
Non-vested balance, December 31, 2007		152,974
Granted		253,269
Vested		(19,587	)
Forfeited		(5,075	)

Non-vested balance, March 31, 2008		381,581
Granted		43,891
Vested		—
Forfeited		(20,824	)

Non-vested balance, June 30, 2008		404,648

Granted		14,816
Vested		(19,981	)
Forfeited		(13,640	)

Non-vested balance, Sept 30, 2008		385,843

1997 Plan —The Company’s 1997 Stock Option/Stock Issuance Plan (the “1997 Plan”) provided for the granting of incentive stock options 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

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splits, combinations, mergers, consolidations, reorganizations, reclassifications, exchanges, or other capital adjustments. The 1997 plan expired in 2007. Accordingly, no future grants are allowed under the 1997 Plan. Previous awards under the 1997 Plan will continue to be outstanding until they are exercised, expire or are forfeited.

The following table summarizes information about the 1997 Plan option activity during the three and nine months ended September 30, 2008:


	Shares
	Subject to
	Options
Outstanding, December 31, 2007		858,262
Forfeited or expired		(11,000	)

Outstanding, March 31, 2008		847,262
Forfeited or expired		(10,950	)

Outstanding, June 30, 2008		836,312

Forfeited or expired		0

Outstanding, Sept 30, 2008		836,312

Exercisable, Sept 30, 2008		796,937

Employee Stock Purchase Plan —The Company has an 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 21,249 and 19,868 shares of common stock during the three months ended September 30, 2008 and 2007, respectively, and 65,778 and 61,945 shares of common stock during the nine months ended September 30, 2008 and 2007, respectively, in connection with the ESPP and received total proceeds of $152,000, $138,000, $470,000 and $430,000, respectively.

9. Comprehensive Income

The Company computes comprehensive income in accordance with SFAS 130, “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements.

For the Company, components of other comprehensive income consist of unrealized gains and losses on available-for-sale securities, net of related income tax effects and foreign currency translation adjustments.

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Comprehensive income, net of any related tax effects, was as follows:


	Three months ended					Nine months ended
	September 30,					September 30,
(in thousands)	2008			2007		2008			2007
Net income	$	2,478		$	1,759	$	6,818		$	6,123
Unrealized gains (losses) on available for sale securities, net of related tax effects of ($26), $(9), zero and ($98) respectively		44			15		(2	)		168
Foreign currency translation adjustments		(70	)		—		(60	)		—

Total comprehensive income	$	2,452		$	1,774	$	6,756		$	6,291

10. Commitments and Contingencies

Other Commitments

As of September 30, 2008, the Company had purchase obligations of approximately $45,502,000 consisting of outstanding purchase orders issued in the normal course of business.

Guarantees and Indemnities

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

Legal Proceedings

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.

Voluntary Field Corrective Action of Certain AEDs

On October 13, 2008 the Company announced a worldwide voluntary field corrective action of certain AEDs manufactured between August 2006 and March 2007. Some AEDs manufactured in this time frame may have a component whose performance doesn’t match the factory software settings. The Company has begun notifying distributors and customers with affected devices and is shipping software updates to each. This action will not affect the company’s AED manufacturing, shipping schedules, or service support to current or new customers.

Costs associated with the voluntary field corrective action totaled approximately $800,000 for the three and nine months ended September 30, 2008 and were charged to product cost of revenues, resulting in an increase to the Company’s warranty liability.

Management continues to review its estimates of the overall voluntary field corrective action costs, which could result in additional charges in the future.

11. Income Taxes

The Company applies the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s consolidated financial statements in accordance with SFAS 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. Based on management’s review of the Company’s tax positions, the Company had no significant unrecognized tax benefits as of September 30, 2008 and December 31, 2007.

The Company is subject to U.S. federal income tax and 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 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 September 30, 2008, the Company had no accrued interest related to uncertain tax positions and no accrued penalties.

12. Derivatives

In 2008, the Company entered into foreign currency forward exchange contracts that are not designated as hedging instruments for accounting purposes, to mitigate the foreign exchange risk of certain balance sheet items. These forward exchange contracts resulted in net realized gains of $518,000 and $451,000 in the three and nine month periods ended September 30, 2008, respectively. The net realized gains were partially offset by net currency losses on foreign cash holdings and outstanding receivables denominated in foreign currencies during the same periods. The assets for these contracts are recorded in other assets and the net realized gains are recorded in other income, net. No contracts were unsettled as of September 30, 2008 and no similar contracts were held as of December 31, 2007.

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13. Fair Value Measurement

In September 2006, the FASB issued SFAS 157, which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This Statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model.

Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 “Application of FASB Statement 157 to FASB Statement 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”, FSP FAS 157-2 “Effective Date of FASB Statement 157” and FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”). FSP 157-1 amends SFAS 157 to exclude SFAS 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP FAS 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP 157-3 clarifies the application of SFAS 157, in cases where a market is not active. The Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of September 30, 2008, and the impact was not material.

The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the Statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, and those initially measured at fair value in a business combination or other licensing agreement.

Valuation Hierarchy

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. Classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company’s assets that are carried at fair value and are accounted for under SFAS 157 are recorded on the balance sheet in cash and cash equivalents, short-term investments and investments in unconsolidated entities.

The following table provides the assets carried at fair value measured on a recurring basis as of September 30, 2008:


	Total carrying		Fair Value Measurements at September 30, 2008 using:
	value at		Quoted prices in		Significant other		Significant
	September 30,		active markets		observable events		unobservable inputs
(in thousands of dollars)	2008		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents	$	26,569	$	19,730	$	6,839	$	—
Investments in unconsolidated entities		645		645		—		—

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In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. Unrealized gains and losses on items for which the fair value option is elected would be reported in earnings. The Company adopted SFAS 159 as of January 1, 2008 and has not elected to measure any additional financial instruments or other items at fair value under this statement during the nine month period ended September 30, 2008.

14. Acquisitions

On April 23, 2008, the Company completed an acquisition of a former distributor, under the purchase method of accounting. The total estimated purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed in connection with the acquisition, based on their fair values as of the closing date. The purchase consideration of $148,000 was allocated to a trade name valued at $202,000, other assets of $12,000, and accounts payable of $66,000. Management has concluded that no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of the trade name and accordingly has considered the useful life of the trade name to be indefinite.

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, the 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, 2007 as well as the section entitled “Risk Factors” in Part II — Item 1A of this Form 10-Q, 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 Securities and Exchange Commission (“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 nine month periods ended September 30, 2008 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, 2007, filed with the SEC on March 17, 2008.

Business Overview

We develop, manufacture, and market a family of advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators (“AEDs”), electrocardiograph systems, stress test systems, Holter monitoring systems, hospital defibrillators, cardiac rehabilitation telemetry systems, and cardiology data management systems (informatics) that connect with hospital information (“HIS”), electronic medical record (“EMR”), and other information systems. We sell a variety of related products and consumables, and provide a portfolio of training, maintenance, and support services. We are the successor to the cardiac businesses that established the trusted Burdick^®, HeartCentrix^®, Powerheart^®, and Quinton^{^®}brands and are headquartered in Bothell, Washington. We distribute our products in more than 100 countries worldwide, with operations in North America, Europe, and Asia.

Critical Accounting Estimates and Policies

To prepare financial statements that conform with accounting principles generally accepted in the United States of America, 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,

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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.

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.

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 in the statement of operations. We use our judgment to determine our provision for income taxes, and any valuation allowance recorded against our net deferred tax assets.

Stock-Based Compensation.We account for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Statement 123(R), “Share-Based Payment” (“SFAS 123R”), and apply the provisions of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”)107, “Share-Based Payment” (“SAB 107”) and SAB 110, “Certain Assumptions Used in Valuation Methods” (“SAB 110”). 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.

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, Spacelabs Burdick Inc. (“Burdick”) and the merger transaction with Cardiac Science, Inc. (“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 our majority-owned joint venture in Shanghai, China, 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, the cross-licensing agreement with Koninklijke Philips Electronics N.V. (“Philips”) in 2007 and the acquisition of Cardiac Science Deutschland in 2008. 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 relationships and patent rights, this evaluation would be performed if events occur that suggest there may be an impairment

Page 17 of 31

loss. If we conclude that any of our intangible assets are impaired, we would record this as a loss in our statement of operations and as a reduction to the intangible asset.

Accounts Receivable.Accounts receivable represent a significant portion of our assets. We must make estimates of the collectability 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 collectability 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.

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 undiscounted future cash flows, an impairment charge is recognized in 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.

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 consolidated financial statements as a whole.

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

Litigation and Related Expenses.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 29, “Accounting for Nonmonetary Transactions,” (“APB 29”), as amended by SFAS 153, “Exchanges of Nonmonetary Assets an amendment of APB Opinion 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.

With respect to arrangements where software is considered more than incidental to the product, the VSOE 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).

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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.

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 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 some 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.

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 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 in separately priced contracts. 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.

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

Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the factors that should be considered in renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This statement also establishes disclosure requirements designed to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The requirements of FSP FAS 142-3 are effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently assessing the impact FSP FAS 142-3 will have on our financial position and results of operations upon adoption.

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In December 2007, the FASB issued SFAS 141R, “Business Combinations” (“SFAS 141R”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements of SFAS 141R are effective for periods beginning after December 15, 2008. We are required to and plan to adopt the provisions of SFAS 141R beginning in the first quarter of 2009. We are currently assessing the impact of the adoption of SFAS 141R. The impact will depend upon the acquisitions, if any, we consummate after the effective date.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interest in Consolidated Financial Statements”, an amendment of ARB 51 (“SFAS 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. The requirements of SFAS 160 are effective for periods beginning after December 15, 2008. We are currently assessing the impact SFAS 160 will have on our financial position and results of operations upon adoption.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement 157” (“FSP FAS 157-2”), which allows for the deferral of the adoption date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We elected to defer the adoption of SFAS 157 for the assets and liabilities within the scope of FSP FAS 157-2. Refer to Note 13, Fair Value Measurements, of this Form 10-Q for our disclosures pursuant to the effective portion of SFAS 157. The adoption of SFAS 157 for those assets and liabilities within the scope of FSP FAS 157-2 is not expected to have a material impact on our financial position or results of operations.

Results of Operations

Highlights of Results for the Three and Nine Month Periods Ended September 30, 2008

	•		We generated revenue of $54.0 million in the three month period ended September 30, 2008, an increase of approximately 20% over the three month period ended September 30, 2007. This included overall AED growth of 34% an increase in service revenues of 16%, partially offset by a decrease in cardiac monitoring revenues of 3%.

	•		We generated revenue of $155.1 million in the nine month period ended September 30, 2008, an increase of approximately 18% over the nine month period ended September 30, 2007. This included overall AED growth of 31% an increase in service revenues of 17%, while cardiac monitoring revenue remained relatively flat.

	•		Gross margins were 48.4% and 49.2% during the three and nine month periods ended September 30, 2008, respectively, compared to 49.0% and 48.4% during the three and nine month periods ended September 30, 2007, respectively.

	•		International product revenue increased by 96% and 90% during the three and nine month periods ended September 30, 2008, respectively, as compared to the same periods in the prior year.

	•		Operating income for the three and nine month periods ended September 30, 2008 was $4.0 million and $10.8 million, respectively, compared with operating income of $2.3 million and $8.1 million, respectively for the comparable periods in the prior year. Operating income for the nine month period ended September 30, 2007 included the net benefit of licensing income in excess of litigation expenses of $2.2 million.

	•		We generated diluted earnings per share of $0.11 and $0.29 for the three and nine month periods ended September 30, 2008, respectively, compared with diluted earnings per share of $0.08 and $0.26 for the three and nine month periods ended September 30, 2007.

	•		We generated cash from operations of $6.4 million and $15.2 million for the three and nine month periods ended September 30, 2008, respectively, compared to cash from operations of $3.7 million and $9.3 million for the comparable periods in 2007.

Looking Forward

We expect continued revenue growth, over time, in sales of our defibrillation products, as we continue to expand our presence in the global AED market and as we continue to increase shipments of our hospital defibrillator. We expect our cardiac monitoring product revenue to grow modestly over time as we increase our sales in both the domestic and international markets. We expect continued growth in service revenue over the longer term. Revenue from all of our business lines may fluctuate from quarter to quarter, however, due to timing of orders and other factors.

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We expect continued growth in gross profit as our revenues increase over time. 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 AED pricing, the effect of product cost reductions, fluctuations in foreign currencies and other factors.

As revenues increase, we expect our aggregate operating expenses to increase, though generally at a slower rate than our overall revenue growth rate. We devote 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. Several components of our research and development efforts require significant funding, the timing of which can cause significant quarterly variability in our expenses. 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 revenue increases and we expand our sales and marketing efforts in both domestic and international locations, hire additional sales and marketing personnel and initiate additional sales and marketing programs. Finally, we expect general and administrative expenses to increase somewhat in the future as we continue to develop our corporate infrastructure in support of the growth of our business.

Revenues

We derive our revenues primarily from the sale of our non-invasive cardiology products and related consumables, and to a lesser extent, from services related to these products, including training. We categorize our revenues as (1) defibrillation products, which includes our AEDs, hospital defibrillators and related accessories; (2) cardiac monitoring products, which includes capital equipment, software products and related accessories and supplies; 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 nine months ended September 30, 2008 and 2007 were as follows:


	Three Months						Three Months
	Ended			% Change			Ended			Nine Months Ended			% Change			Nine Months Ended
(dollars in thousands)	Sept 30, 2008			2007 to 2008			Sept 30, 2007			Sept 30, 2008			2007 to 2008			Sept 30, 2007
Defibrillation products	$	34,071			34.0	%	$	25,430		$	92,371			30.9	%	$	70,553
% of revenue		63.1	%					56.3	%		59.7	%					53.7	%
Cardiac monitoring products		15,316			(2.5	%)		15,715			48,613			(0.9	%)		49,070
% of revenue		28.4	%					34.8	%		31.3	%					37.3	%
Service		4,619			15.5	%		3,999			14,113			16.8	%		12,080
% of revenue		8.6	%					8.9	%		9.1	%					9.2	%

Total revenues	$	54,006			19.6	%	$	45,144		$	155,097			17.8	%	$	131,703

Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007

Defibrillation products revenue increased significantly for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 due to strong growth throughout Europe and Asia (particularly in Japan), which increased by 106% and 102%, respectively, during the period. This increase was partially offset by decreases in domestic defibrillation products revenue of 23% and 18% during the three and nine month periods ended September 30, 2008, respectively, as compared to the same periods in 2007. This decrease was due in part to exceptionally high revenue in the prior year that included multi-million dollar school and corporate AED deployments.

Cardiac monitoring products revenue decreased by 3% for the three month period ended September 30, 2008 from the comparable period in 2007 and remained relatively flat for the nine month period ended September 30, 2008 from the comparable period in 2007. We believe this is due, in part, to weakening of general economic conditions resulting in longer buying cycles and deferred purchasing decisions for customers in this portion of our business.

Service revenue increased 16% and 17%, respectively, for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 due primarily to the success of our continued focus on and promotion of our AED training and program management services, and to a lesser extent on growth in our cardiac monitoring service contract sales.

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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.

Gross profit for the three and nine month periods ended September 30, 2008 and 2007 was as follows:


	Three Months						Three Months
	Ended			% Change			Ended			Nine Months Ended			% Change			Nine Months Ended
(dollars in thousands)	September 30, 2008			2007 to 2008			September 30, 2007			September 30, 2008			2007 to 2008			September 30, 2007
Products	$	24,588			14.9	%	$	21,396		$	71,724			17.4	%	$	61,088
% of products revenue		49.8	%					52.0	%		50.9	%					51.1	%
Service		1,531			105.0	%		747			4,556			68.7	%		2,701
% of service revenue		33.1	%					18.7	%		32.3	%					22.4	%

Total gross profit	$	26,119			18.0	%	$	22,143		$	76,280			19.6	%	$	63,789

% of total revenue		48.4	%					49.0	%		49.2	%					48.4	%

Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007

Gross profit from products increased for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 due principally to a shift in overall product mix to a higher proportion of defibrillation products, for which gross profit is generally higher than for cardiac monitoring products. However, gross profit from products decreased as a percentage of product revenue for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 due principally to $800,000 of costs accrued in September 2008 related to the voluntary field corrective action we announced in October, 2008 related to certain AED products.

Gross profit from service increased as a percentage of service revenue for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 due in part to increased sales of higher value-added offerings and general growth in service revenue while costs remain relatively fixed.

Operating Expenses

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

Research and development expenses consist 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.

Sales and marketing expenses consist 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 consist 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.

Litigation and related expenses include settlement costs and legal fees related primarily to three cases which we settled in the first half of 2007.

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Operating expenses for the three and nine months ended September 30, 2008 and 2007 were as follows:


	Three Months						Three Months			Nine Months						Nine Months
	Ended			% Change			Ended			Ended			% Change			Ended
(dollars in thousands)	Sept 30, 2008			2007 to 2008			Sept 30, 2007			Sept 30, 2008			2007 to 2008			Sept 30, 2007
Research and development	$	4,103			21.0	%	$	3,391		$	11,762			24.3	%	$	9,463
% of total revenue		7.6	%					7.5	%		7.6	%					7.2	%

Sales and marketing		12,934			8.6	%		11,913			38,170			10.7	%		34,466
% of total revenue		23.9	%					26.4	%		24.6	%					26.2	%

General and administrative		5,096			14.2	%		4,462			15,568			11.9	%		13,907
% of total revenue		9.4	%					9.9	%		10.0	%					10.6	%
Litigation and related expenses		—			n/m			91			—			n/m			3,808
% of total revenue		0.0	%					0.2	%		0.0	%					2.9	%
Licensing income and litigation settlement		—			n/m			—			—			n/m			(6,000	)
% of total revenue		0.0	%					0.0	%		0.0	%					(4.6	%)

Total operating expenses	$	22,133			11.5	%	$	19,857		$	65,500			17.7	%	$	55,644

% of total revenue		41.0	%					44.0	%		42.2	%					42.2	%

Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended September 30, 2007

The increase in research and development expenses for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 was due primarily to higher labor and outside contractor costs related to increased investment in future versions of our products.

The increase in sales and marketing expenses for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 was due primarily to higher commissions related to higher total revenues, higher selling expenses from foreign subsidiaries where we have added a direct presence and the timing of expenses associated with annual sales meetings recorded in the second quarter of 2008. In addition, payroll and benefit related costs increased due to higher staffing.

The increase in general and administrative expenses for the three and nine month periods ended September 30, 2008 from the comparable periods in 2007 was due primarily to increases in payroll and benefit related costs, including temporary labor as well as increased bad debt expense and increased bonus expenses, partially offset by lower professional service fees related to audit, tax and legal fees.

Litigation and related expenses during the three and nine month periods ended September 30, 2007 totaled $0.01 million and $3.8 million, respectively, comprised of legal fees related primarily to the three cases which were settled between April and July of 2007. We had no expenses related to these same cases for the three and nine month periods ended September 30, 2008.

Licensing income and litigation settlement during the nine month periods ending September 30, 2007 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. We had no similar settlements for the three and nine month periods ended September 30, 2008.

Other Income and Expense

Interest income increased as a result of increased average cash balances for the three and nine month periods ended September 30, 2008 over the comparable periods in 2007.

Other income, net was zero and $0.1 million for the three and nine month periods ended September 30, 2008, respectively, and consisted primarily of income from royalty agreements, partially offset by net foreign exchange losses during the periods. Other income, net was $0.4 million and $0.9 million for the three and nine month periods ended September 30, 2007, respectively and consisted primarily of income from royalty agreements of $0.1 million and $0.3 million, respectively, and income from sub-lease agreements at facilities acquired as part of the merger of $0.1 million and $0.2 million, respectively.

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Income Taxes

During the three and nine month periods ended September 30, 2008, we recorded income tax expense of $1.6 million and $4.2 million, respectively, compared to income tax expense of $1.0 million and $3.1 million, respectively, for the comparable periods in 2007. Our worldwide effective tax rate for the three and nine month periods ended September 30, 2008 was 37%, compared to a worldwide effective tax rate of 34% for the comparable periods in 2007. We record our quarterly provision for income taxes based on our estimated worldwide effective tax rates for the full year, which are determined based on estimates of pre-tax income for the full year, expected differences between book and tax income and expected state and federal tax credits. The increase in the worldwide effective tax rate in 2008 compared to the 2007 worldwide effective tax rate is due primarily to a difference in our expectation regarding federal research and development tax credits, which expired as of December 31, 2007 and, to a lesser extent to differences in other factors.

On October 3, 2008,H.R. 1424, the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008andTax Extenders and Alternative Minimum Tax Relief Act of 2008were signed into law. This legislation extended federal research and development tax credits through the end of 2009. As a result of this legislation, we expect our worldwide effective tax rate for the year ended December 31, 2008 to be approximately 34%.

Liquidity and Capital Resources

Cash flows for the three and nine months ended September 30, 2008 and 2007 were as follows:


	Three Months						Three Months			Nine Months						Nine Months
	Ended			% Change			Ended			Ended			% Change			Ended
(dollars in thousands)	Sept 30, 2008			2007 to 2008			Sept 30, 2007			Sept 30, 2008			2007 to 2008			Sept 30, 2007
Cash provided by operating activities	$	6,366			72.0	%	$	3,701		$	15,160			62.3	%	$	9,342
Cash used in investing activities		(1,946	)		(88.6	%)		(1,032	)		(3,462	)		(6.1	%)		(3,264	)
Cash provided by financing activities		454			539.4	%		71			738			11.1	%		664

Total change in cash	$	4,874			77.9	%	$	2,740		$	12,436			84.5	%	$	6,742

Cash flows provided by operating activities of $6.4 million for the three month period ended September 30, 2008 resulted from our net income of $2.5 million plus net non-cash items included in net income of $3.6 million and a net decrease in working capital, excluding cash, of $0.3 million. Cash flows provided by operating activities of $3.7 million for the three month period ended September 30, 2007 resulted from our net income of $1.8 million less net non-cash items included in net income of $3.3 million, and a net increase in working capital, excluding cash, of $1.4 million.

Cash flows provided by operating activities of $15.2 million for the nine month period ended September 30, 2008 resulted from our net income of $6.8 million plus net non-cash items included in net income of $10.5 million, and a net increase in working capital, excluding cash, of $2.2 million. Cash flows provided by operating activities of $9.3 million for the nine month period ended September 30, 2007 resulted from our net income of $6.1 million less net non-cash items included in net income of $3.7 million, and a net increase in working capital, excluding cash, of $0.5 million.

Net cash flows used in investing activities of $1.9 million for the three month period ended September 30, 2008 consisted primarily of payments for capital expenditures of $1.0 million related primarily to investments in information technology and research and development and purchases of short term investments of $0.8 million. Net cash flows used in investing activities of $1.0 million for the three month period ended September 30, 2007 consisted primarily of payments for capital expenditures of $0.9 million.

Net cash flows used in investing activities of $3.5 million for the nine month period ended September 30, 2008 consisted primarily of payments for capital expenditures of $2.4 million related primarily to investments in information technology and research and development as well as purchases of short term investments of $0.8 million. Net cash flows used in investing activities of $3.3 million for the nine month period ended September 30, 2007 consisted primarily 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 of $1.7 million, partially offset by net proceeds from short-term investments of $0.2 million.

Net cash flows provided by financing activities for the three and nine month periods ended September 30, 2008 and 2007, consisted of proceeds from exercises of stock options and sales of common stock under our ESPP less minimum tax withholdings on restricted stock awards remitted to taxing authorities.

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As of September 30, 2008, our cash and cash equivalents totaled $32.6 million and we had $0.8 million in short-term investments. 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 $10.0 million line of credit with Silicon Valley Bank with minimal restrictions on the amount eligible for borrowing. Substantially all of our current assets were pledged as collateral for the line of credit. At September 30, 2008, we did not have any borrowings under this or any other line of credit.

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 17, 2008 (as well as those included in Part II — Item 1A of this Form 10-Q). In addition, we are continually considering 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 September 30, 2008 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

Our financial results could be impacted by the credit risk of our customers

We have exposure to the credit risks of some of our customers. Although we have programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks adequately. We monitor individual payment capability in granting credit arrangements, seek to limit the total credit to amounts we believe our customers can pay, and maintain reserves we believe are adequate to cover exposure for potential losses. If there is a deterioration of major customer’s creditworthiness or actual defaults are higher than expected, future resulting losses, if incurred, could harm our business and have a material adverse effect on our operating results.

We may be required to implement a costly product recall or corrective action

In the event that any of our products prove to be defective or deficient, we can voluntarily recall or otherwise take corrective action, or the FDA could require us to redesign or implement a recall of or take other action regarding, any of our products. During the third quarter of 2008, we implemented a voluntary field corrective action related to certain of our AED products. Costs related to this voluntary field corrective action were estimated at $800,000 at September 30, 2008. Should we be required or choose to implement in future periods any additional recalls or corrective actions, we could be required to pay substantial costs as well as face significant adverse publicity or corrections, which could harm our business, including our ability to market our products in the future. The economic impact of a recall could have a material adverse effect on our business, financial condition and results of operations.

With the exception of the risk factors above, there have been no material changes that we are aware of from the risk factors set forth in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 17, 2008.

Item 5. Other Information

On July 29, 2008, the Company entered into an OEM Supply and Purchase Agreement with Nihon Kohden Corporation (“Nihon Kohden”), effective as of January 1, 2008, to sell certain cardiac monitoring and defibrillator products to Nihon Kohden for resale by Nihon Kohden under one or more of its trademarks or brand names.

Item 6. Exhibits


No.		Description
10.69		Form of OEM Supply and Purchase Agreement between Cardiac Science Corporation and Nihon Kohden Corporation entered into July 29, 2008, effective January 1, 2008.

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.

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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/ Daphne L. Taylor
		Daphne L. Taylor
		Vice President, Corporate Controller and Chief Accounting Officer

		Date: November 10, 2008

	By:	/s/ John R. Hinson
		John R. Hinson
		President and Chief Executive Officer

		Date: November 10, 2008

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Positive
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Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Cardiac Science Inactive 10-Q2008 Q3 Quarterly report

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