Zoll Medical (ZOLL) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended January 3, 2010.

or

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

For the transition period from            to            .

Commission File Number 0-20225

ZOLL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

Massachusetts	04-2711626
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
269 Mill Road, Chelmsford, MA	01824-4105
(Address of principal executive offices)	(Zip Code)

(978) 421-9655

(Registrant’s telephone number, including area code)

Not Applicable

(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.    Yes  x    No  ¨

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Class	Outstanding at February 5, 2010
Common Stock, $0.01 par value	21,353,113

This document consists of 43 pages.

ZOLL MEDICAL CORPORATION

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (unaudited) January 3, 2010 and September 27, 2009	3
	Condensed Consolidated Statements of Income (unaudited) Three Months Ended January 3, 2010 and December 28, 2008	4
	Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended January 3, 2010 and December 28, 2008	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	39
ITEM 4.	Controls and Procedures	39
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	40
ITEM 1A.	Risk Factors	40
ITEM 5.	Other Information	41
ITEM 6.	Exhibits	41
Signatures		42

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. ZOLL Medical Corporation (the “Company,” “we,” “our,” or “us”) makes such forward-looking statements under the provisions of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of certain known and unknown risk factors. Readers should pay particular attention to the considerations described in Part I, Item 2 of this report under the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Risk Factors.” Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In this report, the words “anticipates,” “believes,” “expects,” “intends,” “sees,” “future,” “may,” “could,” “estimates,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The Company assumes no obligation to update forward-looking statements or update the reasons why actual results, performances or achievements could differ materially from those provided in the forward-looking statements, except as required by law.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(000’s omitted, except per share data)

(Unaudited)

	Jan. 3, 2010			Sept. 27, 2009
Assets
Current assets:
Cash and cash equivalents	$	56,299		$	51,061
Marketable securities		7,524			7,583
Accounts receivable, less allowances of $5,443 and $5,464 at January 3, 2010 and September 27, 2009, respectively		76,583			80,535
Inventories:
Raw materials		35,171			31,422
Work-in-process		7,198			7,505
Finished goods		32,159			30,773
		74,528			69,700
Prepaid expenses and other current assets		21,455			21,240
Total current assets		236,389			230,119
Property and equipment at cost:
Land, building and improvements		1,315			1,296
Machinery and equipment		99,104			93,124
Construction in progress		2,811			2,499
Tooling		17,838			17,780
Furniture and fixtures		4,167			4,157
Leasehold improvements		5,852			5,762
		131,087			124,618
Less accumulated depreciation and amortization		86,773			83,978
Net property and equipment		44,314			40,640
Investments		1,310			1,310
Notes receivable		3,539			3,897
Goodwill		52,070			52,100
Patents and developed technology, net		23,459			23,923
Deferred tax asset		903			724
Intangibles and other assets, net		19,517			19,134
	$	381,501		$	371,847
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	24,676		$	20,036
Deferred revenue		15,389			12,998
Accrued expenses and other liabilities		35,964			40,455
Total current liabilities		76,029			73,489
Non-Current liabilities:
Other long-term liabilities		16,744			17,800
Total liabilities		92,773			91,289
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 1,000 shares, none issued or outstanding		—			—
Common stock, $0.01 par value, authorized 38,000 shares, 21,343 and 21,062 issued and outstanding at January 3, 2010 and September 27, 2009, respectively		213			210
Capital in excess of par value		164,558			159,224
Accumulated other comprehensive loss		(7,611	)		(8,134	)
Retained earnings		131,568			129,258
Total stockholders’ equity		288,728			280,558
	$	381,501		$	371,847

See notes to unaudited condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(000’s omitted, except per share data)

(Unaudited)

	Three Months Ended
	Jan. 3, 2010			Dec. 28, 2008
Product sales	$	90,338		$	80,872
Rental revenue		14,874			8,590
Total revenue		105,212			89,462
Cost of products sold		45,451			40,534
Cost of rental revenue		3,590			2,015
Total cost of revenue		49,041			42,549
Gross profit		56,171			46,913
Expenses:
Selling and marketing		31,611			26,549
General and administrative		9,511			7,633
Research and development		11,363			7,969
Total expenses		52,485			42,151
Income from operations		3,686			4,762
Investment and other income (expense), net		(22	)		(869	)
Income before income taxes		3,664			3,893
Provision for income taxes		1,354			999
Net income	$	2,310		$	2,894
Basic earnings per common share	$	0.11		$	0.14
Weighted average common shares outstanding		21,215			21,061
Diluted earnings per common and common equivalent share	$	0.11		$	0.14
Weighted average common and common equivalent shares outstanding		21,503			21,304

See notes to unaudited condensed consolidated financial statements.

4

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(Unaudited)

	Three Months Ended
	Jan. 3, 2010			Dec. 28, 2008
OPERATING ACTIVITIES:
Net income	$	2,310		$	2,894
Charges not affecting cash:
Depreciation and amortization		4,676			3,941
Stock-based compensation expense		896			816
Changes in current assets and liabilities:
Accounts receivable		4,011			4,910
Inventories		(9,164	)		(1,216	)
Prepaid expenses and other current assets		(222	)		(236	)
Accounts payable and accrued expenses		5,042			(256	)
Cash provided by operating activities		7,549			10,853
INVESTING ACTIVITIES:
Purchases of marketable securities		—			(6,771	)
Sales of marketable securities		122			16,939
Additions to property and equipment		(2,530	)		(3,740	)
Cash paid for acquired assets		—			(2,945	)
Milestone payments related to prior years’ acquisitions		(3,519	)		(4,500	)
Other assets, net		(971	)		(240	)
Cash used for investing activities		(6,898	)		(1,257	)
FINANCING ACTIVITIES:
Exercise of stock options		4,441			44
Cash provided by financing activities		4,441			44
Effect of exchange rates on cash and cash equivalents		146			(2,763	)
Net increase in cash and cash equivalents		5,238			6,877
Cash and cash equivalents at beginning of period		51,061			36,675
Cash and cash equivalents at end of period	$	56,299		$	43,552
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes	$	305		$	424

See notes to unaudited condensed consolidated financial statements.

5

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for returns, bad debts and the estimated lives of fixed assets. Actual results may differ from these estimates. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The information contained in the interim financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended September 27, 2009 included in its Annual Report on Form 10-K filed with the SEC on December 10, 2009.

The Company’s fiscal year ends on the Sunday closest to September 30. The current fiscal year will end on October 3, 2010 and will have 53 weeks while fiscal year 2009, which ended on September 27, 2009, included only 52 weeks. The extra week was included in the Company’s first quarter of fiscal 2010.

In September 2009, the FASB ratified ASC Update (“ASU”) No. 2009-13,Multiple-Deliverable Revenue Arrangements (formerly EITF 08-1), or ASU 2009-13. ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification, or ASC, Subtopic 605-25 (previously included within EITF Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, or EITF 00-21). The Company has elected to adopt this accounting guidance prospectively in the first quarter of fiscal 2010 as permitted under the pronouncement.

Sales to customers often include a device, disposables and other accessories. For the vast majority of sales orders, all deliverables are shipped together. However, in some cases an element of a multiple element arrangement may not be delivered as of a reporting date. Under the historical accounting guidance, the fair value of the undelivered elements was deferred and only the revenue related to the delivered elements would be recognized if fair value had been established for the undelivered elements. If fair value of any undelivered element had not been established, revenue for the entire order was deferred. Under the new guidance,fair value as the measurement criteria is replaced with the term selling price, and the guidance establishes the following hierarchy for determining the selling price of a deliverable: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged for that deliverable. Revenue for multi-element arrangements is allocated based upon relative selling price of the individual elements.

Our process for determining an ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing ESPs include actual prices charged by the Company for similar offerings, the Company’s historical pricing practices, the pricing of competitive alternatives if they exist, and product-specific business objectives.

For the quarter ended January 3, 2010, we deferred approximately $600,000 related to undelivered elements of a multiple element arrangement. The adoption of this new guidance did not have a material impact on the Company’s financial results.

All material events occurring subsequent to the date of the financial statements through the filing date of this quarterly report on Form 10-Q, February 11, 2010, have been evaluated for disclosure.

2. Segment and Geographic Information

Segment information: The Company operates in a single business segment: the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. In order to make operating and strategic decisions, the Company’s chief executive officer (the “chief operating decision maker”) evaluates revenue performance based on the worldwide revenues of four customer/product categories, but, due to shared infrastructures, profitability is based on an enterprise-wide measure. These customer/product categories consist of (1) the sale of resuscitation devices, temperature management products and accessories to the North American hospital market, including the military marketplace, (2) the sale/lease/rental of resuscitation devices, accessories and data collection management software to the North American pre-hospital market, (3) the sale of disposable/other products in North America, and (4) the sale/lease/rental of resuscitation devices, accessories, disposable electrodes, temperature management products and data collection management software to the international market.

6

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

An immaterial amount of international sales of the Company’s wearable defibrillator product and data collection management software is currently reflected in the North American pre-hospital market.

Net sales by customer/product categories were as follows:

	Three Months Ended
(000’s omitted)	January 3, 2010		December 28, 2008
Hospital Market—North America	$	24,797	$	20,288
Pre-hospital Market—North America		44,571		39,110
Other—North America		6,091		6,291
International Market		29,753		23,773
	$	105,212	$	89,462

The Company reports assets on a consolidated basis to the chief operating decision maker.

Geographic information: Net sales by major geographical area, determined on the basis of destination of the goods, are as follows:

	Three Months Ended
(000’s omitted)	January 3, 2010		December 28, 2008
United States	$	69,946	$	60,253
Foreign		35,266		29,209
	$	105,212	$	89,462

No individual foreign country represented 10% or more of our revenues or assets for the three months ended January 3, 2010 or December 28, 2008, respectively.

3. Comprehensive Income

The Company computes comprehensive income (loss) in accordance with FASB ASC 220,Comprehensive Income,(formerly SFAS No. 130, Reporting Comprehensive Income). FASB ASC 220 establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements. Other comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities and foreign currency translation. Total accumulated comprehensive loss for the three months ended January 3, 2010 and December 28, 2008, respectively, was as follows:

	Three Months Ended
(000’s omitted)	January 3, 2010		December 28, 2008
Net income	$	2,310	$	2,894
Unrealized gain (loss) on available-for-sale securities, net of tax		63		(38	)
Foreign currency translation adjustment		460		(2,597	)
Total comprehensive income	$	2,833	$	259

4. Stock Option Plans

At January 3, 2010, the Company had two active stock-based compensation plans under which stock-based grants may be issued, and two other stock-based compensation plans under which grants are no longer being made. No further grants are being made under the Company’s 1992 Stock Option Plan (“1992 Plan”) and 1996 Non-Employee Directors’ Stock Option Plan (“1996 Plan”), but option grants remain outstanding under both plans. The Company’s active plans are the Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”) and the Amended and Restated 2006 Non-Employee Director Stock Option Plan (“2006 Plan”).

On November 11, 2008, the Board of Directors adopted certain amendments to the 2001 Plan and 2006 Plan and recommended that the Company’s stockholders approve an additional 730,000 shares of Common Stock available for issuance under the 2001 Plan (for a total of 3,250,000 shares), and an additional 35,000 shares of Common Stock available for issuance under the 2006 Plan (for a total of 157,500 shares). At the 2009 Annual Meeting of Stockholders held on January 20, 2009, the Company’s stockholders approved these increases. Under the 2001 Plan, no more than 150,000 of the authorized shares may be issued in the form of restricted stock awards, and the balance may be issued in the form of stock option awards. Only stock option awards can be issued under the 2006 Plan.

7

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Stock options outstanding under the 1992 Plan, the 1996 Plan, the 2001 Plan, and the 2006 Plan generally vest over a four-year period and have exercise prices equal to the fair market value of the Common Stock at the date of grant. All options have a 10-year term. All options issued under the 2001 Plan and 2006 Plan must have an exercise price no less than fair market value on the date of grant. Restricted Common Stock grants made under the 2001 Plan will generally vest over a four-year period.

In accordance with FASB ASC 718,Compensation—Stock Compensation, the Company is required to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Stock-based compensation charges totaled approximately $896,000 during the three months ended January 3, 2010 and totaled approximately $816,000 during the three months ended December 28, 2008. The effect of recording stock-based compensation by line item for the three months ended January 3, 2010 and December 28, 2008 was as follows:

	Three Months Ended
(000’s omitted)	January 3, 2010		December 28, 2008
Cost of goods sold	$	78	$	75
Selling and marketing expense		192		197
General and administrative expense		487		421
Research and development expense		139		123
Total stock-based compensation	$	896	$	816

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants issued during the three months ended January 3, 2010 and December 28, 2008:

	2010		2009
Dividend yield	0	%	0	%
Expected volatility	42.7	%	46.1	%
Risk-free interest rate	2.35	%	2.54	%
Expected lives (years)	5.17		5.13

At January 3, 2010, there was approximately $7.3 million of unrecognized compensation cost related to non-vested awards, which the Company expects to recognize over a weighted-average period of 2.6 years.

The weighted-average, grant-date fair value of options granted (estimated using the Black-Scholes option-pricing model) was $8.30 and $9.63 for the three months ended January 3, 2010 and December 28, 2008, respectively. During the three months ended January 3, 2010, the Company issued 244,750 shares of common stock pursuant to exercised options for proceeds of approximately $4.4 million. Total intrinsic value of options exercised for the three months ended January 3, 2010 and December 28, 2008 was approximately $1.4 million and $17,000, respectively. It is the Company’s policy to issue new shares upon the exercise of options.

The following table summarizes the status of outstanding stock options as of January 3, 2010, as well as changes during the three months ended January 3, 2010:

	Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value ($000’s)
Outstanding at September 27, 2009	2,190,717		$	18.84
Granted	263,500			20.23
Exercised	(244,750	)		18.15
Forfeited	(1,000	)		19.13
Outstanding at January 3, 2010	2,208,467		$	19.08	6.44	$	17,182
Exercisable at January 3, 2010	1,344,579		$	17.65	4.99	$	12,310

8

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The following table summarizes the status of unvested restricted stock awards as of January 3, 2010, as well as changes during the three months ended January 3, 2010:

	Shares		Weighted- Average Fair Value
Unvested at September 27, 2009	36,713		$	20.05
Granted	—			—
Vested	—			—
Forfeited	(263	)		26.93
Unvested at January 3, 2010	36,450		$	20.02

5. Earnings per Share

The shares used for calculating basic earnings per share of common stock were the weighted average shares of common stock outstanding during the period, and the shares used for calculating diluted earnings per share of common stock were the weighted average shares of common stock outstanding during the period plus the dilutive effect of stock options and unvested restricted stock.

	Three Months Ended
(000’s omitted)	January 3, 2010	December 28, 2008
Average shares outstanding for basic earnings per share	21,215	21,061
Dilutive effect of stock options and unvested restricted stock	288	243
Average shares outstanding for diluted earnings per share	21,503	21,304

Average shares outstanding for diluted earnings per share for the three months ended January 3, 2010 and December 28, 2008 does not include options to purchase 921,550 and 1,042,000 shares of Common Stock, respectively, as their effect would have been antidilutive.

6. Derivative Instruments and Hedging Activities

The Company operates globally and its earnings and cash flows are exposed to market risk from changes in currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The program is operated pursuant to documented corporate risk management policies. The Company does not typically enter into derivative transactions for speculative purposes.

The Company uses foreign currency forward contracts to manage its currency transaction exposures with intercompany receivables denominated in foreign currencies. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under FASB ASC 815,Derivatives and Hedging, and, therefore, are marked to market with changes in fair value recorded to earnings. These derivative instruments do not subject the Company’s earnings or cash flows to material risk since gains and losses on those derivatives offset losses and gains on the assets and liabilities being hedged.

The Company had one foreign currency forward contract outstanding at January 3, 2010, serving to mitigate the foreign currency risk of a substantial portion of the Company’s Euro-denominated intercompany balances in the notional amount of approximately 5.5 million Euros. The fair value of this contract at January 3, 2010 was approximately $7.9 million, resulting in an unrealized gain of approximately $9,000 for the quarter ended January 3, 2010. The following table presents the fair value of the Company’s derivative instrument not designated as a hedging instrument as of January 3, 2010 (in thousands):

	Balance Sheet Location	Fair Value
Current assets
Foreign currency contracts	Prepaid expenses and other current assets	$	9
Total current assets		$	9

9

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

At September 27, 2009, the Company had one foreign currency forward contract outstanding serving to mitigate the foreign currency risk of a substantial portion of the Company’s Euro-denominated intercompany balances in the notional amount of approximately 5 million Euros. The fair value of this contract at September 27, 2009 was approximately $7.3 million, resulting in an unrealized gain of approximately $6,000 for the period ended September 27, 2009. The following table presents the fair value of the Company’s derivative instrument not designated as a hedging instrument as of September 27, 2009 (in thousands):

	Balance Sheet Location	Fair Value
Current assets
Foreign currency contracts	Prepaid expenses and other current assets	$	6
Total current assets		$	6

The following table presents the pretax impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings during the three months ended January 3, 2010 and December 28, 2008:

		Gain (Loss) Recognized in Income
(000’s omitted)	Location of Gain (Loss) Recognized in Income	Three Months Ended January 3, 2010		Three Months Ended December 28, 2008
Foreign currency contracts	Investment and other income (expense), net	$	176	$	897

7. Product Warranties

The Company typically offers one-year or five-year product warranties for most of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.

Product warranty activity for the three months ended January 3, 2010 and December 28, 2008 is as follows:

(000’s omitted)	Beginning Balance		Accruals for Warranties Issued During the Period		Decrease to Pre-existing Warranties		Ending Balance
January 3, 2010	$	4,176	$	747	$	801	$	4,122
December 28, 2008	$	3,733	$	498	$	496	$	3,735

8. Acquisitions

Alsius Corporation

On May 4, 2009, the Company completed the acquisition of substantially all the assets of the intravascular temperature management business of Alsius Corporation (“Alsius”). The assets acquired include intellectual property relating to the business, other intangibles, inventories and fixed assets. The Company assumed warranty and service contract obligations relating to Alsius’ installed base of products. The Company consolidated the operations of the acquired business into its Sunnyvale, California subsidiary, ZOLL Circulation, Inc. The Company believes that the acquisition of the temperature management technology and products from Alsius, in combination with the technology and know-how previously acquired by the Company through its purchase of assets from Radiant Medical, Inc. in 2007, creates the opportunity for the Company to become a major participant in the temperature management business. Under the terms of the acquisition, the Company paid approximately $12 million in cash to Alsius. The acquisition was accounted for using the purchase method under SFAS No. 141, “Business Combinations,” now codified in FASB ASC 805,Business Combinations.

The following is a summary of the fair values of the assets acquired and liabilities assumed at the date of acquisition:

(000’s omitted)
Assets:
Inventory	$	3,257
Other current assets		23
Property and equipment		1,415
Goodwill		2,625

10

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(000’s omitted)
Intangible assets subject to amortization (estimated 10 year weighted-average useful life):		5,390
Total assets acquired		12,710
Liabilities:
Current liabilities		304
Total liabilities assumed		304
Net assets acquired	$	12,406

The goodwill resulting from this acquisition is assigned to the Company’s only reportable segment, which is the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. All of the goodwill is expected to be deductible for income tax purposes.

Supplemental Pro Forma Information

The unaudited pro forma combined condensed statements of income for the three month period ended December 28, 2008 below gives effect to the acquisition of the assets of Alsius as if the acquisition had occurred at the beginning of the year, September 29, 2008, after giving effect to certain adjustments, including amortization of the intangibles subject to amortization and related income taxes.

The unaudited pro forma combined condensed statements of income are not necessarily indicative of the financial results that would have occurred if the Alsius asset acquisition had been consummated on September 29, 2008, nor are they necessarily indicative of the financial results which may be attained in the future.

The pro forma information below is based upon available information and upon certain assumptions that the Company’s management believes are reasonable.

(000’s omitted)	Three Months Ended December 28, 2008
Net sales	$	93,302
Net income	$	508
Net income per common share
Basic	$	0.02
Diluted	$	0.02

Contingent Consideration for Prior Period Acquisitions

The terms of the April 2006 acquisition of the assets of Lifecor, Inc. (“Lifecor”) provide for possible annual earn-out payments based upon revenue growth over a multi-year period. Such payments may be due with respect to Lifecor through fiscal 2011. The form of earn-out payments are at the discretion of the Company and can be made in the form of cash, Company stock, or a combination of the two. The earn-out payments for fiscal 2009 and beyond are calculated as 100% of qualifying revenues earned in the current fiscal year in excess of the greater of the prior fiscal year qualifying revenues or $30 million. For fiscal 2009, approximately $12.8 million was accrued for payment to the former stockholders of Lifecor. Of this amount, approximately $3.5 million in cash was paid during the first quarter of fiscal 2010, and the remaining balance was paid in cash during the second quarter of fiscal 2010. For the fiscal 2008 earn-out, approximately $4.5 million was paid to Lifecor in the form of cash in fiscal 2009.

The terms of the March 2004 acquisition of the assets of Infusion Dynamics, Inc. (“Infusion Dynamics”) also provided for possible annual earn-out payments based upon revenue growth through fiscal 2011. Annual earn-out payments to former stockholders of Infusion Dynamics, in the form of cash, for fiscal 2009 and 2008 were both approximately $19,000.

Because the prospective earn-out payments for Lifecor and Infusion Dynamics are based upon revenue growth over several years, a reasonable estimate of the future payment obligations could not be determined. The annual earn-out payments will be recorded as an additional cost of the purchase and recorded as goodwill if the revenue growth specified in the respective acquisition agreements is achieved and becomes payable. The annual earn-out payments are accrued during the respective fiscal year in which they are earned and are paid in the respective subsequent fiscal year.

11

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

9. Inventory

The Company’s inventory is valued at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead. Inventory on hand may exceed future demand either because the product is outdated or obsolete, or because the amount on hand is in excess of future needs. The total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies are reserved. Excess inventory amounts are estimated by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At January 3, 2010, the Company’s inventory was recorded at net realizable value requiring reserves of $8.4 million, or 10.1% of the $82.9 million gross inventories.

Additionally, the LifeVest product is included in inventory while it is being manufactured, and once completed it is then transferred to fixed assets and depreciated over its estimated life as the LifeVest product is a rental model. During the three months ended January 3, 2010 and December 28, 2008, $4.6 million and $2.5 million, respectively, of LifeVest systems were transferred from inventory to fixed assets. For purposes of the Company’s condensed, consolidated statement of cash flows, the transfer was treated as a non-cash transaction.

10. Intangibles and Other Assets

Intangibles and other assets consist of:

		January 3, 2010				September 27, 2009
(000’s omitted)	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Prepaid license fees	16 years	$	12,859	$	3,780	$	12,230	$	3,636
Patents and developed technology	12 years		34,978		11,519		34,672		10,749
Customer-related intangibles	10 years		4,750		1,713		4,750		1,598
Intangible assets not subject to amortization	—		1,530		—		1,530		—
Other assets	—		9,269		3,398		9,015		3,157
		$	63,386	$	20,410	$	62,197	$	19,140

Amortization of acquired intangibles for the three months ended January 3, 2010 and December 28, 2008 was approximately $826,000 and $710,000, respectively, and is included in operating expenses in the condensed, consolidated statements of income.

11. Other Long-Term Liabilities

Other long-term liabilities consist of:

(000’s omitted)	Jan. 3, 2010		Sept. 27, 2009
Accrued warranty expense, long-term	$	2,728	$	2,957
Deferred revenue, long-term		8,081		8,805
Deferred tax liabilities		849		849
Unrecognized tax benefits		4,834		4,834
Deferred lease incentives, long-term		252		355
Total other long-term liabilities	$	16,744	$	17,800

12. Income Taxes

The Company’s effective tax rate for the three months ended January 3, 2010 and December 28, 2008 was 37% and 26%, respectively. The difference in the effective tax rate is due to the fact that the U.S. Congress extended the research and development tax credit, retroactively from January 1, 2008, during the first quarter of fiscal 2009. This extension allowed a full-year tax credit estimate for fiscal 2009 to be included in the Company’s fiscal 2009 rate calculation along with a discrete period adjustment of approximately $400,000 recognized during the first quarter of fiscal 2009 to record the tax credit related to the retroactive application of the credit extension. The current period projected annual rate only contains one quarter of a full-year credit in the annual rate calculation. The Company has estimated that its fiscal 2010 effective tax rate will be approximately 35% assuming retroactive extension of the research and development tax credit.

As of January 3, 2010 and September 27, 2009, the Company had approximately $4.9 million of gross unrecognized tax benefits, which, if recognized, could impact the effective tax rate. Of the $4.9 million current-year balance, approximately $500,000 is expected to reverse in fiscal 2010. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. The Company had $474,000 of accrued interest and penalties in income taxes payable as of January 3, 2010 and $426,000 at September 27, 2009.

12

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal and most state and foreign income tax matters through fiscal 2005. The Internal Revenue Service (IRS) began an audit of the Company’s fiscal 2007 tax return during the third quarter of fiscal 2009. To date, no material adjustments have been proposed. The acquired losses from the business acquired from Revivant in fiscal 2005 for tax years 1997 through 2004 remain open to examination by the IRS to the extent losses are claimed in open years.

13. Fair Value Measurements

Effective September 29, 2008, theFair Value Measurements and Disclosures topic, FASB ASC 820, formerly SFAS No. 157, “Fair Value Measurements,” required that financial assets and liabilities are re-measured and reported at fair value at each reporting period-end date, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually (on a recurring basis). For the quarter ended January 3, 2010, the Company has adopted FASB ASC 820 as it relates to any non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. This adoption did not have a material impact on the Company’s financial results.

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives and most U.S. Government and agency securities).

Level 2—Quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

• Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently);

• Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and

• Inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (examples include certain securities and derivatives).

Level 3—Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of January 3, 2010, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

(000’s omitted)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	16,006	$	16,006	$	—	$	—
Available for sale securities (1)		7,524		918		6,606		—
Foreign currency contracts (2)		9		—		9		—
Total	$	23,539	$	16,924	$	6,615	$	—

(1) Included in marketable securities in the accompanying condensed consolidated balance sheet.

13

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(2) Included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 27, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

(000’s omitted)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	15,918	$	15,918	$	—	$	—
Available for sale securities (1)		7,583		935		6,648		—
Foreign currency contracts (2)		6		—		6		—
Total	$	23,507	$	16,853	$	6,654	$	—

(1) Included in marketable securities in the accompanying condensed consolidated balance sheet.

(2) Included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

14. Legal Proceedings

The Company is, from time to time, involved in the normal course of its business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, it believes that none of the currently pending matters will have an outcome material to its financial condition or business.

15. Cash Equivalents and Marketable Securities

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Substantially all cash and cash equivalents are invested in U.S. Treasury Bills and other U.S. government agency securities. The Company accounts for marketable securities in accordance with FASB ASC 320,Investments—Debt and Equity Securities. All marketable securities must be classified as one of the following: held-to-maturity, available-for-sale, or trading. The Company classifies its marketable securities as available-for-sale and, as such, carries the investments at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income (loss). The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income.

As of January 3, 2010, available-for-sale securities consisted of the following:

	Cost		Accrued Interest		Gross Unrealized					Estimated Fair Value
(000’s omitted)					Gains		Losses
Money-market funds	$	8	$	—	$	—	$	—		$	8
U.S. government agency and Treasury securities		16,903		1		12		—			16,916
Corporate obligations		4,796		11		25		(1	)		4,831
Student loan auction rate securities		1,900		—		—		(125	)		1,775
	$	23,607	$	12	$	37	$	(126	)	$	23,530

14

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

As of September 27, 2009, available-for-sale securities consisted of the following:

	Cost		Accrued Interest		Gross Unrealized					Estimated Fair Value
(000’s omitted)					Gains		Losses
Money-market funds	$	20	$	—	$	—	$	—		$	20
U.S. government agency and Treasury securities		16,803		10		20		—			16,833
Corporate obligations		4,861		11		21		(2	)		4,891
Student loan auction rate securities		1,900		—		—		(143	)		1,757
	$	23,584	$	21	$	41	$	(145	)	$	23,501

The contractual maturities of these investments as of January 3, 2010 were as follows:

(000’s omitted)	Cost		Fair Value
Within 1 year	$	21,900	$	21,794
After 1 year through 5 years		1,678		1,708
After 5 years through 10 years		—		—
After 10 years		29		28
	$	23,607	$	23,530

The contractual maturities of these investments as of September 27, 2009 were as follows:

(000’s omitted)	Cost		Fair Value
Within 1 year	$	20,285	$	20,174
After 1 year through 5 years		3,236		3,264
After 5 years through 10 years		22		23
After 10 years		41		40
	$	23,584	$	23,501

The Company’s available-for-sale securities were included in the following captions in the condensed consolidated balance sheets:

(000’s omitted)	January 3, 2010		September 27, 2009
Cash equivalents	$	16,006	$	15,918
Marketable securities		7,524		7,583
	$	23,530	$	23,501

During fiscal 2008, the Company reclassified approximately $2 million of its marketable securities from current assets to non-current assets due to the illiquidity in the auction-rate securities market. The underlying assets of these investments are student loans that are backed by the federal government. During fiscal 2008, auctions failed for the auction rate securities. As a result, the Company’s ability to liquidate and fully recover the carrying value of the auction rate securities in the near term may be limited. An auction failure means that the parties wishing to sell the securities could not do so. The Company’s auction rate securities are currently rated “AAA” by Standard and Poor’s. The Company recorded a $100,000 impairment charge in fiscal 2008 on these securities based on valuation models. Subsequently, the Company entered into a Rights Agreement with UBS Financial Services, Inc. (“UBS”), through which these securities were acquired. The Rights Agreement entitles the Company to sell these securities to UBS at any time between June 30, 2010 and July 2, 2012 for par value. The Company will continue to receive interest payments based on the default provisions in the instruments until the securities are sold on the market or sold to UBS during the period established by the Rights Agreement. If the Company does not exercise its right to sell the auction rate securities to UBS by July 2, 2012, the right to sell will expire, and UBS will have no further obligation to the Company. The Rights Agreement releases UBS from all claims related to the securities except consequential damages. UBS has the right to purchase the auction rate securities at par value, without prior notice, from the Company at any time after the acceptance date. The Company expects to exercise its option to sell these securities to UBS for par value shortly after June 30, 2010. Accordingly, as of January 3, 2010, these marketable securities are classified as short-term marketable securities. The Company believes there is no further impairment of these securities, primarily due to the government guarantee of the underlying securities and also because of the agreement by UBS to purchase, at the Company’s option, from June 30, 2010 to July 2, 2012, the auction rate securities that the Company originally acquired from UBS.

15

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Gross realized gains and (losses) on available-for-sale securities for the three months ended January 3, 2010 and December 28, 2008, included in “Investment and other income (expense), net” on the consolidated income statements, were as follows:

(000’s omitted)	Jan. 3, 2010		Dec. 28, 2008
Gross realized gains	$	—	$	2
Gross realized losses		—		(237	)
Total, net	$	—	$	(235	)

16. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements:

During the first quarter of fiscal 2010, the Company adopted the remaining provisions of ASC 820 (formerly referred to as SFAS No. 157,Fair Value Measurements) related to non-financial assets and non-financial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis, as well as the provisions of ASC 350-30-25-5 (formerly referred to as EITF Issue No. 08-7,Accounting for Defensive Intangible Assets) as they apply to defensive intangible assets. ASC 820-10-15-1A deferred the adoption of the remaining provisions of ASC 820 to the first quarter of fiscal 2010. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements. However, the effect of these standards could be material in future periods to the extent they impact the manner in which the Company assesses fair value of non-financial assets and liabilities and depending on the extent to which defensive intangible assets are acquired.

In September 2009, the FASB ratified ASC Update (“ASU”) No. 2009-13,Multiple-Deliverable Revenue Arrangements (formerly EITF 08-1), or ASU 2009-13. ASU 2009-13, amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codification, or ASC, Subtopic 605-25 (previously included within EITF Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, or EITF 00-21). ASU 2009-13 provides for two significant changes to the existing multiple element revenue recognition guidance. First, this guidance deletes the requirement to have objective and reliable evidence of fair value for undelivered elements in an arrangement and will result in more deliverables being treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. These changes may result in entities recognizing more revenue up-front, and entities will no longer be able to apply the residual method and defer the fair value of undelivered elements. Upon adoption of these new rules, each separate unit of accounting must have a selling price, which can be based on management’s estimate when there is no other means to determine the fair value of that undelivered item, and the arrangement consideration is allocated based on the elements’ relative selling price. This accounting guidance is effective no later than fiscal years beginning on or after June 15, 2010 but may be early adopted as of the first quarter of an entity’s fiscal year. Entities may elect to adopt this accounting guidance either through prospective application to all revenue arrangements entered into or materially modified after the date of adoption or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. The Company adopted this revised accounting guidance prospectively for the first quarter of fiscal 2010 as permitted by the guidance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In September 2009, the FASB ratified ASU No. 2009-14,Applicability of SOP 97-2 to Certain Arrangements that Include Software Elements(formerly EITF Issue No. 09-3,Certain Revenue Arrangements that Include Software Elements), which amends the existing accounting guidance for how entities account for arrangements that include both hardware and software, which typically resulted in the sale of hardware being accounted for under the software revenue recognition rules. This accounting guidance changes revenue recognition for tangible products containing software elements and non-software elements. The tangible element of the product is always outside of the scope of the software rules, and the software elements of tangible products when the software element and non-software elements function together to deliver the product’s essential functionality are outside of the scope of the software rules. As a result, both the hardware and qualifying related software elements are excluded from the scope of the software revenue guidance and accounted for under the revised multiple-element revenue recognition guidance. ASU 2009-14 is effective for all fiscal years beginning on or after June 15, 2010 with early adoption permitted. Entities must adopt ASU 2009-14 and ASU 2009-13 in the same manner and at the same time. The Company adopted this revised accounting guidance prospectively for the first quarter of fiscal 2010 as permitted by the guidance. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued new requirements for FASB ASC 350,Intangibles—Goodwill and Other Intangibles—Overall,based on FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets. This new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB ASC 350,Intangibles—Goodwill and Other Intangibles. The objective of these new requirements is to improve the consistency between the useful life of a recognized intangible asset under FASB ASC 350, Intangibles—Goodwill and Other Intangibles and the period of expected cash flows used to measure the fair value of the asset under FASB ASC 805,Business Combinations. The new requirements apply to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company adopted this guidance in the first quarter of fiscal 2010. The adoption of these new requirements did not have a material impact on the Company’s consolidated results of operations or financial condition.

16

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

In December 2007, new requirements were issued for FASB ASC 810,Consolidation,based on SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This new guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new requirements became effective as of the beginning of the Company’s fiscal year 2010. The new requirements did not have a material impact on the Company’s financial statements. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the prior accounting rules.

In December 2007, the FASB issued updated guidance related to business combinations, which is included in the Codification in FASB ASC 805,Business Combinations(“FASB ASC 805”), formerly SFAS No. 141 (R), Business Combinations. The updated guidance in FASB ASC 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The new requirements also provide guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The updated requirements of ASC 805 became effective as of the beginning of the Company’s fiscal year beginning September 28, 2009. The new requirements are adopted on a prospective basis for new acquisitions subsequent to the effective date. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the prior accounting rules.

In April 2009, the FASB issued additional new guidance on FASB ASC 805,Business Combinations,formerly FSP FAS 141(R)-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This new guidance addresses the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The new guidance is effective as of the beginning of the Company’s fiscal year beginning September 28, 2009. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the prior accounting rules.

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

We are committed to developing and marketing medical devices and software solutions that help advance emergency care and save lives, while increasing clinical and operational efficiencies. With products for defibrillation and monitoring, circulation and CPR feedback, data management, fluid resuscitation, and temperature management, we provide a comprehensive set of technologies which help clinicians, EMS and fire professionals, and lay rescuers treat victims needing resuscitation and critical care.

We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our consolidated financial statements as of January 3, 2010 for the three months then ended, and the notes thereto.

Our fiscal 2010 consists of 53 weeks. Our three months ended January 3, 2010 included the additional week and, therefore, consisted of 14 weeks, while the three months ended December 28, 2008 consisted of 13 weeks. We estimate that the revenue and expense impact of the additional week was approximately $2 million each during the three months ended January 3, 2010.

Sales for the three months ended January 3, 2010 increased 18% to $105.2 million, as compared to the same period in the prior year. The results include approximately $4.6 million of revenue derived from our new Temperature Management business, whose assets we acquired from Alsius Corporation in May 2009. Revenues also included a positive foreign exchange impact of approximately $2.3 million compared to the first quarter of fiscal 2009. Of the $2.3 million impact on revenue due to foreign exchange, approximately $1.7 million is reflected within our International operations related to the Euro, Australian Dollar and British Pound, while the remaining $0.6 million is related to the Canadian Dollar within our North American operations. We also received a modest benefit from sales of Welch Allyn AED products during the first quarter of 2010. The remaining increase in sales was driven by the LifeVest and International businesses. Although the North American Hospital and EMS environments continue to experience spending constraints due to the current economic environment, revenue from these markets was consistent with the prior-year quarter.

17

Three Months Ended January 3, 2010 Compared To Three Months Ended December 28, 2008

Sales

Net sales by customer/product categories are as follows:

(000’s omitted)	January 3, 2010		December 28, 2008		% Change
Devices and Accessories to the Hospital Market-North America	$	24,797	$	20,288	22	%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		44,571		39,110	14	%
Other Products to North America		6,091		6,291	(3	)%
Subtotal North America		75,459		65,689	15	%
All Products to the International Market		29,753		23,773	25	%
Net Sales	$	105,212	$	89,462	18	%

Net sales increased 18% for the three months ended January 3, 2010, compared to the prior-year period.

Sales to the North American hospital market increased approximately $4.5 million, or 22%, compared to the same period a year ago. The increase includes approximately $2.7 million of revenue derived from our new Temperature Management business. The remainder of the increase was attributable to an increase in volume of US Military/Big Government sales and professional defibrillators sold to hospitals.

Sales to the North American pre-hospital market increased approximately $5.5 million, or 14% during the three months ended January 3, 2010, compared to the same quarter in the prior year. The increase in North American pre-hospital market sales was the result of increased volume in LifeVest (our wearable defibrillator product) revenue of approximately $6.3 million. Modestly lower AutoPulse and AED sales during the three months ended January 3, 2010 were partially offset by an increase in data management software sales.

International sales increased approximately $6.0 million, or 25% during the three months ended January 3, 2010, in comparison to the prior-year period. Sales by our international subsidiaries had a positive impact from foreign currency exchange rate fluctuations of approximately $1.8 million. The increase also includes approximately $1.9 million of revenue derived from our Temperature Management business. The remainder of the increase was due to increased volume of professional defibrillators, AEDs and AutoPulse.

Total sales of the AutoPulse product decreased 13% during the three months ended January 3, 2010, compared to the three months ended December 28, 2008. The decrease in sales volume to the North American pre-hospital market was partially offset by increased volume of AutoPulse sales in the International and North American hospital businesses. Total AutoPulse sales were approximately $3.9 million in comparison to $4.5 million in the prior-year quarter.

Gross Margins

Cost of sales consists primarily of material, direct labor, overhead, and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposable electrodes. Material is the largest component of our products, comprising more than half the cost. Overhead includes indirect labor for such activities as supervision, procurement and shipping. Other components of overhead include such items as related employee benefits, rent and electricity. Our consolidated gross margin may fluctuate considerably depending on unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuations and overall market conditions.

Gross margin for the three months ended January 3, 2010 increased from 52.4% to 53.4%, compared to the same period in the prior year. This increase primarily reflected the positive impact of foreign exchange rate fluctuations on revenue. Other factors, including changes in business mix, affecting the fluctuation in gross margin each individually represented less than one percentage point of our overall gross margin. Our gross margin tends to fluctuate from period to period as a result of product and geographical mix.

Backlog

Backlog increased to approximately $17 million at January 3, 2010, compared to approximately $8.3 million at December 28, 2008. Typically, our backlog decreases sequentially during the first and second quarters, remains flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. We believe the maintenance of a modest backlog will help improve our efficiency, lower our costs and improve our profitability as we believe it will make it less likely that we will be required to incur substantial additional costs at the end of the quarter. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

18

Costs and Expenses

Operating expenses for the three months ended January 3, 2010 and December 28, 2008 were as follows:

(000’s omitted)	January 3, 2010		% of Sales		December 28, 2008		% of Sales		Change %
Selling and marketing	$	31,611	30	%	$	26,549	30	%	19	%
General and administrative		9,511	9	%		7,633	9	%	25	%
Research and development		11,363	11	%		7,969	9	%	43	%
Total expenses	$	52,485	50	%	$	42,151	47	%	25	%

As a percentage of sales, selling and marketing expenses for the three months ended January 3, 2010 was flat as compared to the three months ended December 28, 2008. The increased dollar spending primarily reflected increased personnel-related expenses for the LifeVest sales force and related sales organization, including commission, salaries and fringe benefits that are supporting the increased LifeVest revenue. Additionally, we have built a discrete North American Temperature Management sales force following our acquisition of the intravascular temperature management business from Alsius.

As a percentage of sales, general and administrative expenses remained consistent at 9% of sales during the three months ended January 3, 2010, compared to the three months ended December 28, 2008. The increased dollar spending during the three months ended January 3, 2010 primarily reflected increased salaries and fringe benefits, particularly in support of the LifeVest business and the Company’s 401k match.

As a percentage of sales, research and development expenses for the three months ended January 3, 2010 increased approximately two percentage points to 11% compared to 9% for the three months ended December 28, 2008. Research and development expenses increased for the three months ended January 3, 2010 compared to the three months ended December 28, 2008, due predominantly to personnel-related costs including the additional personnel hired in connection with the strategic alliance with Welch Allyn.

Investment and Other Income (Expense), Net

Investment and other income (expense), net includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (expense), net totaled approximately $(22,000) and $(869,000) for the three months ended January 3, 2010 and December 28, 2008, respectively. This improvement is primarily the result of the weaker US dollar during the first quarter of 2010 as we marked our foreign denominated intercompany receivables to market at the end of the quarter.

Income Taxes

Our effective tax rate for the three months ended January 3, 2010 and December 28, 2008 was 37% and 26%, respectively. The increased rate resulted from a discrete benefit in the first quarter of fiscal 2009 provided by the research and development tax credit being applied to expected annual earnings. Subsequent to the end of fiscal 2008, Congress extended the research and development tax credit which allowed us to record seven quarters worth of credits in fiscal 2009 versus only one quarter of credits in fiscal 2010.

At January 3, 2010 and September 27, 2009, we had $4.9 million of gross unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. Of the $4.9 million balance, we expect approximately $500,000 to reverse in fiscal 2010.

We are subject to U.S. federal income tax as well as the income tax of multiple states and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2005. Our tax return covering fiscal 2007 is currently being audited by the IRS. To date, no material adjustments have been proposed. The acquired losses from Revivant, the business acquired in fiscal 2005, for tax years 1997 through 2004 remain open to examination by the IRS to the extent losses are claimed in open years.

Our historical practice is to recognize interest and penalties related to income tax matters in income tax expense. We had $474,000 and $426,000 accrued for interest and penalties at January 3, 2010 and September 27, 2009, respectively.

We currently estimate that our fiscal 2010 effective tax rate will be approximately 35% assuming the retroactive extension of the research and development tax credit.

Liquidity and Capital Resources

We believe that our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at January 3, 2010 totaled $63.8 million, compared with $58.6 million at September 27, 2009. We continue to have no long-term debt.

As we have previously stated, we have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.

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Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to the Lifecor and Infusion Dynamics acquisitions (payments to Lifecor may be made in cash or the Company’s common stock at our option.) For example, during the quarter ended January 3, 2010, we paid $3.5 million of the approximately $12.8 million earn-out payment for fiscal 2009 in cash to the former stockholders of Lifecor. The remaining $9.3 million of the Lifecor earn-out payment for fiscal 2009 was paid in cash during the second quarter of our fiscal 2010 in January 2010.

We may also need to use these funds in the future for potential acquisitions.

Sources and Uses of Cash

To assist with the discussion, the following table presents the abbreviated cash flows for the three months ended January 3, 2010 and December 28, 2008:

(000’s omitted)	Three months ended January 3, 2010			Three months ended December 28, 2008
Net income	$	2,310		$	2,894
Changes not affecting cash		5,572			4,757
Changes in current assets and liabilities		(333	)		3,202
Cash provided by operating activities		7,549			10,853
Cash used for investing activities		(6,898	)		(1,257	)
Cash provided by financing activities		4,441			44
Effect of foreign exchange rates on cash		146			(2,763	)
Net change in cash and cash equivalents		5,238			6,877
Cash and cash equivalents - beginning of period		51,061			36,675
Cash and cash equivalents - end of period	$	56,299		$	43,552

Operating Activities

Cash provided by operating activities of $7.5 million for the three months ended January 3, 2010 decreased approximately $3.3 million compared to cash provided by operating activities for the three months ended December 28, 2008 of $10.9 million. The decrease in cash provided by operating activities for the three months ended January 3, 2010, as compared to the three months ended December 28, 2008, was primarily attributable to higher inventory in support of increased levels of business. The increased inventory were partially offset by a decrease in cash payments for accounts payable and accrued expenses for the three months ended January 3, 2010 as compared to the three months ended December 28, 2008.

Investing Activities

Cash used in investing activities during the three months ended January 3, 2010 increased by approximately $5.6 million from cash used in investing activities during the three months ended December 28, 2008. This increase is primarily attributable to the approximately $10.0 million generated in the three months ended December 28, 2008 from net sales of marketable securities compared to approximately $122,000 generated from net sales of marketable securities during the three months ended January 3, 2010. This increase was partially offset by the absence of any acquisitions and fewer additions to property and equipment made in the quarter ended January 3, 2010 as compared to the same period in the prior year.

Financing Activities

Cash provided by financing activities during the three months ended January 3, 2010 increased approximately $4.4 million compared to the three months ended December 28, 2008. The change reflects a substantially higher number of stock options exercised during the current three-month period (options for 244,750 shares exercised in the current period compared to options for 3,102 shares exercised in the previous year period).

Investments

In March 2004, we acquired substantially all the assets of Infusion Dynamics. Under the terms of the acquisition, we are obligated to make additional earn-out payments through 2011 (“contingencies”) based on performance of the acquired business (See Note 8). Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. As these contingencies are resolved and the consideration is distributable, we record the fair value of the additional consideration as additional cost of the acquired assets. Our earn-out payments, in the form of cash, for fiscal 2009 and 2008 were both approximately $19,000. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period.

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We exercised our option to acquire the business and assets of Lifecor on March 22, 2006 and acquired the business and assets on April 10, 2006. We assumed Lifecor’s outstanding debt (plus an additional $3.0 million owed to us, which was cancelled) and certain stated liabilities. We paid the third-party debt in April 2006. We agreed to pay additional consideration in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period (See Note 8). The earn-out payment to Lifecor was made in the form of cash for fiscal 2008 in the approximate amount of $4.5 million. In the fourth quarter of fiscal 2009, we accrued approximately $12.8 million for the fiscal 2009 earn-out. We paid in cash approximately $3.5 million of the fiscal 2009 earn-out in the first quarter of fiscal 2010, and the remainder of the earn-out was paid in cash during the second quarter of fiscal 2010. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period. Because additional consideration will be based on the growth of sales, a reasonable estimate of the total acquisition cost cannot be determined.

In October 2008, we announced a strategic alliance with Welch Allyn involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn’s defibrillator and monitoring products. We paid approximately $5 million for the purchase of assets, which consist primarily of capitalized software, inventory and fixed assets, related to the Welch Allyn defibrillator products.

On May 4, 2009, we completed the acquisition of substantially all the assets of the intravascular temperature management business of Alsius Corporation (“Alsius”). The assets acquired include intellectual property relating to the business, other intangibles, inventories and fixed assets. We assumed warranty and service contract obligations relating to Alsius’s installed base of products. The operations of the acquired business were consolidated at our Sunnyvale, California subsidiary, ZOLL Circulation, Inc. We believe that the acquisition of the temperature management technology and products from Alsius, in combination with the technology and know-how previously acquired through our purchase of assets from Radiant Medical, Inc. in 2007, creates the opportunity for us to become a major participant in the temperature management business. No voting interest was acquired in the acquisition. Under the terms of the acquisition, we paid approximately $12 million in cash to Alsius.

Debt Instruments and Related Covenants

We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis, up to $12 million. This line of credit bears interest at the rate of LIBOR plus 4% to 6%. No borrowings were outstanding on this line during fiscal 2009 or as of January 3, 2010. There are no covenants related to this line of credit.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and two minimum purchase commitment contracts for critical raw material components. The table shown below in the next section titled “Contractual Obligations and Other Commercial Commitments” shows the amounts of our operating lease commitments and purchase commitments payable by year. For liquidity purposes, we generally choose to lease our facilities instead of purchasing them.

Contractual Obligations and Other Commercial Commitments

The following table sets forth certain information concerning our obligations and commitments to make future payments under contracts, such as lease agreements.

	Payments Due by Period
(000’s omitted)	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Non-Cancelable Operating Lease Obligations	$	11,000	$	3,234	$	3,865	$	2,295	$	1,606
Purchase Obligations		4,773		1,526		1,632		1,615		—
Total Contractual Obligations	$	15,773	$	4,760	$	5,497	$	3,910	$	1,606

We lease certain office and manufacturing space under operating leases. Our office leases are subject to adjustments based on actual floor space occupied. The leases also require payment of real estate taxes and operating costs. In addition to the office leases, we lease automobiles for business use by a portion of the sales force.

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Our executive headquarters and defibrillator and fluid resuscitation manufacturing operations are located in Chelmsford, Massachusetts. The Chelmsford facility is covered by an eight year lease, beginning July 1, 2003 and expiring on June 29, 2011. The agreement does not contain a renewal period and provides that we pay a pro-rata amount of the landlord’s real estate tax and operating expenses based upon square footage. The lease also provided us with an allowance of approximately $3.7 million for any construction costs associated with their relocation efforts to the leased facility. This reimbursement has been recorded as a deferred lease incentive within accrued expenses and other liabilities and is being amortized as a reduction to rent expense over the life of the lease. Any leasehold improvements made as part of the relocation have been capitalized as leasehold improvements within Property and Equipment and are being amortized over the eight year life of the lease.

Purchase obligations include all legally binding contracts that are non-cancelable. Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of the table above, purchase obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based upon our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain provisions allowing for cancellation without significant penalty.

Contractual obligations that are contingent upon future performance and growth of sales are not included in the table above. These include the additional earn-out payments for the assets of Infusion Dynamics through fiscal 2011 and additional earn-out payments for the assets of Lifecor through fiscal 2011. Because all of these earn-out payments are based upon the growth of sales over several years, a reasonable estimate of the future payment obligations cannot be determined.

Hedging Activities

We had one foreign currency forward contract outstanding at January 3, 2010 in the notional amount of approximately 5.5 million Euros, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances. The net settlement amount of this contract on January 3, 2010 is an unrealized gain of approximately $9,000, which is included in earnings within “investment and other income (expense), net.” We had a net realized gain of approximately $174,000 from foreign currency forward contracts during the quarter ended January 3, 2010, which is included in earnings within “investment and other income (expense), net,” compared to a net realized gain of approximately $1.6 million for the prior year’s quarter.

Legal and Regulatory Affairs

We are, from time to time, involved in the normal course of its business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although we are unable to quantify the exact financial impact of any of these matters, we believe that none of the currently pending matters will have an outcome material to our financial condition or business.

Critical Accounting Estimates

Our management strives to report our financial results in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require us to use technical terminology. We follow accounting principles generally accepted in the United States in preparing our consolidated financial statements. These principles require us to make certain estimates of matters that are inherently uncertain and to make difficult and subjective judgments that affect our financial position and results of operations. Our most critical accounting policies include revenue recognition, and our most critical accounting estimates include accounts receivable reserves, warranty reserves, inventory reserves, and the valuation of long-lived assets. Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies, which include revenue recognition and those that require significant estimates and judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions, and how they are applied in preparation of the financial statements.

Revenue Recognition

Revenues from sales of cardiac resuscitation and temperature management therapy devices, disposable electrodes, catheters and accessories are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk have passed to the customer, the fee is fixed or determinable, and collection is considered probable. Circumstances that generally preclude the immediate recognition of revenue include shipping terms of FOB destination or the existence of a customer acceptance clause in a contract based upon customer inspection of the product. In these instances, revenue is deferred until adequate documentation is obtained to ensure that these criteria have been fulfilled. Similarly, revenues from the sales of our products to distributors fall under the same guidelines. For all significant orders placed by our distributors, we require an approved purchase order, we perform a credit review, and we ensure that the terms on the purchase order or contract are proper and do not include any contingencies which preclude revenue recognition. We do not typically offer any special right of return, stock rotation or price protection to our distributors or end customers. For sales in which payment extends beyond a twelve month period, we recognize revenue at its net present value using an imputed rate of interest based on our experience of successful collection on these terms without concession.

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Our sales to customers often include a device, disposables and other accessories. For the vast majority of our shipments, all deliverables are shipped together. However, in cases some elements of a multiple element arrangement are not delivered as of a reporting date. In September 2009, the FASB amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and include some software elements. We have adopted this new guidance prospectively during the first quarter of 2010. Under the historical accounting guidance, FASB ASC 605-25,Multiple Element Arrangements(formerly Emerging Issues Task Force (“EITF”) Issue No. 00-21,Accounting for Revenue Arrangements with Multiple Deliverables), we deferred the fair value of the undelivered elements and only recognized the revenue related to the delivered elements if we had established fair value for the undelivered elements. If we had not established fair value for any undelivered elements, the entire order was deferred. Under the new guidance of ASU No. 2009-13,Multiple-Deliverable Revenue Arrangements (formerly EITF 08-1), fair value as the measurement criteria is replaced with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. For multi-element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable separately and is the price actually charged for that deliverable. Our process for determining an ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Revenues are recorded net of estimated returns. See Notes 1 and 16 to the condensed, consolidated financial statements for further discussion on the adoption of ASU No. 2009-13.

We license software under non-cancelable license agreements and provide services including training, installation, consulting and maintenance, which consists of product support services, and unspecified upgrade rights (collectively, post-contract customer support, “PCS”). Revenue from the sale of software is recognized in accordance with FASB ASC 985-605,Software—Revenue Recognition(formerly SOP 97-2). License fee revenues are recognized when a non-cancelable license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable, and collection is considered probable. Revenues from maintenance agreements and upgrade rights are recognized ratably over the period of service. Revenue for services, such as software deployment and consulting, is recognized when the service is performed. Our software arrangements contain multiple elements, which include software products, services and PCS. Generally, we do not sell computer hardware products with our software products. We will occasionally facilitate the hardware purchase by providing information to the customer such as where to purchase the equipment. We generally do not have vendor-specific objective evidence of fair value for our software products. We do, however, have vendor-specific objective evidence of fair value for items such as consulting and technical services, deployment and PCS based upon the price charged when such items are sold separately. Accordingly, for transactions where vendor-specific objective evidence exists for undelivered elements but not for delivered elements, we use the residual method. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

We do not typically ship any of our software products to distributors or resellers. Our software products are sold by our sales force directly to the end user. We may sell software to system integrators who provide complete solutions to end users on a contract basis.

On September 28, 2009, we entered into a “state of readiness” contract awarded by the U.S. government to supply defibrillators on short notice. A similar contract with the U.S. government expired on September 27, 2009. Based upon the award, we expect to receive two types of payments from the U.S. government. The first payment of approximately $4 million that we expect to receive will be to reimburse us for the cost to acquire inventories required to meet potentially short-notice delivery schedules. We anticipate receiving this first payment during fiscal 2010 which amount will be carried within “Deferred revenue” on our balance sheet as a liability under government contracts. We also expect to receive a payment from the U.S. government to compensate us for managing the purchase, build, storage and inventory rotation process. We expect that this payment will also compensate us for making future production capacity available. The portion of this payment associated with the purchase and build aspects of the contract we expect will be recognized on a percentage of completion basis while the portion of the payment for the storage, inventory rotation and facilities charge we expect will be recognized ratably over the contract period. The contract has a one-year term with up to an additional four one-year extensions. Under this contract, the U.S. Government has two options to acquire defibrillators. The U.S. Government may buy on a replenishment basis, which means we will record a sale under our normal U.S. Government price list and maintain our “state of readiness”, or the U.S. Government may buy on a non-replenishment basis, which will generally allow us to obtain normal margins but will reduce our future obligations under this arrangement.

For those markets for which we sell separately priced extended warranties, revenue is deferred and recognized over the applicable warranty period, based upon the fair value of the contract.

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We also generate rental revenue from our LifeVest product. Doctors prescribe the LifeVest equipment for use by their patients. The patients then rent the LifeVest product from us for use over a prescribed period of time, typically between 2 to 3 months. The patients are generally covered by health plan contracts, which typically contract with a third party payor that agrees to pay based on fixed or allowable reimbursement rates. Third party payors are entities such as insurance companies, governmental agencies, health maintenance organizations or other managed care providers. The rental income is recognized ratably over the rental period.

Allowance for Doubtful Accounts / Sales Returns and Allowances / Trade-In Allowances

We maintain an allowance for doubtful accounts for estimated losses, for which related provisions are included in bad-debt expense, resulting from the inability of our customers to make required payments. Specifically identified reserves are charged to selling and marketing expenses. Provisions for general reserves are charged to general and administrative expenses. We determine the adequacy of this allowance by regularly reviewing the aging of our accounts receivable and evaluating individual customer receivables, considering customers’ financial condition, historical experience, communications with the customers, credit history and current economic conditions. We also maintain an estimated reserve for potential future product returns and discounts given related to trade-ins and to current period product sales, which is recorded as a reduction of revenue. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included in the sales returns and allowance accounts on our balance sheet.

As of January 3, 2010, our accounts receivable balance of $76.6 million is reported net of allowances of $5.4 million. We believe our reported allowances at January 3, 2010 are adequate. If the financial conditions of our customers were to deteriorate, however, resulting in their inability to make payments, we might need to record additional allowances, resulting in additional expenses being recorded for the period in which such determination would be made.

Although we are not typically contractually obligated to provide trade-in allowances under existing sales contracts, we may offer such allowances when negotiating new sales arrangements. When pricing sales transactions, we contemplate both cash consideration and the net realizable value of any used equipment to be traded in. The trade-in allowance value stated in a sales order may differ from the estimated net realizable value of the underlying equipment. Any excess in the trade-in allowance over the estimated net realizable value of the used equipment represents additional sales discount.

We account for product sales transactions by recording as revenue the total of the cash consideration and the estimated net realizable value of the trade-in equipment less a normal profit margin. Any difference between the estimated net realizable value of the used equipment and the trade-in allowance granted is recorded as a reduction to revenue at the time of the sale.

Used ZOLL equipment is recorded at the lower of cost or market. We regularly review our reserves to ensure that the balance sheet value associated with our trade-in equipment is properly stated.

If the trade-in equipment is a competitor’s product, we will usually resell the product to a third-party distributor who specializes in sale of used medical equipment, without any refurbishment. We typically do not recognize a profit upon the resale of a competitor’s used equipment, although as a result of the inherent nature of the estimation process, we could recognize either a nominal gain or loss.

Fair Value Measurements

During the first quarter of fiscal 2009, we adopted FASB ASC 820, Fair Value Measurements and Disclosures(formerly referenced as SFAS No. 157,Fair Value Measurements), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This new accounting standard does not require any new fair value measurements. We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We had deferred implementation of FASB ASC 820 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until the first quarter of fiscal 2010. The implementation of FASB ASC 820 as it relates to non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis did not have a material impact on our financial statements this quarter. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market for the assets and liabilities and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

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Warranty Reserves

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time, usually one year for pre-hospital and international customers and five years for hospital customers. Revenue is deferred for pre-hospital customers who receive warranties beyond one year. Such revenue is then recognized over the period of extended warranty. We provide for the estimated cost of product warranties at the time product is shipped and revenue is recognized. The costs that we estimate include material, labor, and shipping. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We believe that our recorded liability of $4.1 million at January 3, 2010 is adequate to cover future costs for the servicing of our products sold through that date and under warranty. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventory

We value our inventories at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead.

Inventory on hand may exceed future demand either because the product is outdated or obsolete, or because the amount on hand is in excess of future needs. We provide for the total value of inventories that we determine to be obsolete based on criteria such as customer demand and changing technologies. We estimate excess inventory amounts by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At January 3, 2010, our inventory was recorded at net realizable value requiring reserves of $8.4 million, or 10.1%, of our $82.9 million of gross inventories.

Goodwill

At January 3, 2010, we had approximately $52.1 million in goodwill, primarily resulting from our acquisitions of Revivant (approximately $22 million), the assets of Lifecor (approximately $18 million), certain assets of BIO-key International, Inc. (approximately $5 million), the assets of Infusion Dynamics (approximately $4 million), and the assets of Alsius (approximately $3 million). We test our goodwill for impairment at least annually by comparing the fair value of our reporting units to the carrying value of those reporting units. Fair value is determined based on an estimate of the discounted future cash flows expected from the reporting units. The determination of fair value requires significant judgment on the part of management about future revenues, expenses and other assumptions that contribute to the net cash flows of the reporting units. Additionally, we periodically review our goodwill for impairment whenever events or changes in circumstances indicate that an impairment has occurred.

Long-Lived Assets

We periodically review the carrying amount of our long-lived assets, including property and equipment, and intangible assets, to assess potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The determination includes evaluation of factors such as current market value, business climate and future cash flows expected to result from the use of the related assets. Fair value is determined based on an estimate of the undiscounted cash flows in assessing potential impairment and to record an impairment loss based on fair value in the period when it is determined that the carrying amount of the asset may not be recoverable. This process requires judgment on the part of management.

Income Taxes

We use the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on our income tax provision and net income in the period in which the determination is made.

We adopted the provisions of FASB ASC 740,Income Tax, formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on October 1, 2007. The provision contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. This provision also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure and transition.

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Stock-Based Compensation

In accordance with FASB ASC Topic 718,Compensation—Stock Compensation, we measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize cost over the requisite service period. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Risk Factors

We have modified the following risk factors from those risk factors contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2009, which was filed with the SEC on December 10, 2009:

• “If We Fail to Compete Successfully in the Future Against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected.”

• “Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition.”

• “Recent Economic Trends Could Adversely Affect our Financial Performance.”

• “The Adoption of Federal Medical Device Tax Surcharge by the U.S. Government Could Reduce Our Profitability.”

• “We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales.”

• “Fluctuations in Currency Exchange Rates May Adversely Affect Our International Sales.”

• “Our International Sales Expose Our Business to a Variety of Risks That Could Result in Significant Fluctuations in Our Results of Operations.”

• “We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.”

If We Fail to Compete Successfully in the Future Against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected.

Our principal global competitors with respect to our entire cardiac resuscitation equipment product line are Physio-Control and Philips. Physio-Control is a subsidiary of Medtronic, Inc., a leading medical technology company, and has been the market leader in the defibrillator industry for over 20 years. As a result of Physio-Control’s large position in this industry, many potential customers have relationships with Physio-Control that could make it difficult for us to continue to penetrate the markets for our products. In addition, Medtronic and Philips and other competitors each have significantly greater resources than we do. Accordingly, Medtronic, Philips and other competitors could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. These and other competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and/or less expensive manner.

There are a number of smaller competitors in the United States, which include Cardiac Science Corporation, HeartSine Technology, and Defibtech. Internationally, we face the same competitors as in the United States as well as Nihon Kohden, Corpuls, Schiller, and other local competitors. It is possible the market may embrace these competitors’ products, which could negatively impact our market share.

Additional companies may enter the market. For example, GE Healthcare entered the hospital market through cooperation with Cardiac Science Corporation. They have currently been focused on the International market but could begin to focus on the U.S. market, as well, which may impair our ability to gain market share.

Currently, we believe there are no competitors for our LifeVest product. However, competitors may develop their own products to compete against the LifeVest. It is possible that similar products developed by competitors could be superior to or more cost-effective than our LifeVest product. Consequently, our ability to sell/lease/rent the LifeVest could be materially affected and our financial results could be materially and adversely affected.

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In addition to external defibrillation and external pacing with cardiac resuscitation equipment, it is possible that other alternative therapeutic approaches to the treatment of sudden cardiac arrest may be developed. These alternative therapies or approaches, including pharmaceutical or other alternatives, could prove to be superior to our products.

There is significant competition in the business of developing and marketing software for data collection, billing, scheduling, dispatching, records and resource management in the emergency medical system and fire markets. Our principal competitors in this business include Sansio, Healthware Technologies, Inc., Safety Pad Software, ImageTrend, Inc., eCore Software Solutions, Inc., PDSI Software, Inc., EnRoute Emergency Systems (formerly Geac Computer Corporation, Ltd.), DocuMed, Inc., Tritech Software Systems, Inc., Ortivus AB, RAM Software Systems, Inc., Intergraph Corporation, Affiliated Computer Services, Inc., Emergency Reporting, Inc., AmbPac, Inc., ESO Solutions, Golden Hour and Innovative Engineering, some of which have greater financial, technical, research and development and marketing resources than we do. Because the barriers to entry in this business are relatively low, additional competitors may easily enter this market in the future. It is possible that systems developed by competitors could be superior to our data management system. Consequently, our ability to sell our data management systems could be materially affected and our financial results could be materially and adversely affected.

Our principal competitors in the area of temperature management are Philips (Innercool), Medivance Inc., Gaymar Industries, Inc. and Cincinnati SubZero Products, Inc. (CSZ). The temperature management market is primarily divided into “Intravascular” technologies and “Surface” technologies. Philips has entered both the intravascular and surface markets with the July 15, 2009 acquisition of Innercool Therapies, Incorporated. The Innercool RapidBlue™ system provides Philips an endovascular product that competes with ZOLL’s IVTM solution. Philips also competes in the surface cooling market with Innercool’s CoolBlue™ system (manufactured by CSZ). ZOLL expects Philips to be more active in the promotion of the Innercool technology. Medivance, Inc. markets the Arctic Sun^® Temperature Management system. This surface technology utilizes gel coated pads that are placed directly on the patient’s skin. These pads can have either cold or warm water circulating depending upon the mode of operation. Medivance continues to aggressively market their products within the U.S. marketplace. Both Cincinnati SubZero (Blanketrol^®) and Gaymar Industries, Inc. (Medi-Therm^®) provide cooling blanket products that are wrapped around the patient.

The Resumption of Unrestricted Shipments of Physio-Control AEDs, a Division of Medtronic, May Adversely Affect our Revenues and Profits.

Physio-Control is under consent decree with the FDA which has had some impact on our business. For example, Physio-Control has not been shipping low-end AEDs. If they resume shipments, it may adversely affect our revenues in the future.

Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition.

There have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the reimbursement for healthcare services in the United States. These initiatives have ranged from changing federal and state healthcare reimbursement programs, including providing coverage to the public under governmental funded programs, to minor modifications to existing programs. In December 2009, the U.S. House of Representatives and the U.S. Senate passed separate bills that would have a wide-ranging impact on the U.S. healthcare system. This proposed legislation includes expanded public healthcare measures and substantial new taxes on the medical device industry. The ultimate content or timing of any future healthcare reform legislation, and its impact on us, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our financial condition and results of operations.

General Economic Conditions, Which Are Largely Out of the Company’s Control, May Adversely Affect the Company’s Financial Condition and Results of Operations.

The Company’s businesses may be affected by changes in general economic conditions, both nationally and internationally. Recessionary economic cycles, higher interest rates, higher fuel and other energy costs, inflation, higher levels of unemployment, changes in the laws or industry regulations or other economic factors may adversely affect the demand for the Company’s products. Additionally, these economic factors, as well as higher tax rates, increased costs of labor, insurance and healthcare, and changes in other laws and regulations may increase the Company’s cost of sales and operating expenses, which may adversely affect the Company’s financial condition and results of operations.

Recent Economic Trends Could Adversely Affect our Financial Performance.

The global economic recession has adversely affected the levels of both our sales and profitability. The domestic and global financial and credit markets continue to experience declines or slow growth and there continues to be diminished liquidity and credit availability. We believe these conditions have not materially affected our financial position or our liquidity. However, we could be negatively impacted if these conditions continue for a sustained period of time, or if there is further deterioration in financial markets and major economies. The current tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products and services.

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In addition, weakening economic conditions and outlook may result in a further decline in the level of our customers’ spending that could adversely affect our results of operations and liquidity. Our primary business is the sale of capital equipment. While customers may delay their capital equipment purchases of defibrillator products in the near-term due to the current economic environment, the equipment is a standard of care and will ultimately need to be replaced. However, we cannot be sure as to how long such delays may continue. However, our AutoPulse product and certain of our other products are not currently standards of care. Consequently, customers may indefinitely postpone the purchase of these products and any of their accessories. We are unable to predict the likely duration and severity of the current disruption in the domestic and global financial markets and the related adverse economic conditions. For example, we believe that the challenging sales environment is driven in large part by curtailed spending due to the general economic downturn and the uncertainty of healthcare reform legislation.

Current and Future State and Municipal Budget Deficits Could Adversely Affect our Financial Performance.

Many of our customers include state and municipal agencies. In an article by the Center on Budget and Policy Priorities, the Center estimated that approximately 45 states are facing or will face budget deficits in fiscal 2009 and/or fiscal 2010. Because of these budget deficits, our customers may delay their purchases of capital equipment from the Company due to the current economic environment. Significant purchasing delays may adversely affect our financial performance.

The Adoption of Federal Medical Device Tax Surcharge by the U.S. Government Could Reduce Our Profitability.

There has been discussion of imposing a federal medical device tax surcharge on all medical device companies to help pay for the proposed healthcare reform. Approximately 80% of our revenues come from capital equipment and related accessories sales. Although little benefit would be derived from healthcare reform as it relates to this portion of our business, the U.S. Congress is considering anywhere from a 2.5% to 5% surtax on 100% of our domestic revenues. As we would derive limited benefit from healthcare reform, we would seek to pass this surtax on to our customers. If we are unsuccessful, this surtax could reduce our profitability. Additionally, because of the uncertainty surrounding this issue, the impact of such a surtax, if passed, has not been reflected in our forward guidance.

It is Possible that if Competitors Increase Their Use of Price Discounting, Our Gross Margins Could Decline.

Some competitors have, from time to time, used price discounting in order to attempt to gain market share. If this activity were to increase in the future it is possible that our gross margin and overall profitability could be adversely affected if we decided to respond in kind.

Our Operating Results are Likely to Fluctuate, Which Could Cause Our Stock Price to be Volatile, and the Anticipation of a Volatile Stock Price Can Cause Greater Volatility.

Our quarterly and annual operating results have fluctuated and may continue to fluctuate. Various factors have and may continue to affect our operating results, including:

• high demand for our products, which could disrupt our normal factory utilization and cause shipments to occur in uneven patterns;

• variations in product orders;

• timing of new product introductions;

• temporary disruptions of buying behavior due to changes in technology (e.g., shift from M Series to R Series or E Series defibrillators);

• changes in distribution channels;

• actions taken by our competitors such as the introduction of new products or the offering of sales incentives;

• the ability of our sales forces to effectively market our products;

• supply interruptions from our single-source vendors;

• temporary manufacturing disruptions;

• regulatory actions, including actions taken by the FDA or similar agencies; and

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• delays in obtaining domestic or foreign regulatory approvals.

A large percentage of our sales are made toward the end of each quarter. As a consequence, our quarterly financial results are often dependent on the receipt of customer orders in the last weeks of a quarter. The absence of these orders could cause us to fall short of our quarterly sales targets, which, in turn, could cause our stock price to decline sharply. As we grow in size, and these orders are received closer to the end of a period, we may not be able to manufacture, test, and ship all orders in time to recognize the shipment as revenue for that quarter.

Based on these factors, period-to-period comparisons should not be relied upon as indications of future performance. In anticipation of less successful quarterly results, parties may take short positions in our stock. The actions of parties shorting our stock might cause even more volatility in our stock price. The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly.

We May Acquire Other Businesses, and We May Have Difficulty Integrating These Businesses or Generating an Acceptable Return from Acquisitions.

We recently acquired certain assets from Welch Allyn, Inc. and Alsius Corporation. We may acquire other companies or make strategic purchases of interests in other companies related to our business in order to grow, add product lines, acquire customers or otherwise attempt to gain a competitive advantage in new or existing markets. Such acquisitions and investments may involve the following risks:

• our management may be distracted by these acquisitions and may be forced to divert a significant amount of time and energy into integrating and running the acquired businesses;

• we may face difficulties associated with financing the acquisitions;

• we may face the inability to achieve the desired outcomes justifying the acquisition;

• we may face difficulties integrating the acquired business’ operations and personnel; and

• we may face difficulties incorporating the acquired technology into our existing product lines.

We Acquired New Products and Technologies, Such as Temperature Management Technology from Alsius Corporation. If We Are Not Successful in Integrating these Products and Technologies and Growing Our Business with These Products and Technologies, Our Operating Results May Be Affected.

We have acquired temperature management technology. As part of the successful development of the market for this technology, where applicable, we must:

• establish new marketing and sales strategies;

• identify respected health professionals and organizations to champion the products;

• work with potential customers to develop new sources of unbudgeted funding;

• conduct successful clinical trials;

• achieve early success for the product in the field; and

• obtain FDA approval of new indications.

If we are delayed or fail to achieve these market development initiatives, we may encounter difficulties building our customer base for these products. Sub-par results from any of these items, such as inconclusive results from clinical trials, could cause our operating results to be unfavorably affected.

We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales.

We are conducting clinical trials related to the AutoPulse and the LifeVest. While we are confident in the future outcomes of these trials, an unsuccessful trial could affect the marketability of these products in the future.

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Our Approach to Our Backlog Might Not Be Successful.

We maintain a backlog in order to generate operating efficiencies. If order rates are insufficient to maintain such a backlog, we may be subject to operating inefficiencies.

We May be Required to Implement a Costly Product Recall.

In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA could require us to redesign or implement a recall of, any of our products. Both our larger competitors and we have, on numerous occasions, voluntarily recalled products in the past, and based on this experience, we believe that future recalls could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. Though it may not be possible to quantify the economic impact of a recall, it could have a material adverse effect on our business, financial condition and results of operations.

We initiated a voluntary worldwide field corrective action on our AED Plus automated external defibrillator during the second quarter of fiscal 2009 because the batteries in the AED Plus were not performing as expected. This corrective action applies to approximately 180,000 AED Plus units. We expect to incur a total of approximately $1 million to cover the cost of this corrective action.

Changes Affecting Healthcare Reimbursement and Payors May Require Us to Decrease the Selling Price for Our Products or Could Result in a Reduction in the Size of the Market for Our Products, Each of Which Could Have a Negative Impact on Our Financial Performance.

Trends toward managed care, healthcare cost containment, and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies, which could adversely affect the sale and/or the prices of our products. For example:

• major third-party payers of hospital and pre-hospital services, including Medicare, Medicaid and private healthcare insurers, have substantially revised their payment methodologies during the last few years, which has resulted in stricter standards for reimbursement of hospital and pre-hospital charges for certain medical procedures;

• Medicare, Medicaid and private healthcare insurer cutbacks could create downward price pressure in the cardiac resuscitation pre-hospital market;

• there has been a consolidation among healthcare facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products, and these entities may decide to stop purchasing our products or demand discounts on our prices;

• there is economic pressure to contain healthcare costs in international markets;

• there are proposed and existing laws and regulations in domestic and international markets regulating pricing and profitability of companies in the healthcare industry; and

• there have been initiatives by third-party payers to challenge the prices charged for medical products, which could affect our ability to sell products on a competitive basis.

We expect the healthcare industry to continue to change significantly in the future. Both the pressure to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of sales, which could have a material adverse effect on our business.

We Can be Sued for Producing Defective Products and We May be Required to Pay Significant Amounts to Those Harmed If We are Found Liable, and Our Business Could Suffer from Adverse Publicity.

The manufacture and sale of medical products such as ours entail significant risk of product liability claims, and product liability claims are made against us from time to time. Our quality control standards comply with FDA requirements, and we believe that the amount of product liability insurance we maintain is adequate based on past product liability claims in our industry. We cannot be assured that the amount of such insurance will be sufficient to satisfy claims made against us in the future or that we will be able to maintain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims could result in significant costs or litigation. A product liability lawsuit is currently pending. A successful claim brought against us in excess of our available insurance coverage or any claim that results in significant adverse publicity against us could have a material adverse effect on our business, financial condition and results of operations.

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Recurring Sales of Electrodes to Our Customers May Decline.

We typically have recurring sales of electrodes to our customers. Other vendors have developed electrode adaptors that allow generic electrodes to be compatible with our defibrillators. If we are unable to continue to differentiate the superiority of our electrodes over these generic electrodes, our future revenue from the sale of electrodes could be reduced, or our pricing and profitability could decline.

Failure to Produce New Products or Obtain Market Acceptance for Our New Products in a Timely Manner Could Harm Our Business.

Because substantially all of our revenue comes from the sale of cardiac resuscitation devices and related products, our financial performance will depend upon market acceptance of, and our ability to deliver and support, new products. We cannot be assured that we will be able to produce viable products in the time frames we currently estimate. Factors which could cause delay in these schedules or even cancellation of our projects to produce and market these new products include: research and development delays, the actions of our competitors producing competing products, and the actions of other parties who may provide alternative therapies or solutions, which could reduce or eliminate the markets for pending products.

The degree of market acceptance of any of our products will depend on a number of factors, including:

• our ability to develop and introduce new products in a timely manner;

• our ability to successfully implement new product technologies;

• the market’s readiness to accept new products;

• the standardization of an automated platform for data management systems;

• the clinical efficacy of our products and the outcome of clinical trials;

• the ability to obtain timely regulatory approval for new products; and

• the prices of our products compared to the prices of our competitors’ products.

If our new products do not achieve market acceptance, our financial performance could be adversely affected.

Our Dependence on Sole and Single Source Suppliers Exposes Us to Supply Interruptions and Manufacturing Delays Caused by Faulty Components, Which Could Result in Product Delivery Delays and Substantial Costs to Redesign Our Products.

Although we use many standard parts and components for our products, some key components are purchased from sole or single source vendors for which alternative sources at present are not readily available. For example, we currently purchase proprietary components, including capacitors, display screens, gate arrays and integrated circuits, for which there are no direct substitutes. Our inability to obtain sufficient quantities of these components as well as our limited ability to deal with faulty components may result in future delays or reductions in product shipments, which could cause a fluctuation in our results of operations.

These or any other components could be replaced with alternatives from other suppliers, which could involve a redesign of our products. Such a redesign could involve considerable time and expense. We could be at risk that the supplier might experience difficulties meeting our needs.

If our manufacturers are unable or unwilling to continue manufacturing our components in required volumes, we will have to transfer manufacturing to acceptable alternative manufacturers which could result in significant interruptions of supply. The manufacture of these components is complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could negatively impact the cost and timely delivery of our products. Accordingly, any significant interruption in the supply, or degradation in the quality, of any component would have a material adverse effect on our business, financial condition and results of operations.

We May Not be Able to Obtain Appropriate Regulatory Approvals for Our New Products.

The manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as amended, and the rules and regulations promulgated thereunder. Some of our products have been classified by the FDA as Class II devices and others, such as our AEDs, have been classified as Class III devices. All of these devices must secure a 510(k) pre-market notification clearance before they can be introduced into the U.S. market. The process of obtaining 510(k) clearance typically takes several months and may involve the submission of limited clinical data supporting assertions that the product is substantially equivalent to an already approved device or to a device that was on the market before the Medical Device Amendments of 1976. Recently, we have noticed the 510(k) process is taking longer as the applications appear to be subject to increased scrutiny. We believe this may be a result of recent pressure from Congress to review the current 510(k) process. Delays in obtaining 510(k) clearance could have an adverse effect on the introduction of future products. Moreover, approvals, if granted, may limit the uses for which a product may be marketed, which could reduce or eliminate the commercial benefit of manufacturing any such product.

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We are also subject to regulation in each of the foreign countries in which we sell products. Many of the regulations applicable to our products in such countries are similar to those of the FDA. However, the national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. We cannot be assured that such clearances will be obtained. For example, although we received U.S. 510(k) clearance on our biphasic waveform in 1999, to date we have not been able to obtain similar clearance in Japan. As a result, our Japanese defibrillator revenues are very modest. Although we anticipate clearance in the future, we can provide no such assurance that we will succeed.

If We Fail to Comply With Applicable Regulatory Laws and Regulations, the FDA and Other U.S. and Foreign Regulatory Agencies Could Exercise Any of Their Regulatory Powers, Which Could Have a Material Adverse Effect on Our Business.

Every company that manufactures or assembles medical devices is required to register with the FDA and to adhere to certain quality systems, which regulate the manufacture of medical devices and prescribe record keeping procedures and provide for the routine inspection of facilities for compliance with such regulations. The FDA also has broad regulatory powers in the areas of clinical testing, marketing and advertising of medical devices. To ensure that manufacturers adhere to good manufacturing practices, medical device manufacturers are routinely subject to periodic inspections by the FDA. If the FDA believes that a company may not be operating in compliance with applicable laws and regulations, it could take any of the following actions:

• place the company under observation and re-inspect the facilities;

• issue a warning letter apprising of violating conduct;

• detain or seize products;

• mandate a recall;

• enjoin future violations; and

• assess civil and criminal penalties against the company, its officers or its employees.

We, like most of our U.S. competitors, have received warning letters from the FDA in the past, and we may receive warning letters in the future. The number of warning letters issued within the industry has been on the rise, and it appears the number of warning letters issued within the industry in 2009 will exceed 2008. We have always complied with the warning letters we have received. However, our failure to comply with FDA regulations could result in sanctions being imposed on us, including restrictions on the marketing or recall of our products. These sanctions could have a material adverse effect on our business.

In general, the FDA is becoming increasingly active in its regulatory activities. For example, the FDA recently issued a safety alert in connection with low energy external biphasic defibrillators. The safety alert does not suggest the need for any change to current clinical practice, but the FDA is seeking additional information from healthcare professionals to determine if further FDA activities are advised.

If a foreign regulatory agency believes that we are not operating in compliance with their laws and regulations, they could prevent us from selling our products in their country, which could have a material adverse effect on our business.

Our Industry Is Experiencing Greater Scrutiny by Governmental Authorities, Which May Lead to Greater Governmental Regulation and Heightened Regulatory Enforcement.

Our medical devices and our business activities are subject to rigorous regulation, including by the FDA and numerous other federal, state and foreign governmental authorities. These authorities and members of the U.S. Congress have been increasing their scrutiny of our industry. Certain states have recently passed or are considering legislation restricting our interactions with health care providers and requiring disclosure of many payments to them. While recent case law has clarified that the FDA’s authority over those medical devices for which the FDA has granted Premarket Approval (including our LifeVest product) preempts state tort laws, legislation has been introduced at the federal level to allow state intervention. We anticipate that governmental authorities will continue to scrutinize our industry closely and that additional regulation by governmental authorities may result in increased compliance costs, increased exposure to litigation and other adverse effects to our business. In addition, heightened regulatory enforcement arising from changes in the political and regulatory environment may adversely affect our ability to obtain regulatory approval for our products and to maintain for sale products previously approved. The FDA’s enhanced reporting requirements and ability to analyze reported data may result in more frequent field actions which may include communications to physicians and patients, recalls of products and repair or replacement of devices. One or more of these actions could have a material impact on our net sales, profitability and reputation in the marketplace.

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We Are Dependent upon Licensed and Purchased Technology for Upgradeable Features in Our Products, and We May Not Be Able to Renew These Licenses or Purchase Agreements in the Future.

We license and purchase technology from third parties for upgradeable features in our products, including a 12 lead analysis program, SPO², EtCO², CO and NIBP technologies. We anticipate that we will need to license and purchase additional technology to remain competitive. We may not be able to renew our existing licenses and purchase agreements or to license and purchase other technologies on commercially reasonable terms or at all. If we are unable to renew our existing licenses and purchase agreements or we are unable to license or purchase new technologies, we may not be able to offer competitive products.

Fluctuations in Currency Exchange Rates May Adversely Affect Our International Sales.

Our revenue from foreign operations can be denominated in or significantly influenced by the currency and general economic climate of the country in which we make sales. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in downward price pressure for our products or losses from currency exchange rate fluctuations. As we continue to expand our international operations, downward price pressure and exposure to gains and losses on foreign currency transactions may increase.

Approximately 34% of our revenue in the first quarter of 2010 was generated in foreign markets. Approximately half of this revenue, representing our direct subsidiaries sales, is denominated in a foreign currency and, as such, is subject to direct foreign currency exposure. The currency exposure on the revenue is partially offset by the operating expenses which are also denominated in local currencies. The currency exposure is also partially offset by any forward contracts entered into to hedge our exposure to exchange rates. The other portion of revenue generated in the foreign markets is sold to distributors and is denominated in U.S. dollars. This revenue could be subject to price pressure as the U.S. dollar strengthens.

We may use forward contracts and other instruments to reduce our exposure to exchange rate fluctuations from intercompany accounts receivable and forecasted intercompany sales to our subsidiaries denominated in foreign currencies, and we may not be able to do this successfully. Accordingly, we may experience economic loss and a negative impact on our results of operations and equity as a result of foreign currency exchange rate fluctuations.

Our Current and Future Investments May Lose Value in the Future.

We hold investments in two private companies and may in the future invest in the securities of other companies and participate in joint venture agreements. These investments and future investments are subject to the risks that the entities in which we invest will become bankrupt or lose money.

Investing in other businesses involves risks and no assurance can be made as to the profitability of any investment. Our inability to identify profitable investments could adversely affect our financial condition and results of operations. Unless we hold a majority position in an investment or joint venture, we will not be able to control all of the activities of the companies in which we invest or the joint ventures in which we are participating. Because of this, such entities may take actions against our wishes and not in furtherance of, and even opposed to, our business plans and objectives. These investments are also subject to the risk of impasse if no one party exercises ultimate control over the business decisions.

Future Changes in Applicable Laws and Regulations Could Have an Adverse Effect on Our Business.

Federal, state or foreign governments may change existing laws or regulations or adopt new laws or regulations that regulate our industry. Changes in or adoption of new laws or regulations could result in the following consequences that would have an adverse effect on our business:

• regulatory clearance previously received for our products could be revoked;

• costs of compliance could increase; or

• we may be unable to comply with such laws and regulations so that we would be unable to sell our products.

Changes in Tax Laws or Exposure to Additional Income Tax Liabilities Could Have a Material Impact on Our Financial Condition, Results of Operations and Liquidity.

We are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions. We are also subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our net income or financial condition. Changes in tax laws or tax rulings could materially impact our effective tax rate. For example, proposals for fundamental U.S. international tax reform, such as recent proposals by the Obama administration and others that would have the effect of increasing U.S. taxes on non-U.S. income could, if enacted, have a significant adverse impact on our future results of operations.

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Some of Our Activities May Subject Us to Risks under Federal and State Laws Prohibiting “Kickbacks” and False or Fraudulent Claims.

We are subject to the provisions of a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. While the federal law applies only to referrals, products or services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, with hospitals, physicians, laboratories and other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or are for items or services that were not provided as claimed. Anti-kickback and false claims laws prescribe civil and criminal penalties (including fines) for noncompliance that can be substantial. While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing practices is ever evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could harm our business and prospects.

Patients May Not Be Able to Obtain Appropriate Insurance Coverage for Our LifeVest Product.

The ability of patients to obtain appropriate insurance coverage for our LifeVest product from government and third-party payors is critical to the success of the product. The availability of insurance coverage affects which products physicians may prescribe. Implementation of healthcare reforms in the United States and abroad may limit the price of, or the level at which, insurance is provided for our LifeVest product and adversely affect both our pricing flexibility and the demand for the product. Hospitals or physicians may respond to such pressures by substituting other therapies for our LifeVest product.

Further legislative or administrative reforms to the U.S. or international reimbursement systems that significantly reduce insurance coverage for our LifeVest product or deny coverage for our LifeVest product, or adverse decisions regarding coverage or reimbursement issues relating to our LifeVest product by administrators of such systems would have an adverse impact on sales of our LifeVest product. This in turn could have an adverse effect on our financial condition and results of operations.

Our LifeVest Product is a Reimbursable Product and Is Subject to Laws that Are Different from Our Capital Equipment Business.

The LifeVest product is our first reimbursed product which is different than our typical capital equipment business. The LifeVest product is governed by the Durable Medical Equipment Regulations and is subject to audit. The LifeVest is reimbursed by Medicare, Medicaid, or other third-party payors, for which reimbursement rates may fall with little notice which may have an adverse impact on sales of our LifeVest product.

Failure to Comply with HIPAA Obligations Would Put Us at Risk.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which is primarily applicable to our LifeVest product, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

HIPAA also protects the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. HIPAA restricts the use and disclosure of patient health information, including patient records. Although we believe that HIPAA does not apply to us directly, most of our customers have significant obligations under HIPAA, and we intend to cooperate with our customers and others to ensure compliance with HIPAA with respect to patient information that comes into our possession. Failure to comply with HIPAA obligations can entail criminal penalties. Some states have also enacted rigorous laws or regulations protecting the security and privacy of patient information. If we fail to comply with these laws and regulations, we could face additional sanctions.

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Uncertain Customer Decision Processes May Result in Long Sales Cycles, Which Could Result in Unpredictable Fluctuations in Revenues and Delay the Replacement of Cardiac Resuscitation Devices.

Many of the customers in the pre-hospital market consist of municipal fire and emergency medical systems departments. As a result, there are numerous decision-makers and governmental procedures in the decision-making process. In addition, decisions at hospitals concerning the purchase of new medical devices are sometimes made on a department-by-department basis. Accordingly, we believe the purchasing decisions of many of our customers may be characterized by long decision-making processes, which have resulted in and may continue to result in long sales cycles for our products. For example, the sales cycles for cardiac resuscitation products typically have been between six to nine months, although some sales efforts have taken as long as two years.

Reliance on Domestic and International Distributors to Sell Our Products Exposes Us to Business Risks That Could Result in Significant Fluctuations in Our Results of Operations.

Although we perform credit assessments with sales to distributors, payment by the distributor may be affected by the financial stability of the customers to which the distributor sells. Future sales to distributors may also be affected by the distributor’s ability to successfully sell our products to their customers. Either of these scenarios could result in significant fluctuations in our results of operations.

Our International Sales Expose Our Business to a Variety of Risks That Could Result in Significant Fluctuations in Our Results of Operations.

Approximately 34% of our sales for the first quarter of fiscal 2010 were made to foreign purchasers, and we plan to increase the sale of our products to foreign purchasers in the future. As a result, a significant portion of our sales is and will continue to be subject to the risks of international business, including:

• fluctuations in foreign currencies;

• trade disputes;

• changes in regulatory requirements, tariffs and other barriers;

• consequences of failure to comply with U.S. law and regulations concerning the conduct of business outside the U.S.;

• the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of the products being implemented by the United States or these foreign countries;

• timing and availability of import/export licenses;

• political and economic instability;

• higher credit risk and difficulties in accounts receivable collections;

• increased tax exposure if our revenues in foreign countries are subject to taxation by more than one jurisdiction;

• accepting customer purchase orders governed by foreign laws, which may differ significantly from U.S. laws and limit our ability to enforce our rights under such agreements and to collect damages, if awarded;

• war on terrorism;

• disruption in the international transportation industry; and

• use of international distributors.

As international sales become a larger portion of our total sales, these risks could create significant fluctuations in our results of operations. These risks could affect our ability to resell trade-in products to domestic distributors, who in turn often resell the trade-in products in international markets. Our inability to sell trade-in products might require us to offer lower trade-in values, which might impact our ability to sell new products to customers desiring to trade in older models and then purchase newer products.

We intend to continue to expand our direct sales forces and our marketing support for these sales forces. We intend to continue to expand these areas, but if our sales forces are not effective, or if there is a sudden decrease in the markets where we have direct operations, we could be adversely affected.

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We May Fail to Adequately Protect or Enforce Our Intellectual Property Rights or Secure Rights to Third Party Intellectual Property, and Our Competitors Can Use Some of Our Previously Proprietary Technology.

Our success will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We hold approximately 250 U.S. and 150 foreign patents for our various inventions and technologies. Additional patent applications have been filed with the U.S. Patent and Trademark Office and outside the U.S. and are currently pending. The patents that have been granted to us are for a definitive period of time and will expire. We have filed certain corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications as appropriate. We cannot be assured as to:

• the degree and range of protection any patents will afford against competitors with similar products;

• if and when patents will be issued;

• whether or not others will obtain patents claiming aspects similar to those covered by our patent applications;

• whether or not competitors will use information contained in our expired patents;

• whether or not others will design around our patents or obtain access to our know-how; or

• the extent to which we will be successful in avoiding any patents granted to others.

If certain patents issued to others are upheld or if certain patent applications filed by others issue and are upheld, we may be:

• required to obtain licenses or redesign our products or processes to avoid infringement;

• prevented from practicing the subject matter claimed in those patents; or

• required to pay damages.

There is substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation or administrative proceedings, including interference proceedings before the U.S. Patent and Trademark Office, related to intellectual property rights have been and in the future could be brought against us or be initiated by us. Adverse determinations in any patent litigation could subject us to significant liabilities to third parties, could require us to seek licenses from third parties and could, if licenses are not available, prevent us from manufacturing, selling or using certain of our products, some of which could have a material adverse effect on the Company. In addition, the costs of any such proceedings may be substantial whether or not we are successful.

Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all U.S. employees, consultants and advisors to enter into confidentiality agreements, which prohibit the disclosure of confidential information to anyone outside of our Company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. We cannot be assured that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of the lawful development by others of such information.

Reliance on Overseas Vendors for Some of the Components for Our Products Exposes Us to International Business Risks, Which Could Have an Adverse Effect on Our Business.

Some of the components we use in our products are acquired from foreign manufacturers, particularly countries located in Europe and Asia. As a result, a significant portion of our purchases of components is subject to the risks of international business. The failure to obtain these components as a result of any of these risks can result in significant delivery delays of our products, which could have an adverse effect on our business.

Intangibles and Goodwill We Currently Carry on Our Balance Sheet May Become Impaired.

At January 3, 2010, we had approximately $89 million of goodwill and intangible assets on our balance sheet. These assets are subject to impairment if the cash flow that we generate from these assets specifically, or our business more broadly, are insufficient to justify the carrying value of the assets. Factors affecting our ability to generate cash flow from these assets include, but are not limited to, general market conditions, product acceptance, pricing and competition, distribution, costs of production and operations.

In addition, volatility in our stock price and declines in our market capitalization could put pressure on the carrying value of our goodwill and other long-lived assets if the current period of economic uncertainty and related volatility in the financial markets persist for an extended period of time.

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Provisions in Our Charter Documents, Our Shareholder Rights Agreement and State Law May Make It Harder for Others To Obtain Control of the Company Even Though Some Stockholders Might Consider Such a Development to be Favorable.

Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by our stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for third parties to acquire a majority of our outstanding voting stock. In addition, our restated articles of organization provide for staggered terms for the members of the board of directors, which could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult. Our restated articles of organization, restated by-laws and applicable Massachusetts law also impose various procedural and other requirements that could delay or make a merger, tender offer or proxy contest involving us more difficult.

We have also implemented a so-called poison pill by adopting our shareholders rights agreement, which was renewed in April 2008. This poison pill significantly increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding Common Stock or otherwise “triggers” the poison pill by exceeding the applicable stock ownership threshold. The existence of this poison pill could delay, deter or prevent a takeover of the Company.

All of these provisions could limit the price that investors might be willing to pay in the future for shares of our Common Stock, which could preclude our shareholders from recognizing a premium over the prevailing market price of our stock.

We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.

We have only one manufacturing facility for each of our major products. Damage to any such facility could render us unable to manufacture the relevant product or require us to reduce the output of products at the damaged facility. In addition, a severe weather event, other natural disaster or any other significant disruption affecting a facility occurring late in a quarter could make it difficult to meet product shipping targets. Any of these events could materially and adversely impact our business, financial condition and results of operations.

We Hold Various Marketable Securities Investments Which Are Subject to Market Risk, Including Volatile Interest Rates and a Volatile Stock Market.

Our management believes it has a conservative investment policy. It calls for investing in high quality investment grade securities with an average duration of 24 months or less. However, with the volatility of interest rates and fluctuations in credit quality of the underlying investments and issues of general market liquidity, there can be no assurance that the Company’s investments will not lose value. Management does not believe it has material exposure currently.

Our Strategic Alliance With Welch Allyn May Not Be Successful Which May Adversely Impact Our Operating Results.

We recently entered into a strategic alliance with Welch Allyn involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn’s defibrillator and monitoring products. If we are delayed or fail to achieve our goals for this strategic alliance, our operating results could be unfavorably affected. For example, we have experienced a delay in receiving a 510(k) clearance for an AED product to be sold by Welch Allyn. In addition, a reduction in military expenditures in the monitoring and resuscitation markets would adversely affect business opportunities expected to result from the strategic alliance.

The Company Has Acquired Substantially All the Assets of Alsius Corporation. If We are Not Successful in Fully Integrating this Business, Our Operating Results May be Affected.

On May 4, 2009, we acquired substantially all the assets of the intravascular temperature management business of Alsius. Alsius developed and manufactured intravascular temperature management devices. We face many challenges in order for this acquisition to be successful, such as scaling up the new production facility, reducing the costs of the products, leveraging our sales force to sell the new products and continuing clinical efforts for acceptance of the products for additional applications. Additionally, selling temperature management products may expose us to new risk factors. If we are not successful in achieving these and other integration challenges, our operating results may be adversely affected.

We May Incur Significant Liability if it is Determined Under FDA Regulations That We Are Promoting Off-Label Use of Our Temperature Management Products.

We have regulatory clearances to sell our temperature management products in Europe, Canada and in other countries outside the United States to treat cardiac arrest, but we do not have FDA clearance to sell these products in the United States to treat cardiac arrest. In the United States, the use of our temperature management products to treat cardiac arrest is and will be considered off-label use unless and until we receive regulatory clearance for use of our temperature management products to treat cardiac arrest patients. In the event that we are not able to obtain FDA clearance or approval, we may be at risk for liabilities and lost revenue as a result of off-label use.

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Under the Federal Food, Drug and Cosmetic Act and other laws, we are prohibited from promoting our temperature management products for off-label uses. This means that we may not make claims about the safety or effectiveness of our temperature management products for the treatment of cardiac arrest patients, and means that we may not proactively discuss or provide information on the use of our temperature management products for the treatment of cardiac arrest patients, with very specific exceptions. Physicians, however, may lawfully choose to purchase our temperature management products and use them off-label. We do not track how physicians use our temperature management products after they are purchased, and cannot identify what percentage of our revenues from sales of our temperature management product is derived from off-label use. We are aware, however, that physicians in the United States may be using our temperature management products off-label to treat cardiac arrest due to the 2006 American Heart Association recommendation that cooling be used to treat cardiac arrest. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies, and even criminal sanctions. We do not believe any of our activities constitute promotion of off-label use. Should the FDA determine, however, that our activities constitute promotion of off-label use, the FDA could bring action to prevent us from distributing our temperature management products within the United States for the off-label use, could impose fines and penalties on us and our executives, and could prohibit us from participating in government healthcare programs such as Medicare and Medicaid.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have cash equivalents and marketable securities that primarily consist of money market accounts and fixed-rate, asset-backed corporate securities. The majority of these investments have maturities within one to five years. We believe that our exposure to interest rate risk is minimal due to the term and type of our investments and that the fluctuations in interest rates would not have a material adverse effect on our results of operations.

We have international subsidiaries in Canada, the United Kingdom, the Netherlands, France, Germany, Austria, Australia, and New Zealand. These subsidiaries transact business in their functional or local currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition.

We use foreign currency forward contracts to manage our currency transaction exposures. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under FASB ASC 815,Derivatives and Hedging,formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and therefore, are marked-to-market with changes in fair value recorded to earnings. These derivative instruments do not subject our earnings or cash flows to material risk since gains and losses on those derivatives generally offset losses and gains on the assets and liabilities being hedged.

We had one foreign currency forward contract outstanding at January 3, 2010, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances in the notional amount of approximately 5.5 million Euros. The fair value of this contract at January 3, 2010 was approximately $7.9 million, resulting in an unrealized gain of approximately $9,000. A sensitivity analysis of a change in the fair value of the derivative foreign exchange contracts outstanding at January 3, 2010 indicates that, if the U.S. dollar weakened by 10% against the different foreign currencies, the fair value of these contracts would decrease by approximately $787,000 resulting in a total loss on the contracts of approximately $779,000. Conversely, if the U.S. dollar strengthened by 10% against the different foreign currencies, the fair value of these contracts would increase by approximately $716,000 resulting in a total gain on the contracts approximately of $725,000. Any gains and losses on the fair value of the derivative contracts would be largely offset by losses and gains on the underlying transaction. These offsetting gains and losses are not reflected in the analysis below.

Intercompany Receivable Hedge

Exchange Rate Sensitivity: January 3, 2010

(Amounts in $)

	Expected Maturity Dates									Unrealized gain
	2010		2011	2012	2013	2014	Thereafter	Total
Forward Exchange Agreements (Receive $/Pay Euro) Contract Amount	$	7,883,000						$	7,883,000	$	9,000
Average Contract Exchange Rate		1.4332	—	—	—	—	—		1.4332

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of January 3, 2010, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended January 3, 2010 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, from time to time, involved in the normal course of its business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although we are unable to quantify the exact financial impact of any of these matters, we believe that none of the currently pending matters will have an outcome material to our financial condition or business.

Item 1A. Risk Factors

We have modified the following risk factors from those risk factors contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2009, which was filed with the SEC on December 10, 2009:

• “If We Fail to Compete Successfully in the Future Against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected.”

• “Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition.”

• “Recent Economic Trends Could Adversely Affect our Financial Performance.”

• “The Adoption of Federal Medical Device Tax Surcharge by the U.S. Government Could Reduce Our Profitability.”

• “We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales.”

• “Fluctuations in Currency Exchange Rates May Adversely Affect Our International Sales.”

• “Our International Sales Expose Our Business to a Variety of Risks That Could Result in Significant Fluctuations in Our Results of Operations.”

“We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.”

The risk factors as so modified have been repeated in their entirety for the reader’s convenience in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors.”

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Item 5. Other Information

(a) Not applicable.

(b) During the period covered by this report, there were no changes to the procedures by which security holders may recommend nominees to the Board of Directors.

Item 6. Exhibits

Exhibit No.	Exhibit
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)

(1) Filed herewith.

(2) Furnisheded herewith.

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZOLL MEDICAL CORPORATION
Date: February 11, 2010	By:	/S/    RICHARD A. PACKER
		Richard A. Packer,
		Chief Executive Officer
		(Principal Executive Officer)
Date: February 11, 2010	By:	/S/  �� A. ERNEST WHITON
		A. Ernest Whiton,
		Vice President of Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Exhibit
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)

(1) Filed herewith.

(2) Furnished herewith.

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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