##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES 
EXCHANGE ACT OF 1934
 Commission File Number 000-51512
 
 Cardiac Science Corporation
  Delaware
(State of Incorporation)
    
    94-3300396
(IRS Employer Identification No.)
 3303 Monte Villa Parkway
Bothell, Washington 98021
 (425) 402-2000
 
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)
    
    
    3Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26SIGNATURE
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,(In thousands, except per share data)
    
    2008
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    27,721
    
    
    $
    20,159Short-term investments
    
    
    -
    
    
    
    350Accounts receivable, net of allowance for doubtful accounts of $606 and
$500, respectively
    
    
    29,439
    
    
    
    29,439Inventories
    
    
    22,565
    
    
    
    21,794Deferred income taxes, net
    
    
    9,582
    
    
    
    9,558Prepaid expenses and other current assets
    
    
    3,113
    
    
    
    2,509Total current assets
    
    
    92,420
    
    
    
    83,809Other assets
    
    
    438
    
    
    
    125Machinery and equipment, net of accumulated depreciation and amortization of
$14,262 and $13,065, respectively
    
    
    5,244
    
    
    
    5,056Deferred income taxes, net
    
    
    27,826
    
    
    
    30,288Intangible assets, net of accumulated amortization of $11,906 and $9,927,
respectively
    
    
    33,281
    
    
    
    35,053Investments in unconsolidated entities
    
    
    655
    
    
    
    727Goodwill
    
    
    107,613
    
    
    
    107,613Total assets
    
    $
    267,477
    
    
    $
    262,671LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,622
    
    
    $
    12,792Accrued liabilities
    
    
    10,430
    
    
    
    11,075Warranty liability
    
    
    3,549
    
    
    
    3,211Deferred revenue
    
    
    7,651
    
    
    
    8,141Total current liabilities
    
    
    34,252
    
    
    
    35,219Other liabilities
    
    
    -
    
    
    
    54Total liabilities
    
    
    34,252
    
    
    
    35,273Minority interests
    
    
    298
    
    
    
    127Commitments and contingenciesShareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of June 30, 2008 and December 31, 2007,
respectively
    
    
    -
    
    
    
    -Common stock (65,000,000 shares authorized), $0.001 par value,
22,849,205 and 22,781,648 shares issued and outstanding at June 30, 2008 December 31, 2007, respectively
    
    
    225,602
    
    
    
    224,250Accumulated other comprehensive income
    
    
    131
    
    
    
    167Retained earnings
    
    
    7,194
    
    
    
    2,854Total shareholders equity
    
    
    232,927
    
    
    
    227,271Total liabilities and shareholders equity
    
    $
    267,477
    
    
    $
    262,671
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands, except share and per share data)
    
    2008
    
    2007
    
    2008
    
    2007Revenues:Products
    
    $
    47,257
    
    
    $
    40,787
    
    
    $
    91,596
    
    
    $
    78,478Service
    
    
    4,875
    
    
    
    4,102
    
    
    
    9,495
    
    
    
    8,081Total revenues
    
    
    52,132
    
    
    
    44,889
    
    
    
    101,091
    
    
    
    86,559Cost of Revenues:Products
    
    
    22,929
    
    
    
    19,949
    
    
    
    44,461
    
    
    
    38,786Service
    
    
    3,240
    
    
    
    3,174
    
    
    
    6,469
    
    
    
    6,127Total cost of revenues
    
    
    26,169
    
    
    
    23,123
    
    
    
    50,930
    
    
    
    44,913Gross profit
    
    
    25,963
    
    
    
    21,766
    
    
    
    50,161
    
    
    
    41,646Operating Expenses:Research and development
    
    
    3,796
    
    
    
    3,090
    
    
    
    7,659
    
    
    
    6,072Sales and marketing
    
    
    13,047
    
    
    
    11,445
    
    
    
    25,236
    
    
    
    22,553General and administrative
    
    
    5,347
    
    
    
    4,933
    
    
    
    10,472
    
    
    
    9,445Litigation and related expenses
    
    
    -
    
    
    
    2,029
    
    
    
    -
    
    
    
    3,717Licensing income and litigation settlement
    
    
    -
    
    
    
    (6,000
    )
    
    
    -
    
    
    
    (6,000
    )Total operating expenses
    
    
    22,190
    
    
    
    15,497
    
    
    
    43,367
    
    
    
    35,787Operating income
    
    
    3,773
    
    
    
    6,269
    
    
    
    6,794
    
    
    
    5,859Other Income (Expense):Interest income (expense), net
    
    
    163
    
    
    
    74
    
    
    
    278
    
    
    
    96Other income (expense), net
    
    
    (125
    )
    
    
    327
    
    
    
    86
    
    
    
    452Total other income
    
    
    38
    
    
    
    401
    
    
    
    364
    
    
    
    548Income before income tax expense
and minority interests
    
    
    3,811
    
    
    
    6,670
    
    
    
    7,158
    
    
    
    6,407Income tax expense
    
    
    (1,407
    )
    
    
    (2,155
    )
    
    
    (2,647
    )
    
    
    (2,080
    )Income before minority interests
    
    
    2,404
    
    
    
    4,515
    
    
    
    4,511
    
    
    
    4,327Minority interests
    
    
    (118
    )
    
    
    15
    
    
    
    (171
    )
    
    
    37Net income
    
    $
    2,286
    
    
    $
    4,530
    
    
    $
    4,340
    
    
    $
    4,364Net income per share - basic
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.19
    
    
    $
    0.19Net income per share - diluted
    
    $
    0.10
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19Weighted
average shares outstanding - basic
    
    
    22,806,307
    
    
    
    22,689,932
    
    
    
    22,729,858
    
    
    
    22,651,053Weighted
average shares outstanding - diluted
    
    
    23,246,240
    
    
    
    23,283,471
    
    
    
    23,277,135
    
    
    
    23,187,206
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    2008
    
    2007
    
    2008
    
    2007Operating Activities:Net income
    
    $
    2,286
    
    
    $
    4,530
    
    
    $
    4,340
    
    
    $
    4,364Adjustments to reconcile net income to net cash
provided by operating activities:Stock-based compensation
    
    
    488
    
    
    
    562
    
    
    
    1,046
    
    
    
    1,175Depreciation and amortization
    
    
    1,624
    
    
    
    1,706
    
    
    
    3,233
    
    
    
    3,312Loss on disposal of equipment
    
    
    -
    
    
    
    1
    
    
    
    -
    
    
    
    4Licensing income and litigation settlement
    
    
    -
    
    
    
    (6,000
    )
    
    
    -
    
    
    
    (6,000
    )Deferred income taxes
    
    
    1,292
    
    
    
    2,027
    
    
    
    2,462
    
    
    
    1,952Minority interests
    
    
    118
    
    
    
    (16
    )
    
    
    171
    
    
    
    (38
    )Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    2,688
    
    
    
    (102
    )
    
    
    (313
    )
    
    
    (360
    )Inventories
    
    
    (141
    )
    
    
    (1,934
    )
    
    
    (749
    )
    
    
    (2,541
    )Prepaid expenses and other assets
    
    
    (61
    )
    
    
    (432
    )
    
    
    (624
    )
    
    
    (1,016
    )Accounts payable
    
    
    (1,857
    )
    
    
    372
    
    
    
    (236
    )
    
    
    2,555Accrued liabilities
    
    
    955
    
    
    
    1,904
    
    
    
    (384
    )
    
    
    1,266Warranty liability
    
    
    102
    
    
    
    297
    
    
    
    338
    
    
    
    373Deferred revenue
    
    
    (1,160
    )
    
    
    460
    
    
    
    (490
    )
    
    
    595Net cash provided by operating activities
    
    
    6,334
    
    
    
    3,375
    
    
    
    8,794
    
    
    
    5,641Investing Activities:Purchases of short-term investments
    
    
    -
    
    
    
    (395
    )
    
    
    -
    
    
    
    (544
    )Maturities of short-term investments
    
    
    -
    
    
    
    149
    
    
    
    350
    
    
    
    696Purchase of patents as part of litigation settlement
    
    
    -
    
    
    
    (1,000
    )
    
    
    -
    
    
    
    (1,000
    )Purchases of machinery and equipment
    
    
    (1,008
    )
    
    
    (494
    )
    
    
    (1,442
    )
    
    
    (822
    )Cash paid for acquisitions
    
    
    (268
    )
    
    
    (292
    )
    
    
    (424
    )
    
    
    (562
    )Net cash used in investing activities
    
    
    (1,276
    )
    
    
    (2,032
    )
    
    
    (1,516
    )
    
    
    (2,232
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee purchase plan
    
    
    173
    
    
    
    387
    
    
    
    346
    
    
    
    601Minimum tax withholding on restricted stock awards
    
    
    -
    
    
    
    -
    
    
    
    (62
    )
    
    
    (8
    )Net cash provided by financing activities
    
    
    173
    
    
    
    387
    
    
    
    284
    
    
    
    593Net change in cash and cash equivalents
    
    
    5,231
    
    
    
    1,730
    
    
    
    7,562
    
    
    
    4,002Cash and cash equivalents, beginning of period
    
    
    22,490
    
    
    
    12,091
    
    
    
    20,159
    
    
    
    9,819Cash and cash equivalents, end of period
    
    $
    27,721
    
    
    $
    13,821
    
    
    $
    27,721
    
    
    $
    13,821
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Organization and Description of Business
 ® ® ® ®
 Basis of Presentation
  Use of Estimates
  Net Income Per Share
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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(in thousands, except share data)
    
    2008
    
    2007
    
    2008
    
    2007Numerator:Net income
    
    $
    2,286
    
    
    $
    4,530
    
    
    $
    4,340
    
    
    $
    4,364Denominator:Weighted average shares for basic calculation
    
    
    22,806,307
    
    
    
    22,689,932
    
    
    
    22,729,858
    
    
    
    22,651,053Incremental shares from employee stock options and ESPP
    
    
    439,933
    
    
    
    593,539
    
    
    
    547,277
    
    
    
    536,153Weighted average shares for diluted calculation
    
    
    23,246,240
    
    
    
    23,283,471
    
    
    
    23,277,135
    
    
    
    23,187,206
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Antidilutive shares issuable upon exercise of stock options
    
    
    2,545,957
    
    
    
    2,531,423
    
    
    
    2,550,979
    
    
    
    2,860,630Antidilutive shares issuable upon exercise of warrants
    
    
    246,609
    
    
    
    328,609
    
    
    
    246,609
    
    
    
    329,609Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    449,589
    
    
    
    165,156
    
    
    
    337,224
    
    
    
    216,743Total
    
    
    3,242,155
    
    
    
    3,025,188
    
    
    
    3,134,812
    
    
    
    3,406,982
 Customer and Vendor Concentrations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Customer
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Customer 1
    
    
    20%
    
    
    
    *
    
    
    
    17%
    
    
    
    10%
 
 * Did not exceed 10%.   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Vendor
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Vendor 1
    
    
    16%
    
    
    
    14%
    
    
    
    15%
    
    
    
    12%
  Reclassifications
  Page 7 of 31




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Recent Accounting Pronouncements
      2. Segment Reporting
    Page 8 of 31




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Defibrillation products
    
    
    31,683
    
    
    
    24,083
    
    
    
    58,299
    
    
    
    45,122Cardiac monitoring products
    
    $
    15,574
    
    
    $
    16,704
    
    
    $
    33,297
    
    
    $
    33,356Service
    
    
    4,875
    
    
    
    4,102
    
    
    
    9,495
    
    
    
    8,081Total
    
    $
    52,132
    
    
    $
    44,889
    
    
    $
    101,091
    
    
    $
    86,559
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Domestic
    
    $
    31,320
    
    
    $
    35,143
    
    
    $
    63,541
    
    
    $
    66,591Foreign
    
    
    20,812
    
    
    
    9,746
    
    
    
    37,550
    
    
    
    19,968Total
    
    $
    52,132
    
    
    $
    44,889
    
    
    $
    101,091
    
    
    $
    86,559
   3. Restructuring Costs
   Balance at
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    June 30,(in thousands)
    
    2007
    
    
    Expenditures
    
    
    2008Vacated facilities
    
    $
    679
    
    
    $
    (310)
    
    
    $
    369
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4. Inventories
  June 30,
    
    December 31,(in thousands)
    
    2008
    
    2007Raw materials
    
    $
    17,990
    
    
    $
    16,543Finished goods
    
    
    4,575
    
    
    
    5,251Total inventories
    
    $
    22,565
    
    
    $
    21,794
 5. Intangible Assets
  AccumulatedUseful life
    
    Cost
    
    Amortization
    
    NetIntangible assets not subject to amortization:Burdick trade name
    
    
    
    
    
    $
    3,400
    
    
    $
    -
    
    
    $
    3,400Cardiac Science trade name
    
    
    
    
    
    
    11,380
    
    
    
    -
    
    
    
    11,380Cardiac Science Deutschland trade name
    
    
    
    
    
    
    207
    
    
    
    -
    
    
    
    207Total intangible assets not subject to amortization
    
    
    
    
    
    
    14,987
    
    
    
    -
    
    
    
    14,987Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (4,902
    )
    
    
    3,748Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (4,013
    )
    
    
    7,317Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (770
    )
    
    
    630Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (676
    )
    
    
    184Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (917
    )
    
    
    43Philips patent rights
    
    13 years
    
    
    7,000
    
    
    
    (628
    )
    
    
    6,372Total intangible assets subject to amortization
    
    
    
    
    
    
    30,200
    
    
    
    (11,906
    )
    
    
    18,294Total
    
    
    
    
    
    $
    45,187
    
    
    $
    (11,906
    )
    
    $
    33,281
  2008
    
    $
    3,9582009
    
    
    3,9582010
    
    
    3,2582011
    
    
    2,1042012
    
    
    2,102Thereafter
    
    
    4,893
 6. Credit Facility
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7. Warranty Liability
  Six months ended(in thousands)
    
    June 30, 2008Warranty liability, beginning of the period
    
    $
    3,211Charged to product cost of revenues
    
    
    1,553Warranty expenditures
    
    
    (1,215
    )Warranty liability, end of the period
    
    $
    3,549
 8. Stock-Based Compensation Plans
   Three months ended
    
    Six months endedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Stock options plans:Volatility
    
    
    48.2%

    
    
     49.5%

    
    
 48.4%

    
    
 49.5%Expected term (years)
    
    
 6.25

    
    
 6.25

    
    
 6.25

    
    
 6.25Risk-free interest rate
    
    
 3.5%

    
    
     4.8%

    
    
 3.4%

    
    
 4.8%Expected dividend yield
    
    
 -

    
    
 -

    
    
 -

    
    
 -Fair value of options granted
    
    $
 4.84

    
    $
 5.96

    
    $
     4.35

    
    $
 5.62Employee stock purchase plan:Volatility
    
    
 27.0%

    
    
 37.0%

    
    
 27.0%

    
    
 37.0%Expected term (years)
    
    
 0.5

    
    
 0.5

    
    
 0.5

    
    
 0.5Risk-free interest rate
    
    
 4.5%

    
    
     4.5%

    
    
 4.5%

    
    
 4.5%Expected dividend yield
    
    
 -

    
    
 -

    
    
 -

    
    
 -Fair value of employee stock purchase rights
    
    $
 2.01

    
    $
 2.14

    
    $
 2.01

    
    $
 2.14Non-vested stock:*Fair value of non-vested stock awards granted
    
    $
 9.44

    
    $
 -

    
    $
 9.02

    
    $
 9.07
    Outstanding shares - 2002 Plan
    
    
    2,104,520Outstanding shares - 1997 Plan
    
    
    836,312Stock options available for grant
    
    
    905,923Outstanding non-vested stock awards
    
    
    404,648Employee stock purchase plan shares available for issuance
    
    
    794,127Total common shares reserved for future issuance
    
    
    5,045,530
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2002 Plan -
  SharesSubject toOptionsOutstanding, December 31, 2007
    
    
    2,106,842Granted
    
    
    52,500Exercised
    
    
    (4,041
    )Forfeited or expired
    
    
    (27,451
    )Outstanding, March 31, 2008
    
    
    2,127,850Granted
    
    
    12,500Exercised
    
    
    (5,541
    )Forfeited or expired
    
    
    (30,289
    )Outstanding, June 30, 2008
    
    
    2,104,520Exercisable, June 30, 2008
    
    
    1,661,035
 Non-vested
Stock Awards 
  SharesNon-vested balance, December 31, 2007
    
    
    152,974Granted
    
    
    253,269Vested
    
    
    (19,587
    )Forfeited
    
    
    (5,075
    )Non-vested balance, March 31, 2008
    
    
    381,581Granted
    
    
    43,891Vested
    
    
    -Forfeited
    
    
    (20,824
    )Non-vested balance, June 30, 2008
    
    
    404,648
 1997
Plan -
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SharesSubject toOptionsOutstanding, December 31, 2007
    
    
    858,262Forfeited or expired
    
    
    (11,000
    )Outstanding, March 31, 2008
    
    
    847,262Forfeited or expired
    
    
    (10,950
    )Outstanding, June 30, 2008
    
    
    836,312Exercisable, June 30, 2008
    
    
    796,937
 Employee
Stock Purchase Plan -
  9. Comprehensive Income
    Three months ended
    
    Six months endedJune 30,

    
    June 30,(in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Net income
    
    $
    2,286
    
    
    $
    4,530
    
    
    $
    4,340
    
    
    $
    4,364Other comprehensive
income (loss), net of
related tax effects
of

($8), $114, $24 and $89,
respectively
    
    
    26
    
    
    
    194
    
    
    
    (36
    )
    
    
    153Total comprehensive
income
    
    $
    2,312
    
    
    $
    4,724
    
    
    $
    4,304
    
    
    $
    4,517
 10. Commitments and Contingencies
   Page 13 of 31




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11. Income Taxes
    12. Derivatives
  13. Fair Value Measurement
    Page 14 of 31




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Fair Value Measurements at June 30, 2008 using:Total carrying
    
    Quoted prices in
    
    Significant other
    
    Significantvalue at June 30,
    
    active markets
    
    observable events
    
    unobservable inputs(in thousands of dollars)
    
    2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Cash equivalents
    
    $
    17,467

    
    $
    10,388

    
    $
7,079

    
    $
    -Investments in unconsolidated
entities
    
    
575

    
    
575

    
    
-

    
    
-Liabilities:Derivative foreign currency
forward exchange contracts
    
    
112

    
    
-

    
    
112

    
    
-
  14.
Acquisitions
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements relating to Cardiac
Science Corporation. Except for historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact, including future results of
operations or financial position, made in this Quarterly Report on Form 10-Q are forward looking.
The words believe, expect, intend, anticipate, will, may, variations of such words, and
similar expressions identify forward-looking statements, but their absence does not mean that the
statement is not forward-looking. These forward-
looking statements reflect managements current expectations and involve risks and
uncertainties. Our actual results could differ materially from results that may be anticipated by
such forward-looking statements due to various uncertainties.
 The principal factors that could cause or contribute to such differences include, but are not limited to,
the factors discussed in the section entitled Risk Factors in Part 1  Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2007 as well as the section entitled Risk Factors in Part II  Item 1A of this
Form 10-Q, and those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on
these forward-looking statements,
 Page 15 of 31




---



##### Table of Contents



which speak only as of the date of this report. We undertake no obligation to revise any
forward-looking statements to reflect events or circumstances that may subsequently arise. Readers
are urged to review and consider carefully the various disclosures made in this report and in our
other filings made with the Securities and Exchange Commission (SEC) that disclose and describe
the risks and factors that may affect our business, prospects and results of operations.
  Business Overview
 ® ® ® ®
 Critical Accounting Estimates and Policies
   Deferred Tax Assets and Income Taxes
 Stock-based Compensation.
 Goodwill.
 Page 16 of 31




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Intangible Assets.
   Accounts Receivable.
 Valuation of Long-Lived Assets.
 Inventories.
 Warranty.
 Page 17 of 31




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Litigation and Related Expenses.
 Software Revenue Recognition.
  Revenue Recognition.
    Page 18 of 31




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Sales Returns.
 Recent Accounting Pronouncements
      Results of Operations
 Highlights of Results for the Three and Six Month Periods Ended June 30, 2008
 
    
    We generated revenue of $52.1 million in the three month period ended June 30, 2008, an
increase of approximately 16% over the three month period ended June 30, 2007. This
included overall AED growth of 32% and increased service revenues of 19%, partially offset
by a decrease in cardiac monitoring revenues of 7%.
    
    We generated revenue of $101.1 million in the six month period ended June 30, 2008, an
increase of approximately 17% over the six month period ended June 30, 2007. This included
overall AED growth of 29% and increased service revenues of 18%, while cardiac monitoring
revenue remained stable.
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
    
    Gross margins were 49.8% and 49.6% during the three and six month periods ended June 30,
2008, respectively, up significantly from 48.5% and 48.1% during the three and six month
periods ended June 30, 2007, respectively.
    
    International product revenue increased by 113% and 87% during the three and six month
periods ended June 30, 2008, respectively, as compared to the same periods in the prior
year.
    
    We re-commenced shipments of our hospital defibrillator, which contributed meaningful
increases to defibrillation revenues during the three month period ended June 30, 2008.
    
    Operating income for the three and six month periods ended June 30, 2008 was $3.8
million and $6.8 million, respectively, compared with operating income of $6.3 million and
$5.9 million, respectively, for the comparable periods in the
prior year. Operating income for the three and six months ended
June 30, 2007 included the net benefit of licensing
income in excess of litigation expenses of $4.0 million and
$2.3 million, respectively.
    
    We generated diluted earnings per share of $0.10 and $0.19 for the three and six month
periods ended June 30, 2008, respectively, compared with diluted earnings per share of
$0.19 and $0.19 for the three and six month periods ended June 30, 2007.
    
    We generated cash from operations of $6.3 million and $8.8 million for the three and six
month periods ended June 30, 2008, respectively.
 Looking Forward
    Page 20 of 31




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Revenues
   Three Months
    
    
    
    Three MonthsEnded
    
    % Change
    
    Ended
    
    Six Months Ended
    
    % Change
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007Defibrillation products
    
    $
    31,683

    
    
    31.6%

    
    $
24,083

    
    $
58,299

    
    
29.2%

    
    $
45,122% of revenue
    
    
60.8%

    
    
    
    
    
    
53.7%

    
    
57.8%

    
    
    
    
    
    
    52.2%Cardiac monitoring products
    
    
15,574

    
    
(6.8%)

    
    
16,704

    
    
    33,297

    
    
(0.2%)

    
    
    33,356% of revenue
    
    
29.9%

    
    
    
    
    
    
37.2%

    
    
32.9%

    
    
    
    
    
    
    38.5%Service
    
    
4,875

    
    
    18.8%

    
    
4,102

    
    
9,495

    
    
17.5%

    
    
8,081% of revenue
    
    
    9.4%

    
    
    
    
    
    
9.1%

    
    
9.4%

    
    
    
    
    
    
    9.3%Total revenues
    
    $
    52,132

    
    
16.1%

    
    $
44,889

    
    $
101,091

    
    
16.8%

    
    $
86,559
 Three and Six Months Ended June 30, 2008 Compared to the Three and Six Months Ended June 30,
2007
    Page 21 of 31




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Gross Profit
   Three Months
    
    
    
    
    
    Three MonthsEnded
    
    % Change
    
    Ended
    
    Six Months Ended
    
    % Change
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007Products
    
    $
    24,328

    
    
    16.7%

    
    $
20,838

    
    $
47,135

    
    
18.8%

    
    $
39,692% of products revenue
    
    
    51.5%

    
    
    
    
    
    
51.1%

    
    
51.5%

    
    
    
    
    
    
    50.6%Service
    
    
1,635

    
    
    76.2%

    
    
928

    
    
3,026

    
    
54.9%

    
    
1,954% of service revenue
    
    
33.5%

    
    
    
    
    
    
22.6%

    
    
31.9%

    
    
    
    
    
    
24.2%Total gross profit
    
    $
25,963

    
    
19.3%

    
    $
21,766

    
    $
50,161

    
    
20.4%

    
    $
41,646% of total revenue
    
    
49.8%

    
    
    
    
    
    
48.5%

    
    
49.6%

    
    
    
    
    
    
    48.1%
 Three and Six Months Ended June 30, 2008 Compared to the Three and Six Months Ended June 30,
2007
   Operating Expenses
     Page 22 of 31




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Three Months
    
    
    
    
    
    Three Months
    
    Six Months
    
    
    
    
    
    Six MonthsEnded
    
    % Change
    
    Ended
    
    Ended
    
    % Change
    
    Ended(dollars in thousands)
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007Research and development (including stock-based
compensation expense of $70, $81, $140 and
$160)
    
    $
    3,796

    
    
    22.8%

    
    $
    3,090

    
    $
    7,659

    
    
    26.1%

    
    $
    6,072% of total revenue
    
    
    7.3%

    
    
    
    
    
    
    6.9%

    
    
    7.6%

    
    
    
    
    
    
    7.0%Sales and marketing (including stock-based
compensation expense of $185, $196, $376 and
$431)
    
    
        13,047

    
    
    14.0%

    
    
    11,445

    
    
        25,236

    
    
    11.9%

    
    
    22,553% of total revenue
    
    
    25.0%

    
    
    
    
    
    
    25.5%

    
    
    25.0%

    
    
    
    
    
    
    26.1%General and administrative (including
stock-based compensation expense of $173, $210,
$402 and $426)
    
    
        5,347

    
    
    8.4%

    
    
    4,933

    
    
    10,472

    
    
    10.9%

    
    
    9,445% of total revenue
    
    
    10.3%

    
    
    
    
    
    
    11.0%

    
    
    10.4%

    
    
    
    
    
    
    10.9%Litigation and related expenses
    
    
    -

    
    
    n/m

    
    
    2,029

    
    
    -

    
    
    n/m

    
    
    3,717% of total revenue
    
    
    0.0%

    
    
    
    
    
    
    4.5%

    
    
    0.0%

    
    
    
    
    
    
    4.3%Licensing income and litigation settlement
    
    
    -

    
    
    n/m

    
    
    (6,000)

    
    
    -

    
    
    n/m

    
    
        (6,000)% of total revenue
    
    
    0.0%

    
    
    
    
    
    
    (13.4%)

    
    
    0.0%

    
    
    
    
    
    
    (6.9%)Total operating expenses
    
    $
    22,190

    
    
    43.2%

    
    $
    15,497

    
    $
    43,367

    
    
    21.2%

    
    $
    35,787% of total revenue
    
    
    42.6%

    
    
    
    
    
    
    34.5%

    
    
        42.9%

    
    
    
    
    
    
    41.3%
 Three and Six Months Ended June 30, 2008 Compared to the Three and Six Months Ended June 30,
2007
      Page 23 of 31




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Other Income and Expense
   Income Taxes
  Liquidity and Capital Resources
  Three Months
    
    
    
    
    
    Three Months
    
    Six Months
    
    
    
    
    
    Six MonthsEnded
    
    % Change
    
    Ended
    
    Ended
    
    % Change
    
    Ended(dollars in thousands)
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007
    
    June 30, 2008
    
    2007 to 2008
    
    June 30, 2007Cash provided by operating activities
    
    $
        6,334

    
    
    87.7%

    
    $
    3,375

    
    $
    8,794

    
    
    55.9%

    
    $
    5,641Cash used in investing activities
    
    
    (1,276)

    
    
    37.2%

    
    
    (2,032)

    
    
    (1,516)

    
    
    32.1%

    
    
    (2,232)Cash provided by financing activities
    
    
    173

    
    
        (55.35)%

    
    
    387

    
    
    284

    
    
    (52.1%)

    
    
        593Total change in cash
    
    $
        5,231

    
    
    202.4%

    
    $
    1,730

    
    $
    7,562

    
    
    89.0%

    
    $
    4,002
  Page 24 of 31




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 25 of 31




---



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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Our financial results could be impacted by the credit risk of our customers
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    
    WithheldW. Robert Berg
    
    
    15,973,035
    
    
    
    616,842John R. Hinson
    
    
    16,123,129
    
    
    
    466,748Ray E. Newton, III
    
    
    16,355,638
    
    
    
    234,242
  
 Item 5. Other Information
  
 Item 6. Exhibits
 No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Michael K. MatysikMichael K. MatysikSenior Vice President and Chief Financial 
Officer
(Principal Financial Officer)
Date: August 8, 2008 Page 27 of 31