##### 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, 2006
 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
    
    94-3300396(State of Incorporation)
    
    (IRS Employer Identification No.)
 3303 Monte Villa Parkway
Bothell, Washington 98021
 (425) 402-2000
 
  þ o
  o þ 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
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 1A.
    
    Risk Factors
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits
    
    
    33SIGNATURE
    
    
    
    
    34EXHIBIT 10.32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Page 2 of 34




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,746
    
    
    $
    3,546Accounts receivable, net of allowance for doubtful accounts of $760 and
$3,455, respectively
    
    
    24,884
    
    
    
    25,738Inventories
    
    
    18,765
    
    
    
    22,052Deferred income taxes
    
    
    12,113
    
    
    
    12,115Prepaid expenses and other current assets
    
    
    2,274
    
    
    
    2,511Total current assets
    
    
    66,782
    
    
    
    65,962Other assets
    
    
    508
    
    
    
    100Machinery and equipment, net of accumulated depreciation and amortization of
$8,894 and $7,565, respectively
    
    
    6,986
    
    
    
    7,631Deferred income taxes
    
    
    30,258
    
    
    
    27,849Intangible assets, net of accumulated amortization of $4,377 and $2,642, respectively
    
    
    33,603
    
    
    
    35,338Investment in unconsolidated entities
    
    
    461
    
    
    
    462Goodwill
    
    
    108,648
    
    
    
    111,215Total assets
    
    $
    247,246
    
    
    $
    248,557LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,228
    
    
    $
    11,642Accrued liabilities
    
    
    9,037
    
    
    
    11,918Warranty liability
    
    
    2,690
    
    
    
    2,348Deferred revenue
    
    
    7,485
    
    
    
    7,924Total current liabilities
    
    
    31,440
    
    
    
    33,832Other liabilities
    
    
    1,024
    
    
    
    1,806Total liabilities
    
    
    32,464
    
    
    
    35,638Minority interest in consolidated entity
    
    
    102
    
    
    
    128Commitments and contingenciesShareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of June 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value, 22,508,433
and 22,410,344 shares issued and outstanding at June 30, 2006 and
December 31, 2005, respectively
    
    
    219,849
    
    
    
    218,335Accumulated other comprehensive income
    
    
    (2
    )
    
    
    5Accumulated deficit
    
    
    (5,167
    )
    
    
    (5,549
    )Total shareholders equity
    
    
    214,680
    
    
    
    212,791Total liabilities and shareholders equity
    
    $
    247,246
    
    
    $
    248,557
  Page 3 of 34




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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)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Products
    
    $
    35,007
    
    
    $
    19,073
    
    
    $
    69,576
    
    
    $
    37,417Service
    
    
    4,214
    
    
    
    2,895
    
    
    
    8,760
    
    
    
    5,881Total revenues
    
    
    39,221
    
    
    
    21,968
    
    
    
    78,336
    
    
    
    43,298Cost of Revenues:Products
    
    
    17,511
    
    
    
    10,198
    
    
    
    35,191
    
    
    
    19,880Service
    
    
    3,120
    
    
    
    1,895
    
    
    
    6,162
    
    
    
    3,777Total cost of revenues
    
    
    20,631
    
    
    
    12,093
    
    
    
    41,353
    
    
    
    23,657Gross profit
    
    
    18,590
    
    
    
    9,875
    
    
    
    36,983
    
    
    
    19,641Operating Expenses:Research and development
    
    
    2,875
    
    
    
    1,908
    
    
    
    5,845
    
    
    
    3,717Sales and marketing
    
    
    9,914
    
    
    
    4,592
    
    
    
    19,297
    
    
    
    9,249General and administrative
    
    
    5,916
    
    
    
    2,266
    
    
    
    11,727
    
    
    
    4,311Total operating expenses
    
    
    18,705
    
    
    
    8,766
    
    
    
    36,869
    
    
    
    17,277Operating income (loss)
    
    
    (115
    )
    
    
    1,109
    
    
    
    114
    
    
    
    2,364Other Income (Expense):Interest income (expense), net
    
    
    (5
    )
    
    
    145
    
    
    
    (55
    )
    
    
    258Other income, net
    
    
    274
    
    
    
    53
    
    
    
    505
    
    
    
    114Total other income
    
    
    269
    
    
    
    198
    
    
    
    450
    
    
    
    372Income before income taxes and minority interest
in loss of consolidated entity
    
    
    154
    
    
    
    1,307
    
    
    
    564
    
    
    
    2,736Income tax expense
    
    
    (49
    )
    
    
    (434
    )
    
    
    (208
    )
    
    
    (904
    )Income before minority interest in loss of
consolidated entity
    
    
    105
    
    
    
    873
    
    
    
    356
    
    
    
    1,832Minority interest in loss of consolidated entity
    
    
    13
    
    
    
    6
    
    
    
    26
    
    
    
    26Net income
    
    $
    118
    
    
    $
    879
    
    
    $
    382
    
    
    $
    1,858Net income per share  basic
    
    $
    0.01
    
    
    $
    0.08
    
    
    $
    0.02
    
    
    $
    0.17Net income per share  diluted
    
    $
    0.01
    
    
    $
    0.08
    
    
    $
    0.02
    
    
    $
    0.16Weighted average shares outstanding  basic
    
    
    22,486,564
    
    
    
    10,876,303
    
    
    
    22,458,843
    
    
    
    10,867,145Weighted average shares outstanding  diluted
    
    
    22,522,902
    
    
    
    11,319,497
    
    
    
    22,565,413
    
    
    
    11,362,952
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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)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Operating Activities:Net income
    
    $
    118
    
    
    $
    879
    
    
    $
    382
    
    
    $
    1,858Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    1,543
    
    
    
    410
    
    
    
    3,100
    
    
    
    814Deferred income taxes
    
    
    49
    
    
    
    398
    
    
    
    112
    
    
    
    832Stock-based compensation
    
    
    567
    
    
    
    15
    
    
    
    1,016
    
    
    
    39Minority interest in loss of consolidated entity
    
    
    (13
    )
    
    
    (6
    )
    
    
    (26
    )
    
    
    (26
    )Gain on sale of marketable equity securities
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )Changes in operating assets and liabilities, net of
business acquired:Accounts receivable
    
    
    864
    
    
    
    (786
    )
    
    
    898
    
    
    
    641Inventories
    
    
    (280
    )
    
    
    307
    
    
    
    1,774
    
    
    
    (385
    )Prepaid expenses and other current assets
    
    
    370
    
    
    
    (148
    )
    
    
    986
    
    
    
    (135
    )Accounts payable
    
    
    760
    
    
    
    (500
    )
    
    
    878
    
    
    
    (103
    )Accrued liabilities
    
    
    (751
    )
    
    
    447
    
    
    
    (2,348
    )
    
    
    (1,417
    )Warranty liability
    
    
    52
    
    
    
    43
    
    
    
    63
    
    
    
    (34
    )Deferred revenue
    
    
    (104
    )
    
    
    333
    
    
    
    (91
    )
    
    
    308Net cash flows provided by operating activities
    
    
    3,175
    
    
    
    1,377
    
    
    
    6,744
    
    
    
    2,377Investing Activities:Purchases of machinery and equipment
    
    
    (400
    )
    
    
    (140
    )
    
    
    (796
    )
    
    
    (327
    )Payments related to the purchase of Cardiac Science, Inc.
    
    
    (441
    )
    
    
    (1,018
    )
    
    
    (1,214
    )
    
    
    (1,097
    )Proceeds from sales of marketable equity securities
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    625Net cash flows used in investing activities
    
    
    (841
    )
    
    
    (533
    )
    
    
    (2,010
    )
    
    
    (799
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee purchase plan
    
    
    243
    
    
    
    165
    
    
    
    466
    
    
    
    350Net cash flows provided by financing activities
    
    
    243
    
    
    
    165
    
    
    
    466
    
    
    
    350Net change in cash and cash equivalents
    
    
    2,577
    
    
    
    1,009
    
    
    
    5,200
    
    
    
    1,928Cash and cash equivalents, beginning of period
    
    
    6,169
    
    
    
    22,821
    
    
    
    3,546
    
    
    
    21,902Cash and cash equivalents, end of period
    
    $
    8,746
    
    
    $
    23,830
    
    
    $
    8,746
    
    
    $
    23,830Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    169
    
    
    $
    120
    
    
    $
    191
    
    
    $
    129Cash paid for interest
    
    
    63
    
    
    
    7
    
    
    
    141
    
    
    
    135Supplemental disclosures of non-cash investing and
financing activities:Accounts payable recorded for acquisition related costs
    
    $
    
    
    
    $
    260
    
    
    $
    
    
    
    $
    260
  Page 5 of 34




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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
  Page 6 of 34




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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands, except share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    118
    
    
    $
    879
    
    
    $
    382
    
    
    $
    1,858Denominator:Weighted average shares for basic calculation
    
    
    22,486,564
    
    
    
    10,876,303
    
    
    
    22,458,843
    
    
    
    10,867,145Incremental shares from employee stock options
    
    
    36,338
    
    
    
    443,194
    
    
    
    106,570
    
    
    
    495,807Weighted average shares for diluted calculation
    
    
    22,522,902
    
    
    
    11,319,497
    
    
    
    22,565,413
    
    
    
    11,362,952
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Antidilutive shares issuable upon exercise of stock options
    
    
    2,306,074
    
    
    
    760,054
    
    
    
    2,113,709
    
    
    
    408,971Antidilutive shares issuable upon exercise of warrants
    
    
    330,909
    
    
    
    
    
    
    
    330,909
    
    
    
    Total
    
    
    2,636,983
    
    
    
    760,054
    
    
    
    2,444,618
    
    
    
    408,971
 Customer and Vendor Concentrations
  Three months ended
    
    Six months endedJune 30,
    
    June 30,Customer
    
    2006
    
    2005
    
    2006
    
    2005Customer 1
    
    
    14.2
    %
    
    
    *
    
    
    
    11.9
    %
    
    
    *Customer 2
    
    
    *
    
    
    
    11.1
    %
    
    
    10.2
    %
    
    
    15.9
    %
 *
    
    Did not exceed 10%.  Three months ended
    
    Six months endedJune 30,
    
    June 30,Vendor
    
    2006
    
    2005
    
    2006
    
    2005Vendor 1
    
    
    14.1
    %
    
    
    18.1
    %
    
    
    13.7
    %
    
    
    20.0
    %Vendor 2
    
    
    11.4
    %
    
    
    *
    
    
    
    *
    
    
    
    *Vendor 3
    
    
    *
    
    
    
    11.1
    %
    
    
    *
    
    
    
    *
 *
    
    Did not exceed 10%.  Taxes Collected from Customers and Remitted to Governmental Authorities
  Recent Accounting Pronouncements
  Page 7 of 34




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2. Merger Transaction with Cardiac Science, Inc.
     
    
    11,467,753 shares of common stock valued at approximately $146,911,000 issued to CSI
stockholders and senior note holders. The fair value of common stock issued is based on a
per share value of $12.81, which is equal to Quintons average closing price per share as
reported on The Nasdaq National Market for the trading-day period two days before and after
February 28, 2005, the announcement date of the merger transaction, adjusted by the Quinton
exchange ratio.
    
    Cash payment of $20,000,000 to the CSI senior note holders.
    
    1,229,881 vested options to purchase shares of common stock issued to CSI option
holders, valued at $7,402,000 calculated using the Black-Scholes option-pricing model.
    
    330,909 exercisable warrants to purchase shares of common stock issued to certain CSI
warrant holders, valued at $1,320,000 calculated using the Black-Scholes option-pricing
model.
    
    $3,198,000 in accrued liabilities related to estimated exit and severance costs.
    
    $2,244,000 in estimated transaction related costs of Quinton.
 Page 8 of 34




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(in thousands)Cash
    
    $
    20,000Shares
    
    
    146,911Options
    
    
    7,402Warrants
    
    
    1,320Accrued liabilities
    
    
    3,198Transaction costs
    
    
    2,244Total
    
    $
    181,075
   (in thousands)Cash and cash equivalents
    
    $
    6,295Accounts receivable, net of allowance for doubtful accounts
    
    
    7,098Inventories
    
    
    11,826Net deferred tax assets, current
    
    
    7,699Prepaid expenses and other current assets
    
    
    2,548Machinery and equipment
    
    
    3,979Net deferred tax assets, non-current
    
    
    24,017Other long-term assets
    
    
    661Intangible assets
    
    
    31,360Goodwill
    
    
    100,025Total assets acquired
    
    
    195,508Liabilities assumed
    
    
    (14,433
    )Net assets acquired
    
    $
    181,075
  (in thousands)
    
    Six months endedJune 30, 2006Goodwill,
beginning of period
    
    $
    102,592Increase in
accounts receivable, net of allowance for doubtful accounts
    
    
    (44
    )Decrease in
inventories
    
    
    1,513Increase in
prepaid expenses and other current assets
    
    
    (1,135
    )Increase in
net deferred tax assets, non-current
    
    
    (2,517
    )Decrease in
liabilities assumed
    
    
    (384
    )Goodwill,
end of period
    
    $
    100,025
    Page 9 of 34




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Three months ended
    
    Six months ended(in thousands, except per share data)
    
    June 30, 2005
    
    June 30, 2005Revenues
    
    $

    
    37,444
    
    $

    

    73,185Net loss
    
    $

    

    (3,352)
    
    $

    

    (54,231)Basic net loss per share
    
    $

    

    (0.15)
    
    $
    

    (2.43)
   3. Segment Reporting
    Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Cardiac monitoring products
    
    $
    17,727
    
    
    $
    19,073
    
    
    $
    37,576
    
    
    $
    37,417Defibrillation products
    
    
    17,280
    
    
    
    
    
    
    
    32,000
    
    
    
    Service
    
    
    4,214
    
    
    
    2,895
    
    
    
    8,760
    
    
    
    5,881Total
    
    $
    39,221
    
    
    $
    21,968
    
    
    $
    78,336
    
    
    $
    43,298
 Page 10 of 34




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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Domestic
    
    $
    29,247
    
    
    $
    20,510
    
    
    $
    59,600
    
    
    $
    39,986Foreign
    
    
    9,974
    
    
    
    1,458
    
    
    
    18,736
    
    
    
    3,312Total
    
    $
    39,221
    
    
    $
    21,968
    
    
    $
    78,336
    
    
    $
    43,298
  4. Restructuring Costs
      Balance at
    
    Accrued as Part
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    of the Merger
    
    
    
    
    
    Cash
    
    December 31,(in thousands)
    
    2004
    
    Transaction
    
    Additions
    
    Expenditures
    
    2005Vacated facilities
    
    $
    
    

    
    $
    
    2,709

    
    $
    
    56

    
    $
    
    (514
    )

    $
    

    2,251Employee severance and retention costs
    
    
    
    

    
    
    
    1,702

    
    
    
    1,589

    
    
    
    (1,478
    )
    

    
    1,813
 Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Cash
    
    
    
    
    
    June 30,(in thousands)
    
    2005
    
    Additions
    
    Expenditures
    
    Adjustments
    
    2006Vacated facilities
    
    $
    
    2,251
    
    $

    
    65
    
    $

    

    (574
    )
    $

    
    (152
    )
    $

    

    1,590Employee severance and retention costs
    
    
    
    1,813

    
    
    
    212
    
    
    
    (1,464
    )
    
    
    
    
    
    
    561
 5. Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Raw materials
    
    $
    15,945
    
    
    $
    18,746Finished goods
    
    
    2,820
    
    
    
    3,306Total inventories
    
    $
    18,765
    
    
    $
    22,052
 Page 11 of 34




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6. Credit Facility
   7. Warranty Liability
  Six months ended(in thousands)
    
    June 30, 2006Warranty liability, beginning of the period
    
    $
    2,348Charged to cost of revenues
    
    
    1,059Adjustment to estimated fair value of acquired warranty
    
    
    279Warranty expenditures
    
    
    (996
    )Warranty liability, end of the period
    
    $
    2,690
 8. Stock-Based Compensation Plans
    Page 12 of 34




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Three months ended
    
    Six months endedJune 30, 2006
    
    June 30, 2006As Reported
    
    If Reported
    
    As Reported
    
    If ReportedFollowing
    
    Following
    
    Following
    
    Following(in thousands, except per share data)
    
    SFAS 123R
    
    APB 25
    
    SFAS 123R
    
    APB 25Condensed Consolidated Statement of Operations:Operating income (loss)
    
    $
    (115
    )
    
    $
    376
    
    
    $
    114
    
    
    $
    991Income before income taxes and minority interest in loss
of consolidated entity
    
    $
    154
    
    
    $
    645
    
    
    $
    564
    
    
    $
    1,441Net income
    
    $
    118
    
    
    $
    545
    
    
    $
    382
    
    
    $
    1,134Net income per share:Basic
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05Diluted
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.05Condensed Consolidated Statement of Cash Flows:Net cash provided by operating activities
    
    $
    3,175
    
    
    $
    3,175
    
    
    $
    6,744
    
    
    $
    6,744Net cash provided by financing activities
    
    $
    243
    
    
    $
    243
    
    
    $
    466
    
    
    $
    466
  Page 13 of 34




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands, except per share data)
    
    2005
    
    
    2005Net income  as reported
    
    $
    879
    
    
    $
    1,858Add back: Stock-based employee compensation expense included in
reported income, net of related tax effects
    
    
    15
    
    
    
    39Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effect of
$54 and $111, respectively
    
    
    (552
    )
    
    
    (1,095
    )Net income  pro forma
    
    $
    342
    
    
    $
    802Net income per share as reported  basic
    
    $
    0.08
    
    
    $
    0.17Net income per share as reported  diluted
    
    $
    0.08
    
    
    $
    0.16Net income per share pro forma  basic
    
    $
    0.03
    
    
    $
    0.07Net income per share pro forma  diluted
    
    $
    0.03
    
    
    $
    0.07
  Three
    
    
    Sixmonths ended
    
    
    months endedJune 30, 2005
    
    
    June 30, 2005Weighted average shares outstanding
    
    
    10,876,303
    
    
    
    10,867,145Pro forma incremental shares from employee stock options
    
    
    402
    
    
    
    83,113Pro forma weighted average shares for diluted calculation
    
    
    10,876,705
    
    
    
    10,950,258
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005(pro forma)
    
    
    
    
    
    (pro forma)Stock options plans:*Volatility
    
    
    
    
    
    
    
    
    
    
    56.0
    %
    
    
    62.0
    %Expected term (years)
    
    
    
    
    
    
    
    
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    4.6
    %
    
    
    4.5
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    
    
    
    $
    
    
    
    $
    6.49
    
    
    $
    8.05Employee stock purchase plan:Volatility
    
    
    34.0
    %
    
    
    64.6
    %
    
    
    34.0
    %
    
    
    64.6
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    4.4
    %
    
    
    2.7
    %
    
    
    4.4
    %
    
    
    2.7
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of employee stock purchase rights
    
    $
    2.37
    
    
    $
    4.44
    
    
    $
    2.37
    
    
    $
    4.44Non-vested stock:Fair value of non-vested stock awards granted
    
    $
    9.62
    
    
    $
    
    
    
    $
    9.98
    
    
    $
    
 *
    
    Stock options were not issued in the three months ended June 30, 2006 or 2005.  Page 14 of 34




---



##### Table of Contents



Stock Option Plans 1 4
     Outstanding shares - 2002 Plan
    
    
    1,915,297Outstanding shares - 1997 Plan
    
    
    1,249,648Stock options available for grant
    
    
    554,337Outstanding restricted stock grants
    
    
    98,750Employee stock purchase plan shares available for issuance
    
    
    612,373Total common shares reserved for future issuance
    
    
    4,430,405
 2002 Plan 
 1 4
 Page 15 of 34




---



##### Table of Contents



Shares
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    Aggregate IntrinsicSubject to
    
    
    Exercise Price
    
    
    Remaining
    
    
    ValueOptions
    
    
    per Share
    
    
    Contractual Life
    
    
    (in thousands)Outstanding, January 1, 2006
    
    
    1,960,525
    
    
    $
    7.67
    
    
    6.8 yearsGranted
    
    
    75,000
    
    
    
    11.13
    
    
    9.8 yearsExercised
    
    
    (41,124
    )
    
    
    0.84
    
    
    2.9 yearsCancelled
    
    
    (66,023
    )
    
    
    10.26
    
    
    7.7 yearsOutstanding, March 31, 2006
    
    
    1,928,378
    
    
    
    7.86
    
    
    6.9 years
    
    $
    4,297Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (7,796
    )
    
    
    8.80
    
    
    6.2 yearsCancelled
    
    
    (5,285
    )
    
    
    10.21
    
    
    7.7 yearsOutstanding, June 30, 2006
    
    
    1,915,297
    
    
    $
    7.86
    
    
    6.6 years
    
    $
    3,222Exercisable, June 30, 2006
    
    
    1,617,563
    
    
    $
    7.18
    
    
    6.4 years
    
    $
    2,809
  Outstanding
    
    
    ExercisableWeighted-Weighted-
    
    
    Average
    
    
    
    
    
    
    Weighted-Average
    
    
    Remaining
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price$0.00 - $1.08
    
    
    32,358
    
    
    $
    0.29
    
    
    2.4 years
    
    
    32,358
    
    
    $
    0.29$1.09 - $2.42
    
    
    6,138
    
    
    
    1.31
    
    
    2.9 years
    
    
    6,138
    
    
    
    1.31$2.43 - $3.25
    
    
    567,048
    
    
    
    2.85
    
    
    4.2 years
    
    
    567,048
    
    
    
    2.85$3.26 - $4.51
    
    
    13,095
    
    
    
    4.28
    
    
    5.5 years
    
    
    13,095
    
    
    
    4.28$4.52 - $7.59
    
    
    7,718
    
    
    
    7.00
    
    
    6.7 years
    
    
    7,718
    
    
    
    7.00$7.60 - $8.79
    
    
    199,847
    
    
    
    7.77
    
    
    6.5 years
    
    
    166,896
    
    
    
    7.77$8.80 - $10.84
    
    
    614,791
    
    
    
    9.82
    
    
    7.9 years
    
    
    592,702
    
    
    
    9.79$10.85 - $12.95
    
    
    462,725
    
    
    
    12.01
    
    
    8.0 years
    
    
    220,031
    
    
    
    11.86$12.96 - $14.25
    
    
    11,577
    
    
    
    13.38
    
    
    8.0 years
    
    
    11,577
    
    
    
    13.38$0.00 - $14.25
    
    
    1,915,297
    
    
    $
    7.86
    
    
    6.6 years
    
    
    1,617,563
    
    
    $
    7.18
 1997 Plan 
  Page 16 of 34




---



##### Table of Contents



Shares
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    Aggregate IntrinsicSubject to
    
    
    Exercise Price
    
    
    Remaining
    
    
    ValueOptions
    
    
    per Share
    
    
    Contractual Life
    
    
    (in thousands)Outstanding, January 1, 2006
    
    
    1,274,748
    
    
    $
    25.04
    
    
    6.8 yearsCancelled
    
    
    (18,350
    )
    
    
    23.35
    
    
    7.5 yearsOutstanding, March 31, 2006
    
    
    1,256,398
    
    
    
    25.07
    
    
    6.6 years
    
    $
    6Cancelled
    
    
    (6,750
    )
    
    
    26.29
    
    
    7.7 yearsOutstanding and exercisable, June 30, 2006
    
    
    1,249,648
    
    
    $
    25.06
    
    
    6.3 years
    
    $
    
  Weighted-
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    ContractualRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Life$9.05
    
    
    75,000
    
    
    $
    9.05
    
    
    9.3 years$10.20 - $11.10
    
    
    18,875
    
    
    
    10.82
    
    
    8.7 years$16.00 - $17.50
    
    
    126,875
    
    
    
    17.35
    
    
    6.2 years$19.30 - $20.60
    
    
    600,365
    
    
    
    20.26
    
    
    5.8 years$21.20 - $22.40
    
    
    22,315
    
    
    
    22.09
    
    
    7.1 years$24.00 - $24.60
    
    
    59,595
    
    
    
    24.19
    
    
    6.1 years$26.00 - $26.00
    
    
    32,000
    
    
    
    26.00
    
    
    6.8 years$35.20 - $36.50
    
    
    28,540
    
    
    
    35.21
    
    
    7.3 years$38.30 - $41.50
    
    
    215,941
    
    
    
    39.98
    
    
    6.5 years$45.30 - $50.70
    
    
    36,750
    
    
    
    46.62
    
    
    6.7 years$54.40 - $60.00
    
    
    33,392
    
    
    
    58.44
    
    
    4.0 years$9.05 - $60.00
    
    
    1,249,648
    
    
    $
    25.06
    
    
    6.3 years
 Non-vested Stock Awards -
     Page 17 of 34




---



##### Table of Contents



Weighted AverageShares
    
    
    Grant-Date Fair ValueNon-vested balance, January 1, 2006
    
    
    104,350
    
    
    $
    9.38Granted
    
    
    3,700
    
    
    
    10.12Non-vested balance, March 31, 2006
    
    
    108,050
    
    
    
    9.41Granted
    
    
    1,450
    
    
    
    9.62Vested
    
    
    (1,450
    )
    
    
    9.62Cancelled
    
    
    (9,300
    )
    
    
    9.40Non-vested balance, June 30, 2006
    
    
    98,750
    
    
    $
    9.41
 Employee Stock Purchase Plan -
   9. Comprehensive Income
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    118
    
    
    $
    879
    
    
    $
    382
    
    
    $
    1,858Other comprehensive
income (loss), net of
related tax effects of
$2, $1, $5 and $13
respectively
    
    
    (21
    )
    
    
    4
    
    
    
    (7
    )
    
    
    (22
    )Total comprehensive income
    
    $
    97
    
    
    $
    883
    
    
    $
    375
    
    
    $
    1,836
 10. Commitments and Contingencies
     Page 18 of 34




---



##### Table of Contents



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, 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. The principal factors that could cause or
contribute to such differences include, but are not limited to, those discussed in the section
entitled Risk Factors in Part 1  Item 1A of our Annual Report on Form 10-K/A for the year ended
December 31, 2005 and those discussed elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date of this report.
We undertake no obligation to revise any forward-looking statements to reflect events or
circumstances that may subsequently arise. Readers are urged to review and consider carefully the
various disclosures made in this report and in our other filings made with the SEC that attempt to
advise interested parties of the risks and factors that may affect our business, prospects and
results of operations.
  Business Overview
  Page 19 of 34




---



##### Table of Contents



Critical Accounting Estimates and Policies
  Critical Accounting Estimates
 and
 Stock-based Compensation
  Purchase Price Allocations
   Page 20 of 34




---



##### Table of Contents



Accounts Receivable
  Inventories
  Goodwill
   Intangible Assets
    Page 21 of 34




---



##### Table of Contents



Valuation of Long-Lived Assets
  Warranty
  Deferred Tax Assets and Income Taxes
  Litigation and Other Contingencies
  Restructuring Costs
  Software Revenue Recognition
  Page 22 of 34




---



##### Table of Contents



Sales Returns
  Critical Accounting Policies
 Segment Reporting
  Revenue Recognition
       Page 23 of 34




---



##### Table of Contents



Accounting for Stock-Based Compensation
   Results of Operations
 Overview of Results for the Three and Six Months Ended June 30, 2006
 
    
    Revenue of $39.2 million for the three months ended June 30, 2006 and $78.3 million for
the six months then ended increased by 79% and 81%, respectively, over the reported amounts
for the comparable periods in the prior year.
    
    Gross margin improved to approximately 47% for both the three and six month periods
ended June 30, 2006 from approximately 45% for both of the comparable respective periods in
the prior years.
    
    Inclusive of year to date litigation expenses of $2.0 million and merger related charges
in the first quarter of over $0.4 million, the Company has generated net income of $0.4
million in the first six months of 2006.
    
    In the first six months of 2006, the Company has generated cash from operations of $6.7
million, compared with reported (Quinton only) cash from operations of $2.4 million for the
first half of 2005.
 Looking Forward
    Page 24 of 34




---



##### Table of Contents



Three-Month Period Ended June 30, 2006 Compared to the Three-Month Period Ended June 30, 2005
 Revenues
   Three months ended
    
    
    
    
    
    
    Three months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Cardiac monitoring products
    
    $
    17,727
    
    
    
    (7.1
    %)
    
    $
    19,073% of revenue
    
    
    45.2
    %
    
    
    
    
    
    
    86.8
    %Defibrillation products
    
    
    17,280
    
    
    
    100.0
    %
    
    
    % of revenue
    
    
    44.1
    %
    
    
    
    
    
    
    0.0
    %Service
    
    
    4,214
    
    
    
    45.6
    %
    
    
    2,895% of revenue
    
    
    10.7
    %
    
    
    
    
    
    
    13.2
    %Total revenues
    
    $
    39,221
    
    
    
    78.5
    %
    
    $
    21,968
    Gross Profit
  Page 25 of 34




---



##### Table of Contents



Three months ended
    
    
    
    
    
    
    Three months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Products
    
    $
    17,496
    
    
    
    97.1
    %
    
    $
    8,875% of products revenue
    
    
    50.0
    %
    
    
    
    
    
    
    46.5
    %Service
    
    
    1,094
    
    
    
    9.4
    %
    
    
    1,000% of service revenue
    
    
    26.0
    %
    
    
    
    
    
    
    34.5
    %Total gross profit
    
    $
    18,590
    
    
    
    88.3
    %
    
    $
    9,875% of total revenue
    
    
    47.4
    %
    
    
    
    
    
    
    45.0
    %
    Operating Expenses
     Page 26 of 34




---



##### Table of Contents



Three months ended
    
    
    
    
    
    
    Three months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Research and development (including
stock based compensation expense of
$89 and $0)
    
    $
    2,875
    
    
    
    50.7
    %
    
    $
    1,908% of total revenue
    
    
    7.3
    %
    
    
    
    
    
    
    8.7
    %Sales and marketing (including stock
based compensation expense of $215
and $0)
    
    
    9,914
    
    
    
    115.9
    %
    
    
    4,592% of total revenue
    
    
    25.3
    %
    
    
    
    
    
    
    20.9
    %General and administrative
(including stock based compensation
expense of $175 and $15)
    
    
    5,916
    
    
    
    161.1
    %
    
    
    2,266% of total revenue
    
    
    15.1
    %
    
    
    
    
    
    
    10.4
    %Total operating expenses
    
    $
    18,705
    
    
    
    113.4
    %
    
    $
    8,766% of total revenue
    
    
    47.7
    %
    
    
    
    
    
    
    40.0
    %
    Other Income and Expense
  Income Taxes
 Three months ended
    
    
    
    
    
    Three months endedJune 30,
    
    % Change
    
    June 30,(dollars in thousands)
    
    2006
    
    2005 to 2006
    
    2005Income before taxes
    
    $
    
    154

    
    
    
    (88.2
    %)

    $
    
    1,307Income tax expense
    
    $
    
    49

    
    
    
    (88.7
    %)

    $
    
    434Effective tax rate
    
    
    
    31.8
    %

    
    
    (4.2
    %)

    
    
    33.2
    %
 Page 27 of 34




---



##### Table of Contents



Six-Month Period Ended June 30, 2006 Compared to the Six-Month Period Ended June 30, 2005
 Revenues
  Six months ended
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Cardiac monitoring products
    
    $
    37,576
    
    
    
    0.4
    %
    
    $
    37,417% of revenue
    
    
    48.0
    %
    
    
    
    
    
    
    86.4
    %Defibrillation products
    
    
    32,000
    
    
    
    100.0
    %
    
    
    % of revenue
    
    
    40.8
    %
    
    
    
    
    
    
    0.0
    %Service
    
    
    8,760
    
    
    
    49.0
    %
    
    
    5,881% of revenue
    
    
    11.2
    %
    
    
    
    
    
    
    13.6
    %Total revenues
    
    $
    78,336
    
    
    
    80.9
    %
    
    $
    43,298
    Page 28 of 34




---



##### Table of Contents



Gross Profit
  Six months ended
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Products
    
    $
    34,385
    
    
    
    96.1
    %
    
    $
    17,537% of products revenue
    
    
    49.4
    %
    
    
    
    
    
    
    46.9
    %Service
    
    
    2,598
    
    
    
    23.5
    %
    
    
    2,104% of service revenue
    
    
    29.7
    %
    
    
    
    
    
    
    35.8
    %Total gross profit
    
    $
    36,983
    
    
    
    88.3
    %
    
    $
    19,641% of total revenue
    
    
    47.2
    %
    
    
    
    
    
    
    45.4
    %
    Operating Expenses
  Six months ended
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Research and development (including
stock based compensation expense of
$166 and $0)
    
    $
    5,845
    
    
    
    57.3
    %
    
    $
    3,717% of total revenue
    
    
    7.5
    %
    
    
    
    
    
    
    8.6
    %Sales and marketing (including stock
based compensation expense of $372
and $0)
    
    
    19,297
    
    
    
    108.6
    %
    
    
    9,249% of total revenue
    
    
    24.6
    %
    
    
    
    
    
    
    21.4
    %General and administrative
(including stock based compensation
expense of $331 and $39)
    
    
    11,727
    
    
    
    172.0
    %
    
    
    4,311% of total revenue
    
    
    15.0
    %
    
    
    
    
    
    
    10.0
    %Total operating expenses
    
    $
    36,869
    
    
    
    113.4
    %
    
    $
    17,277% of total revenue
    
    
    47.1
    %
    
    
    
    
    
    
    39.9
    %
  Page 29 of 34




---



##### Table of Contents



Other Income and Expense
  Income Taxes
 Six months ended
    
    
    
    
    
    
    Six months endedJune 30,
    
    
    % Change
    
    
    June 30,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005Income before taxes
    
    $
    564
    
    
    
    (79.4
    %)
    
    $
    2,736Income tax expense
    
    $
    208
    
    
    
    (77.0
    %)
    
    $
    904Effective tax rate
    
    
    36.9
    %
    
    
    11.8
    %
    
    
    33.0
    %
  Consolidation of Operations
  Liquidity and Capital Resources
   Page 30 of 34




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 31 of 34




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
  
 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
  
 Item 5. Other Information
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Item 6. Exhibits
 Exhibits10.32
    
    Form of Stock Option Grant Notice and Stock Option Agreement for grants made pursuant to the Cardiac
Science Corporation 2002 Stock Incentive Plan.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    
    /s/ Michael K. Matysik

Michael K. MatysikSenior Vice President and Chief
Financial 
Officer (Principal Financial and Accounting Officer)Date: August 9, 2006
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