##### 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 September 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
    
    94-3300396(State of Incorporation)
    
    (IRS Employer Identification No.)
 3303 Monte Villa Parkway
Bothell, Washington 98021
 (425) 402-2000
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 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
    
    
    16Item 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 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26SIGNATURE
    
    
    
    
    27EX-10.69EX-31.1EX-31.2EX-32.1EX-32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,(In thousands, except per share data)
    
    2008
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    32,595
    
    
    $
    20,159Short-term investments
    
    
    845
    
    
    
    350Accounts receivable, net of allowance for doubtful accounts of $613 and
$500, respectively
    
    
    30,278
    
    
    
    29,439Inventories
    
    
    23,493
    
    
    
    21,794Deferred income taxes
    
    
    9,556
    
    
    
    9,558Prepaid expenses and other current assets
    
    
    2,901
    
    
    
    2,509Total current assets
    
    
    99,668
    
    
    
    83,809Other assets
    
    
    400
    
    
    
    125Machinery and equipment, net of accumulated depreciation and amortization of
$14,815 and $13,065, respectively
    
    
    5,677
    
    
    
    5,056Deferred income taxes
    
    
    26,333
    
    
    
    30,288Intangible assets, net of accumulated amortization of $12,895 and $9,927,
respectively
    
    
    32,272
    
    
    
    35,053Investments in unconsolidated entities
    
    
    725
    
    
    
    727Goodwill
    
    
    107,613
    
    
    
    107,613Total assets
    
    $
    272,688
    
    
    $
    262,671LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,031
    
    
    $
    12,792Accrued liabilities
    
    
    11,392
    
    
    
    11,075Warranty liability
    
    
    4,374
    
    
    
    3,211Deferred revenue
    
    
    8,206
    
    
    
    8,141Total current liabilities
    
    
    36,003
    
    
    
    35,219Other liabilities
    
    
    
    
    
    
    54Total liabilities
    
    
    36,003
    
    
    
    35,273Minority interests
    
    
    384
    
    
    
    127Commitments and contingenciesShareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of September 30, 2008 and December 31, 2007,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value,
22,936,193 and 22,781,648 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively
    
    
    226,524
    
    
    
    224,250Accumulated other comprehensive income
    
    
    105
    
    
    
    167Retained earnings
    
    
    9,672
    
    
    
    2,854Total shareholders equity
    
    
    236,301
    
    
    
    227,271Total liabilities and shareholders equity
    
    $
    272,688
    
    
    $
    262,671
  Page 3 of 31




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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except share and per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Products
    
    $
    49,387
    
    
    $
    41,145
    
    
    $
    140,984
    
    
    $
    119,623Service
    
    
    4,619
    
    
    
    3,999
    
    
    
    14,113
    
    
    
    12,080Total revenues
    
    
    54,006
    
    
    
    45,144
    
    
    
    155,097
    
    
    
    131,703Cost of Revenues:Products
    
    
    24,799
    
    
    
    19,749
    
    
    
    69,260
    
    
    
    58,535Service
    
    
    3,088
    
    
    
    3,252
    
    
    
    9,557
    
    
    
    9,379Total cost of revenues
    
    
    27,887
    
    
    
    23,001
    
    
    
    78,817
    
    
    
    67,914Gross profit
    
    
    26,119
    
    
    
    22,143
    
    
    
    76,280
    
    
    
    63,789Operating Expenses:Research and development
    
    
    4,103
    
    
    
    3,391
    
    
    
    11,762
    
    
    
    9,463Sales and marketing
    
    
    12,934
    
    
    
    11,913
    
    
    
    38,170
    
    
    
    34,466General and administrative
    
    
    5,096
    
    
    
    4,462
    
    
    
    15,568
    
    
    
    13,907Litigation and related expenses
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    3,808Licensing income and litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,000
    )Total operating expenses
    
    
    22,133
    
    
    
    19,857
    
    
    
    65,500
    
    
    
    55,644Operating income
    
    
    3,986
    
    
    
    2,286
    
    
    
    10,780
    
    
    
    8,145Other Income:Interest income, net
    
    
    156
    
    
    
    103
    
    
    
    434
    
    
    
    199Other income, net
    
    
    20
    
    
    
    406
    
    
    
    106
    
    
    
    858Total other income
    
    
    176
    
    
    
    509
    
    
    
    540
    
    
    
    1,057Income before income tax expense
and minority interests
    
    
    4,162
    
    
    
    2,795
    
    
    
    11,320
    
    
    
    9,202Income tax expense
    
    
    (1,598
    )
    
    
    (1,023
    )
    
    
    (4,245
    )
    
    
    (3,103
    )Income before minority interests
    
    
    2,564
    
    
    
    1,772
    
    
    
    7,075
    
    
    
    6,099Minority interests
    
    
    (86
    )
    
    
    (13
    )
    
    
    (257
    )
    
    
    24Net income
    
    $
    2,478
    
    
    $
    1,759
    
    
    $
    6,818
    
    
    $
    6,123Net income per share  basic
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.30
    
    
    $
    0.27Net income per share  diluted
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.29
    
    
    $
    0.26Weighted average shares outstanding  basic
    
    
    22,892,161
    
    
    
    22,726,066
    
    
    
    22,840,524
    
    
    
    22,676,332Weighted average shares outstanding  diluted
    
    
    23,413,042
    
    
    
    23,290,558
    
    
    
    23,402,011
    
    
    
    23,248,930
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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating Activities:Net income
    
    $
    2,478
    
    
    $
    1,759
    
    
    $
    6,818
    
    
    $
    6,123Adjustments to reconcile net income to net cash
provided by operating activities:Stock-based compensation
    
    
    469
    
    
    
    574
    
    
    
    1,515
    
    
    
    1,749Depreciation and amortization
    
    
    1,544
    
    
    
    1,762
    
    
    
    4,777
    
    
    
    5,074Licensing income and litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,000
    )Deferred income taxes
    
    
    1,493
    
    
    
    912
    
    
    
    3,955
    
    
    
    2,864Minority interests
    
    
    86
    
    
    
    62
    
    
    
    257
    
    
    
    24Changes in operating assets and liabilities, net of
businesses acquired:Accounts receivable, net
    
    
    (526
    )
    
    
    243
    
    
    
    (1,169
    )
    
    
    (117
    )Inventories
    
    
    (929
    )
    
    
    (259
    )
    
    
    (1,678
    )
    
    
    (2,800
    )Prepaid expenses and other assets
    
    
    (151
    )
    
    
    617
    
    
    
    (445
    )
    
    
    (395
    )Accounts payable
    
    
    (591
    )
    
    
    (1,881
    )
    
    
    (827
    )
    
    
    666Accrued liabilities
    
    
    1,113
    
    
    
    (385
    )
    
    
    729
    
    
    
    889Warranty liability
    
    
    825
    
    
    
    264
    
    
    
    1,163
    
    
    
    637Deferred revenue
    
    
    555
    
    
    
    33
    
    
    
    65
    
    
    
    628Net cash provided by operating activities
    
    
    6,366
    
    
    
    3,701
    
    
    
    15,160
    
    
    
    9,342Investing Activities:Purchases of short-term investments
    
    
    (845
    )
    
    
    (346
    )
    
    
    (845
    )
    
    
    (890
    )Maturities of short-term investments
    
    
    
    
    
    
    395
    
    
    
    350
    
    
    
    1,091Purchase of patents as part of litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )Purchases of machinery and equipment
    
    
    (983
    )
    
    
    (866
    )
    
    
    (2,425
    )
    
    
    (1,688
    )Proceeds from repayment of note
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    Cash paid for acquisitions
    
    
    (156
    )
    
    
    (215
    )
    
    
    (580
    )
    
    
    (777
    )Net cash used in investing activities
    
    
    (1,946
    )
    
    
    (1,032
    )
    
    
    (3,462
    )
    
    
    (3,264
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee purchase plan
    
    
    541
    
    
    
    147
    
    
    
    887
    
    
    
    748Minimum tax withholding on restricted stock awards
    
    
    (87
    )
    
    
    (76
    )
    
    
    (149
    )
    
    
    (84
    )Net cash provided by financing activities
    
    
    454
    
    
    
    71
    
    
    
    738
    
    
    
    664Net change in cash and cash equivalents
    
    
    4,874
    
    
    
    2,740
    
    
    
    12,436
    
    
    
    6,742Cash and cash equivalents, beginning of period
    
    
    27,721
    
    
    
    13,821
    
    
    
    20,159
    
    
    
    9,819Cash and cash equivalents, end of period
    
    $
    32,595
    
    
    $
    16,561
    
    
    $
    32,595
    
    
    $
    16,561
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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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    2,478
    
    
    $
    1,759
    
    
    $
    6,818
    
    
    $
    6,123Denominator:Weighted average shares for basic calculation
    
    
    22,892,161
    
    
    
    22,726,066
    
    
    
    22,840,524
    
    
    
    22,676,332Incremental shares from employee stock options and ESPP
    
    
    520,881
    
    
    
    564,492
    
    
    
    561,487
    
    
    
    572,598Weighted average shares for diluted calculation
    
    
    23,413,042
    
    
    
    23,290,558
    
    
    
    23,402,011
    
    
    
    23,248,930
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Antidilutive shares issuable upon exercise of stock options
    
    
    2,408,583
    
    
    
    2,445,283
    
    
    
    2,451,399
    
    
    
    2,487,400Antidilutive shares issuable upon exercise of warrants
    
    
    245,109
    
    
    
    250,109
    
    
    
    246,109
    
    
    
    303,109Antidilutive shares related to non-vested stock awards and
ESPP
    
    
    391,967
    
    
    
    145,722
    
    
    
    308,544
    
    
    
    145,233Total
    
    
    3,045,659
    
    
    
    2,841,114
    
    
    
    3,006,052
    
    
    
    2,935,742
 Customer and Vendor Concentrations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Customer
    
    2008
    
    2007
    
    2008
    
    2007Customer 1
    
    
    24
    %
    
    
    13
    %
    
    
    19
    %
    
    
    11
    %Customer 2
    
    
    *
    
    
    
    *
    
    
    
    11
    %
    
    
    *
 
 *
    
    Did not exceed 10%.   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Vendor
    
    2008
    
    2007
    
    2008
    
    2007Vendor 1
    
    
    18
    %
    
    
    20
    %
    
    
    17
    %
    
    
    14
    %
  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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Defibrillation products
    
    $
    34,071
    
    
    $
    25,430
    
    
    $
    92,371
    
    
    $
    70,553Cardiac monitoring products
    
    
    15,316
    
    
    
    15,715
    
    
    
    48,613
    
    
    
    49,070Service
    
    
    4,619
    
    
    
    3,999
    
    
    
    14,113
    
    
    
    12,080Total
    
    $
    54,006
    
    
    $
    45,144
    
    
    $
    155,097
    
    
    $
    131,703
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Domestic
    
    $
    31,166
    
    
    $
    33,478
    
    
    $
    94,707
    
    
    $
    99,985Foreign
    
    
    22,840
    
    
    
    11,666
    
    
    
    60,390
    
    
    
    31,718Total
    
    $
    54,006
    
    
    $
    45,144
    
    
    $
    155,097
    
    
    $
    131,703
   3. Restructuring Costs
   Balance at
    
    
    
    
    
    Balance atDecember 31,
    
    Cash
    
    Sept 30,(in thousands)
    
    2007
    
    Expenditures
    
    2008Vacated facilities
    
    $
    679
    
    
    $
    (466
    )
    
    $
    213
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4. Inventories
  Sept 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    18,910
    
    
    $
    16,543Finished goods
    
    
    4,583
    
    
    
    5,251Total inventories
    
    $
    23,493
    
    
    $
    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
    
    
    
    
    187
    
    
    
    
    
    
    
    187Total intangible assets not subject to
amortization
    
    
    
    
    14,967
    
    
    
    
    
    
    
    14,967Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (5,334
    )
    
    
    3,316Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (4,367
    )
    
    
    6,963Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (805
    )
    
    
    595Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (706
    )
    
    
    154Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (920
    )
    
    
    40Patent rights
    
    13 years
    
    
    7,000
    
    
    
    (763
    )
    
    
    6,237Total intangible assets subject to amortization
    
    
    
    
    30,200
    
    
    
    (12,895
    )
    
    
    17,305Total
    
    
    
    $
    45,167
    
    
    $
    (12,895
    )
    
    $
    32,272
  2008
    
    $
    3,9582009
    
    
    3,9582010
    
    
    3,2582011
    
    
    2,1042012
    
    
    2,102Thereafter
    
    
    4,893
 6. Credit Facility
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7. Warranty Liability
  Nine months ended(in thousands)
    
    September 30, 2008Warranty liability, beginning of the period
    
    $
    3,211Charged to product cost of revenues
    
    
    3,276Warranty expenditures
    
    
    (2,113
    )Warranty liability, end of the period
    
    $
    4,374
 8. Stock-Based Compensation Plans
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Stock options plans:Volatility
    
    
    47.9
    %
    
    
    50.9
    %
    
    
    48.3
    %
    
    
    50.4
    %Expected term (years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    3.6
    %
    
    
    4.9
    %
    
    
    3.5
    %
    
    
    4.9
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    4.89
    
    
    $
    5.33
    
    
    $
    4.45
    
    
    $
    5.23Employee 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
    
    $
    9.55
    
    
    $
    9.62
    
    
    $
    9.05
    
    
    $
    9.22
   Outstanding shares - 2002 Plan
    
    
    2,010,277Outstanding shares - 1997 Plan
    
    
    836,312Stock options available for grant
    
    
    947,019Outstanding non-vested stock awards
    
    
    385,843Employee stock purchase plan shares available for issuance
    
    
    772,878Total common shares reserved for future issuance
    
    
    4,952,329
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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
    
    
    2,104,520Granted
    
    
    15,000Exercised
    
    
    (57,272
    )Forfeited or expired
    
    
    (51,971
    )Outstanding, September 30, 2008
    
    
    2,010,277Exercisable September 2008
    
    
    1,588,765
 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
    
    
    404,648Granted
    
    
    14,816Vested
    
    
    (19,981
    )Forfeited
    
    
    (13,640
    )Non-vested balance, Sept 30, 2008
    
    
    385,843
 1997 Plan 
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##### Table of Contents



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
    
    
    836,312Forfeited or expired
    
    
    0Outstanding, Sept 30, 2008
    
    
    836,312Exercisable, Sept 30, 2008
    
    
    796,937
 Employee Stock Purchase Plan 
  9. Comprehensive Income
   Page 13 of 31




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    2,478
    
    
    $
    1,759
    
    
    $
    6,818
    
    
    $
    6,123Unrealized gains (losses) on available for sale securities, net
of related tax effects of
($26), $(9), zero and ($98) respectively
    
    
    44
    
    
    
    15
    
    
    
    (2
    )
    
    
    168Foreign currency translation adjustments
    
    
    (70
    )
    
    
    
    
    
    
    (60
    )
    
    
    Total comprehensive income
    
    $
    2,452
    
    
    $
    1,774
    
    
    $
    6,756
    
    
    $
    6,291
 10. Commitments and Contingencies
           11. Income Taxes
    12. Derivatives
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13. Fair Value Measurement
        Total carrying
    
    Fair Value Measurements at September 30, 2008 using:value at
    
    Quoted prices in
    
    Significant other
    
    SignificantSeptember 30,
    
    active markets
    
    observable events
    
    unobservable inputs(in thousands of dollars)
    
    2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Cash equivalents
    
    $
    26,569
    
    
    $
    19,730
    
    
    $
    6,839
    
    
    $
    Investments in unconsolidated
entities
    
    
    645
    
    
    
    645
    
    
    
    
    
    
    
    
 Page 15 of 31




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##### Table of Contents



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,
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
  Page 16 of 31




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Deferred Tax Assets and Income Taxes
 Stock-Based Compensation.
 Goodwill.
  Intangible Assets.
   Page 17 of 31




---



##### Table of Contents



Accounts Receivable.
 Valuation of Long-Lived Assets.
 Inventories.
 Warranty.
 Litigation and Related Expenses.
 Software Revenue Recognition.
  Page 18 of 31




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Revenue Recognition.
     Sales Returns.
 Recent Accounting Pronouncements
   Page 19 of 31




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Results of Operations
 Highlights of Results for the Three and Nine Month Periods Ended September 30, 2008
 
    
    We generated revenue of $54.0 million in the three month period ended September 30,
2008, an increase of approximately 20% over the three month period ended September 30,
2007. This included overall AED growth of 34% an increase in service revenues of 16%,
partially offset by a decrease in cardiac monitoring revenues of 3%.
    
    We generated revenue of $155.1 million in the nine month period ended September 30,
2008, an increase of approximately 18% over the nine month period ended September 30, 2007.
This included overall AED growth of 31% an increase in service revenues of 17%, while
cardiac monitoring revenue remained relatively flat.
    
    Gross margins were 48.4% and 49.2% during the three and nine month periods ended
September 30, 2008, respectively, compared to 49.0% and 48.4% during the three and nine
month periods ended September 30, 2007, respectively.
    
    International product revenue increased by 96% and 90% during the three and nine month
periods ended September 30, 2008, respectively, as compared to the same periods in the
prior year.
    
    Operating income for the three and nine month periods ended September 30, 2008 was $4.0
million and $10.8 million, respectively, compared with operating income of $2.3 million and
$8.1 million, respectively for the comparable periods in the prior year. Operating income
for the nine month period ended September 30, 2007 included the net benefit of licensing
income in excess of litigation expenses of $2.2 million.
    
    We generated diluted earnings per share of $0.11 and $0.29 for the three and nine month
periods ended September 30, 2008, respectively, compared with diluted earnings per share of
$0.08 and $0.26 for the three and nine month periods ended September 30, 2007.
    
    We generated cash from operations of $6.4 million and $15.2 million for the three and
nine month periods ended September 30, 2008, respectively, compared to cash from operations
of $3.7 million and $9.3 million for the comparable periods in 2007.
 Looking Forward
  Page 20 of 31




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Revenues
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Nine Months Ended
    
    
    % Change
    
    
    Nine Months Ended(dollars in thousands)
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007
    
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007Defibrillation products
    
    $
    34,071
    
    
    
    34.0
    %
    
    $
    25,430
    
    
    $
    92,371
    
    
    
    30.9
    %
    
    $
    70,553% of revenue
    
    
    63.1
    %
    
    
    
    
    
    
    56.3
    %
    
    
    59.7
    %
    
    
    
    
    
    
    53.7
    %Cardiac monitoring products
    
    
    15,316
    
    
    
    (2.5
    %)
    
    
    15,715
    
    
    
    48,613
    
    
    
    (0.9
    %)
    
    
    49,070% of revenue
    
    
    28.4
    %
    
    
    
    
    
    
    34.8
    %
    
    
    31.3
    %
    
    
    
    
    
    
    37.3
    %Service
    
    
    4,619
    
    
    
    15.5
    %
    
    
    3,999
    
    
    
    14,113
    
    
    
    16.8
    %
    
    
    12,080% of revenue
    
    
    8.6
    %
    
    
    
    
    
    
    8.9
    %
    
    
    9.1
    %
    
    
    
    
    
    
    9.2
    %Total revenues
    
    $
    54,006
    
    
    
    19.6
    %
    
    $
    45,144
    
    
    $
    155,097
    
    
    
    17.8
    %
    
    $
    131,703
 Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended
September 30, 2007
    Page 21 of 31




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Gross Profit
   Three Months
    
    
    
    
    
    
    Three MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Nine Months Ended
    
    
    % Change
    
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2008
    
    
    2007 to 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    2007 to 2008
    
    
    September 30, 2007Products
    
    $
    24,588
    
    
    
    14.9
    %
    
    $
    21,396
    
    
    $
    71,724
    
    
    
    17.4
    %
    
    $
    61,088% of products revenue
    
    
    49.8
    %
    
    
    
    
    
    
    52.0
    %
    
    
    50.9
    %
    
    
    
    
    
    
    51.1
    %Service
    
    
    1,531
    
    
    
    105.0
    %
    
    
    747
    
    
    
    4,556
    
    
    
    68.7
    %
    
    
    2,701% of service revenue
    
    
    33.1
    %
    
    
    
    
    
    
    18.7
    %
    
    
    32.3
    %
    
    
    
    
    
    
    22.4
    %Total gross profit
    
    $
    26,119
    
    
    
    18.0
    %
    
    $
    22,143
    
    
    $
    76,280
    
    
    
    19.6
    %
    
    $
    63,789% of total revenue
    
    
    48.4
    %
    
    
    
    
    
    
    49.0
    %
    
    
    49.2
    %
    
    
    
    
    
    
    48.4
    %
 Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended
September 30, 2007
   Operating Expenses
      Page 22 of 31




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Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Ended
    
    
    % Change
    
    
    Ended(dollars in thousands)
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007
    
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007Research and development
    
    $
    4,103
    
    
    
    21.0
    %
    
    $
    3,391
    
    
    $
    11,762
    
    
    
    24.3
    %
    
    $
    9,463% of total revenue
    
    
    7.6
    %
    
    
    
    
    
    
    7.5
    %
    
    
    7.6
    %
    
    
    
    
    
    
    7.2
    %Sales and marketing
    
    
    12,934
    
    
    
    8.6
    %
    
    
    11,913
    
    
    
    38,170
    
    
    
    10.7
    %
    
    
    34,466% of total revenue
    
    
    23.9
    %
    
    
    
    
    
    
    26.4
    %
    
    
    24.6
    %
    
    
    
    
    
    
    26.2
    %General and administrative
    
    
    5,096
    
    
    
    14.2
    %
    
    
    4,462
    
    
    
    15,568
    
    
    
    11.9
    %
    
    
    13,907% of total revenue
    
    
    9.4
    %
    
    
    
    
    
    
    9.9
    %
    
    
    10.0
    %
    
    
    
    
    
    
    10.6
    %Litigation and related expenses
    
    
    
    
    
    
    n/m
    
    
    
    91
    
    
    
    
    
    
    
    n/m
    
    
    
    3,808% of total revenue
    
    
    0.0
    %
    
    
    
    
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    
    
    
    
    2.9
    %Licensing income and litigation settlement
    
    
    
    
    
    
    n/m
    
    
    
    
    
    
    
    
    
    
    
    n/m
    
    
    
    (6,000
    )% of total revenue
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    
    
    
    
    (4.6
    %)Total operating expenses
    
    $
    22,133
    
    
    
    11.5
    %
    
    $
    19,857
    
    
    $
    65,500
    
    
    
    17.7
    %
    
    $
    55,644% of total revenue
    
    
    41.0
    %
    
    
    
    
    
    
    44.0
    %
    
    
    42.2
    %
    
    
    
    
    
    
    42.2
    %
 Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended
September 30, 2007
      Other Income and Expense
   Page 23 of 31




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Income Taxes
  H.R. 1424, the Emergency Economic Stabilization Act of 2008, Energy
Improvement and Extension Act of 2008 Tax Extenders and Alternative Minimum Tax Relief Act of
2008
 Liquidity and Capital Resources
  Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    % Change
    
    
    Ended
    
    
    Ended
    
    
    % Change
    
    
    Ended(dollars in thousands)
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007
    
    
    Sept 30, 2008
    
    
    2007 to 2008
    
    
    Sept 30, 2007Cash provided by operating activities
    
    $
    6,366
    
    
    
    72.0
    %
    
    $
    3,701
    
    
    $
    15,160
    
    
    
    62.3
    %
    
    $
    9,342Cash used in investing activities
    
    
    (1,946
    )
    
    
    (88.6
    %)
    
    
    (1,032
    )
    
    
    (3,462
    )
    
    
    (6.1
    %)
    
    
    (3,264
    )Cash provided by financing activities
    
    
    454
    
    
    
    539.4
    %
    
    
    71
    
    
    
    738
    
    
    
    11.1
    %
    
    
    664Total change in cash
    
    $
    4,874
    
    
    
    77.9
    %
    
    $
    2,740
    
    
    $
    12,436
    
    
    
    84.5
    %
    
    $
    6,742
      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
  We may be required to implement a costly product recall or corrective action
   
 Item 5. Other Information
  
 Item 6. Exhibits
 No.
    
    Description10.69
    
    Form of OEM Supply and Purchase Agreement between Cardiac Science Corporation and Nihon Kohden
Corporation entered into July 29, 2008, effective January 1, 2008.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 26 of 31




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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Daphne L. TaylorDaphne L. TaylorVice President, Corporate Controller
and Chief Accounting OfficerDate: November 10, 2008By:
    /s/ John R. HinsonJohn R. HinsonPresident and Chief Executive OfficerDate: November 10, 2008 Page 27 of 31