##### 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 March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 000-49755
 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
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial
Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATUREEXHIBIT 10.57EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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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
 December 31,
    
    
    March 31,(In thousands)
    
    2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,546
    
    
    $
    6,169Accounts receivable, net of allowance for doubtful accounts of $3,455 and
$3,296 respectively
    
    
    25,738
    
    
    
    25,899Inventories
    
    
    22,052
    
    
    
    20,004Deferred income taxes
    
    
    12,115
    
    
    
    12,115Prepaid expenses and other current assets
    
    
    2,511
    
    
    
    1,988Total current assets
    
    
    65,962
    
    
    
    66,175Other assets
    
    
    100
    
    
    
    100Machinery and equipment, net of accumulated depreciation and amortization of
$7,565 and $8,235 respectively
    
    
    7,631
    
    
    
    7,262Deferred income taxes
    
    
    27,849
    
    
    
    27,790Intangible assets, net
    
    
    35,338
    
    
    
    34,470Investment in unconsolidated entities
    
    
    462
    
    
    
    454Goodwill
    
    
    111,215
    
    
    
    110,888Total assets
    
    $
    248,557
    
    
    $
    247,139LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    11,642
    
    
    $
    11,760Accrued liabilities
    
    
    11,918
    
    
    
    9,891Warranty liability
    
    
    2,348
    
    
    
    2,359Deferred revenue
    
    
    7,924
    
    
    
    7,937Total current liabilities
    
    
    33,832
    
    
    
    31,947Other liabilities
    
    
    1,806
    
    
    
    1,306Total liabilities
    
    
    35,638
    
    
    
    33,253Minority interest in consolidated entity
    
    
    128
    
    
    
    115Shareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of December 31, 2005 and March 31, 2006
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value, 22,410,344
and 22,475,369 shares issued and outstanding at December 31, 2005 and
March 31, 2006, respectively
    
    
    218,335
    
    
    
    219,037Accumulated other comprehensive income
    
    
    5
    
    
    
    19Accumulated deficit
    
    
    (5,549
    )
    
    
    (5,285
    )Total shareholders equity
    
    
    212,791
    
    
    
    213,771Total liabilities and shareholders equity
    
    $
    248,557
    
    
    $
    247,139




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##### Table of Contents



CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months endedMarch 31,(In thousands, except share and per share data)
    
    2005
    
    
    2006Revenues:Products
    
    $
    18,344
    
    
    $
    34,569Service
    
    
    2,986
    
    
    
    4,546Total revenues
    
    
    21,330
    
    
    
    39,115Cost of Revenues:Products
    
    
    9,682
    
    
    
    17,680Service
    
    
    1,882
    
    
    
    3,042Total cost of revenues
    
    
    11,564
    
    
    
    20,722Gross profit
    
    
    9,766
    
    
    
    18,393Operating Expenses:Research and development
    
    
    1,809
    
    
    
    2,970Sales and marketing
    
    
    4,657
    
    
    
    9,383General and administrative
    
    
    2,045
    
    
    
    5,811Total operating expenses
    
    
    8,511
    
    
    
    18,164Operating income
    
    
    1,255
    
    
    
    229Other Income (Expense):Interest income (expense), net
    
    
    113
    
    
    
    (50
    )Other income, net
    
    
    61
    
    
    
    231Total other income
    
    
    174
    
    
    
    181Income before income taxes and minority interest in loss of consolidated entity
    
    
    1,429
    
    
    
    410Income tax expense
    
    
    (470
    )
    
    
    (159
    )Income before minority interest in loss of consolidated entity
    
    
    959
    
    
    
    251Minority interest in loss of consolidated entity
    
    
    20
    
    
    
    13Net income
    
    $
    979
    
    
    $
    264Net income per share  basic
    
    $
    0.09
    
    
    $
    0.01Net income per share  diluted
    
    $
    0.09
    
    
    $
    0.01Weighted average shares outstanding  basic
    
    
    10,857,886
    
    
    
    22,430,814Weighted average shares outstanding  diluted
    
    
    11,406,306
    
    
    
    22,607,617




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CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months endedMarch 31,(In thousands)
    
    2005
    
    
    2006Operating Activities:Net income
    
    $
    979
    
    
    $
    264Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    404
    
    
    
    1,557Deferred income taxes
    
    
    434
    
    
    
    63Stock-based compensation
    
    
    24
    
    
    
    449Minority interest in loss of consolidated entity
    
    
    (20
    )
    
    
    (13
    )Changes in operating assets and liabilities, net of business acquired:Accounts receivable
    
    
    1,427
    
    
    
    34Inventories
    
    
    (692
    )
    
    
    2,054Prepaid expenses and other current assets
    
    
    13
    
    
    
    616Accounts payable
    
    
    397
    
    
    
    118Accrued liabilities
    
    
    (1,864
    )
    
    
    (1,597
    )Warranty liability
    
    
    (77
    )
    
    
    11Deferred revenue
    
    
    (25
    )
    
    
    13Net cash flows provided by operating activities
    
    
    1,000
    
    
    
    3,569Investing Activities:Purchases of machinery and equipment
    
    
    (187
    )
    
    
    (396
    )Payments related to the purchase of Cardiac Science, Inc.
    
    
    (79
    )
    
    
    (773
    )Net cash flows used in investing activities
    
    
    (266
    )
    
    
    (1,169
    )Financing Activities:Proceeds from exercise of stock options and issuance of shares under employee
purchase plan
    
    
    185
    
    
    
    223Net cash flows provided by financing activities
    
    
    185
    
    
    
    223Net change in cash and cash equivalents
    
    
    919
    
    
    
    2,623Cash and cash equivalents, beginning of period
    
    
    21,902
    
    
    
    3,546Cash and cash equivalents, end of period
    
    $
    22,821
    
    
    $
    6,169Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    9
    
    
    $
    22Cash paid for interest
    
    
    128
    
    
    
    78Supplemental disclosures of non-cash investing and financing activities:Accounts payable recorded for acquisition related costs
    
    $
    806
    
    
    $
    




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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 endedMarch 31,(in thousands, except share data)
    
    2005
    
    2006Numerator:Net income
    
    $
    979
    
    
    $
    264Denominator:Weighted average shares for basic calculation
    
    
    10,857,886
    
    
    
    22,430,814Incremental shares from employee stock options
    
    
    548,420
    
    
    
    176,803Weighted average shares for diluted calculation
    
    

11,406,306
    
    
    
    22,607,617
  Three months endedMarch 31,2005
    
    2006Antidilutive shares issuable upon exercise of stock options
    
    
    57,889
    
    
    
    1,921,343Antidilutive shares issuable upon exercise of warrants
    
    
    
    
    
    
    330,909Total
    
    
    57,889
    
    
    
    2,252,252
 2. Merger Transaction with Cardiac Science, Inc.




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##### Table of Contents




    
    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.The following table summarizes total purchase consideration:
 (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
    
    
    7,250Inventories
    
    
    13,315Net deferred tax assets, current
    
    
    7,699Prepaid expenses and other current assets
    
    
    1,488Machinery and equipment
    
    
    3,979Net deferred tax assets, non-current
    
    
    21,500Other long-term assets
    
    
    661Intangible assets
    
    
    31,360Goodwill
    
    
    102,265Total assets acquired
    
    
    195,812Liabilities assumed
    
    
    (14,737
    )Net assets acquired
    
    $
    181,075




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Three months ended(in thousands, except per share data)
    
    March 31, 2005Revenues
    
    $
    35,741Net loss
    
    $
    (50,879
    )Basic net loss per share
    
    $
    (2.28
    )
   3. Segment Reporting




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##### Table of Contents



Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2006Cardiac monitoring products
    
    $
    18,344
    
    
    $
    19,849Defibrillation products
    
    
    
    
    
    
    14,720Service
    
    
    2,986
    
    
    
    4,546Total
    
    $
    21,330
    
    
    $
    39,115
  Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2006Domestic
    
    $
    19,476
    
    
    $
    30,353Foreign
    
    
    1,854
    
    
    
    8,762Total
    
    $
    21,330
    
    
    $
    39,115
    4. Restructuring Costs




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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
        )
    
    1,813Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Cash
    
    
    
    
    
    March 31,(in thousands)
    
    2005
    
    Additions
    
    Expenditures
    
    Adjustments
    
    2006Vacated facilities
    
    $
    2,251
    
    $
    35
    
    $
    (422
        )
    $
    (157
        )
    $
    1,707Employee severance and retention costs
    
    
    1,813
    
    
    152
    
    
    (1,069
        )
    
    
    
    
    896
 5. Inventories
  December 31,
    
    
    March 31,(in thousands)
    
    2005
    
    
    2006Raw materials
    
    $
    18,746
    
    
    $
    15,945Finished goods
    
    
    3,306
    
    
    
    4,059Total inventories
    
    $
    22,052
    
    
    $
    20,004
 6. Credit Facility




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7. Warranty Liability
  Three months ended(in thousands)
    
    March 31, 2006Warranty liability, beginning of the period
    
    $
    2,348Charged to cost of revenues
    
    
    512Warranty expenditures
    
    
    (501
    )Warranty liability, end of the period
    
    $
    2,359
 8. Stock-Based Compensation Plans




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Three months ended March 31, 2006As Reported
    
    If Reported(in thousands, except per share data)
    
    Following SFAS 123R
    
    Following APB 25Condensed Consolidated Statement of Operations:Operating income
    
    $
    229
    
    
    $
    615Income before income taxes and minority interest in loss of consolidated entity
    
    $
    410
    
    
    $
    796Net income
    
    $
    264
    
    
    $
    589Net income per share:Basic
    
    $
    0.01
    
    
    $
    0.03Diluted
    
    $
    0.01
    
    
    $
    0.03Condensed Consolidated Statement of Cash Flows:Net cash provided by operating activities
    
    $
    3,569
    
    
    $
    3,569Net cash provided by financing activities
    
    $
    223
    
    
    $
    223
  Three monthsendedMarch 31,(in thousands, except per share data)
    
    2005Net income  as reported
    
    $
    979Add back: Stock-based employee compensation expense
included in reported income, net of related tax effects
    
    
    24Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effect of $57
    
    
    (543
    )Net income  pro forma
    
    $
    460Net income per share as reported  basic
    
    $
    0.09Net income per share as reported  diluted
    
    $
    0.09Net income per share pro forma  basic
    
    $
    0.04Net income per share pro forma  diluted
    
    $
    0.04
  Weighted average shares outstanding
    
    
    10,857,886Pro forma incremental shares from employee stock options
    
    
    165,825Pro forma weighted average shares for diluted calculation
    
    
    11,023,711




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##### Table of Contents



Three months endedMarch 31,2005
    
    2006(pro forma)Stock options plans:Volatility
    
    
    62.0
    %
    
    
    56.0
    %Expected term (years)
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.5
    %
    
    
    4.6
    %Expected dividend yield
    
    
    
    
    
    
    Fair value of options granted
    
    $
    8.05
    
    
    $
    6.49Employee stock purchase plan:Volatility
    
    
    64.6
    %
    
    
    34.0
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    2.7
    %
    
    
    4.4
    %Expected dividend yield
    
    
    
    
    
    
    Fair value of employee stock purchase rights
    
    $
    4.44
    
    
    $
    2.37Non-vested stock:Fair value of non-vested stock awards granted
    
    $
    
    
    
    $
    10.12
   Stock
Option Plans 1 4




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##### Table of Contents



Outstanding shares  2002 Plan
    
    
    1,928,378Outstanding shares  1997 Plan
    
    
    1,256,398Stock options available for grant
    
    
    537,102Outstanding restricted stock grants
    
    
    105,400Employee stock purchase plan shares available for issuance
    
    
    636,191Total common shares reserved for future issuance
    
    
    4,463,469
 2002 Plan 
 1 4
  AggregateShares
    
    Weighted Average
    
    Weighted Average
    
    IntrinsicSubject to
    
    Exercise Price per
    
    Remaining
    
    ValueOptions
    
    Share
    
    Contractual Life
    
    (in thousands)Outstanding, January 1, 2006
    
    
    1,960,525
    
    
    $
    7.67
    
    
    
    6.8Granted
    
    
    75,000
    
    
    
    11.13
    
    
    
    9.8Exercised
    
    
    (41,124
    )
    
    
    0.84
    
    
    
    2.9Cancelled
    
    
    (66,023
    )
    
    
    10.26
    
    
    
    7.7Outstanding, March 31, 2006
    
    
    1,928,378
    
    
    $
    7.86
    
    
    
    6.9
    
    
    $
    4,297Exercisable, March 31, 2006
    
    
    1,587,275
    
    
    $
    7.10
    
    
    
    6.7
    
    
    $
    3,808
  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
    
    
    32,359
    
    
    $
    0.29
    
    
    2.6 years
    
    
    32,359
    
    
    $
    0.29$1.09 -  $2.42
    
    
    6,139
    
    
    
    1.31
    
    
    3.2 years
    
    
    6,139
    
    
    
    1.31$2.43 -  $3.25
    
    
    567,046
    
    
    
    2.85
    
    
    4.5 years
    
    
    567,046
    
    
    
    2.85$3.26 -  $4.51
    
    
    13,096
    
    
    
    4.28
    
    
    5.7 years
    
    
    13,096
    
    
    
    4.28$4.52 -  $7.59
    
    
    7,719
    
    
    
    7.00
    
    
    7.0 years
    
    
    7,719
    
    
    
    7.00$7.60 -  $8.79
    
    
    209,882
    
    
    
    7.79
    
    
    6.8 years
    
    
    163,409
    
    
    
    7.79$8.80 -  $10.84
    
    
    615,056
    
    
    
    9.82
    
    
    8.2 years
    
    
    588,718
    
    
    
    9.79$10.85 -  $12.95
    
    
    465,503
    
    
    
    12.01
    
    
    8.3 years
    
    
    197,211
    
    
    
    11.86$12.96 -  $14.25
    
    
    11,578
    
    
    
    13.38
    
    
    8.2 years
    
    
    11,578
    
    
    
    13.38$0.00 -  $14.25
    
    
    1,928,378
    
    
    $
    7.86
    
    
    6.9 years
    
    
    1,587,275
    
    
    $
    7.10




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##### Table of Contents



1997 Plan 
   AggregateShares
    
    Weighted Average
    
    Weighted Average
    
    IntrinsicSubject to
    
    Exercise Price per
    
    Remaining
    
    ValueOptions
    
    Share
    
    Contractual Life
    
    (in thousands)Outstanding, January 1, 2006
    
    
    1,274,748
    
    
    $
    25.04
    
    
    6.8 yearsCancelled
    
    
    (18,350
    )
    
    
    23.35
    
    
    7.5 yearsOutstanding and Exercisable, March 31, 2006
    
    
    1,256,398
    
    
    $
    25.07
    
    
    6.6 years
    
    
    $
    6
  Outstanding and ExercisableWeighted-Weighted-
    
    AverageAverage
    
    RemainingNumber of
    
    Exercise
    
    ContractualRange of Exercise Prices
    
    Options
    
    Price
    
    Life$9.05
    
    
    75,000
    
    
    $
    9.05
    
    
    9.6 years$10.20 - $11.10
    
    
    19,875
    
    
    
    10.79
    
    
    9.0 years$16.00 - $17.50
    
    
    127,275
    
    
    
    17.35
    
    
    6.5 years$19.30 - $20.60
    
    
    603,015
    
    
    
    20.26
    
    
    6.1 years$21.20 - $22.40
    
    
    22,315
    
    
    
    22.09
    
    
    7.4 years$24.00 - $24.60
    
    
    59,594
    
    
    
    24.19
    
    
    6.3 years$26.00 - $26.00
    
    
    32,000
    
    
    
    26.00
    
    
    7.1 years$35.20 - $36.50
    
    
    28,840
    
    
    
    35.22
    
    
    7.5 years$38.30 - $41.50
    
    
    218,342
    
    
    
    39.98
    
    
    6.8 years$45.30 - $50.70
    
    
    36,750
    
    
    
    46.62
    
    
    6.9 years$54.40 - $60.00
    
    
    33,392
    
    
    
    58.44
    
    
    4.3 years$9.05 - $60.00
    
    

1,256,398
    
    
    $
    25.07
    
    
    6.6 years
 Non-vested
Stock Awards 




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##### 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
    
    
    $
    9.41
 Employee
Stock Purchase Plan 
   9. Comprehensive Income
  Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2006Net income
    
    $
    979
    
    
    $
    264Other comprehensive income (loss), net of related tax effects of $13 and $3 respectively
    
    
    (26
    )
    
    
    14Total comprehensive income
    
    $
    953
    
    
    $
    278
 10. Commitments and Contingencies




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
    
    Deborah Silver v. Cardiac Science, Inc., et al., Case No. 1138-N;
    
    Lisa A. Weber v. Cardiac Science, Inc., et al. Case No. 1140-N;
    
    Suan Investments, Inc. v. Raymond W. Cohen, et al., Case No. 1148-N;
    
    David Shaev, et al. v. Cardiac Science, Inc., et al., Case No. 1153-N;
    
    Irvin M. Chase, et al., v. Cardiac Science, Inc., et al., Case No. 1159-N; and
    
    James Stellato v. Cardiac Science, Inc., et al., Case No. 1162-N.
  
    
    Albert Rosenfeld v. Cardiac Science, Inc., et al. Case No. 05CC00057; and
    
    Jerrold Schaffer v. Cardiac Science, Inc., et al., Case No. 05CC00059.




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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 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




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Critical Accounting Estimates and Policies
  Critical Accounting Estimates
 and
 Stock-based Compensation
  Purchase Price Allocations




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Accounts Receivable
  Inventories
  Goodwill
   Intangible Assets




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




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Sales Returns
  Investment in Unconsolidated Entity
  Critical Accounting Policies
 Segment Reporting
  Revenue Recognition




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Accounting for Stock-Based Compensation
   Results of Operations
 Overview of Results for the Three Months Ended March 31, 2006
 
    
    Our revenue exceeded $39 million, with increased revenue
from our cardiac monitoring, defibrillation and service channels.
    
    We generated operating cash of $3.6 million.
    
    We returned to GAAP profitability with net income of $0.3 million and earnings per share of $0.01.
    
    In mid-February we obtained FDA 510k clearance to market a new crash cart
defibrillator monitor designed specifically for use by medical professionals to respond to
cardiac emergencies in hospital settings. This new defibrillator monitor will be sold
exclusively by GE Healthcare.
    
    In March, we presented groundbreaking new research that illustrates a new dimension of
analysis of cardiac stress testing data that can be used to substantially improve the
determination of a patients risk of cardiovascular death.
 Looking Forward




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Revenues
    Three months
    
    
    
    
    
    
    Three monthsended
    
    
    
    
    
    
    endedMarch 31,
    
    
    % Change
    
    
    March 31,(dollars in thousands)
    
    2005
    
    
    2005 to 2006
    
    
    2006Cardiac monitoring products
    
    $
    18,344
    
    
    
    8.2
    %
    
    $
    19,849% of revenue
    
    
    86.0
    %
    
    
    
    
    
    
    50.7
    %Defibrillation products
    
    
    
    
    
    
    100.0
    %
    
    
    14,720% of revenue
    
    
    0.0
    %
    
    
    
    
    
    
    37.7
    %Service
    
    
    2,986
    
    
    
    52.2
    %
    
    
    4,546% of revenue
    
    
    14.0
    %
    
    
    
    
    
    
    11.6
    %Total revenues
    
    $
    21,330
    
    
    
    83.4
    %
    
    $
    39,115
    Gross Profit




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Three months
    
    
    
    
    
    
    Three monthsended
    
    
    
    
    
    
    endedMarch 31,
    
    
    % Change
    
    
    March 31,(dollars in thousands)
    
    2005
    
    
    2005 to 2006
    
    
    2006Products
    
    $
    8,662
    
    
    
    95.0
    %
    
    $
    16,889% of products revenue
    
    
    47.2
    %
    
    
    
    
    
    
    48.9
    %Service
    
    
    1,104
    
    
    
    36.2
    %
    
    $
    1,504% of service revenue
    
    
    37.0
    %
    
    
    
    
    
    
    33.1
    %Total gross profit
    
    $
    9,766
    
    
    
    88.3
    %
    
    $
    18,393% of total revenue
    
    
    45.8
    %
    
    
    
    
    
    
    47.0
    %
    Operating Expenses




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Three months
    
    
    
    
    
    
    Three monthsended
    
    
    
    
    
    
    endedMarch 31,
    
    
    % Change
    
    
    March 31,(dollars in thousands)
    
    2005
    
    
    2005 to 2006
    
    
    2006Research and development (including
stock based compensation expense of
$0 and $77)
    
    $
    1,809
    
    
    
    64.2
    %
    
    $
    2,970% of total revenue
    
    
    8.5
    %
    
    
    
    
    
    
    7.6
    %Sales and marketing (including stock
based compensation expense of $0 and
$157)
    
    
    4,657
    
    
    
    101.5
    %
    
    
    9,383% of total revenue
    
    
    21.8
    %
    
    
    
    
    
    
    24.0
    %General and administrative
(including stock based compensation
of $24 and $156)
    
    
    2,045
    
    
    
    184.2
    %
    
    
    5,811% of total revenue
    
    
    9.6
    %
    
    
    
    
    
    
    14.9
    %Total operating expenses
    
    $
    8,511
    
    
    
    113.4
    %
    
    $
    18,164% of total revenue
    
    
    39.9
    %
    
    
    
    
    
    
    46.4
    %
    Other Income and Expense
  Income Taxes
 Three months
    
    
    
    
    
    Three monthsended
    
    
    
    
    
    endedMarch 31,
    
    % Change
    
    March 31,(dollars in thousands)
    
    2005
    
    2005 to 2006
    
    2006Income before taxes
    
    $
    1429
    
    
    
    (71.3
    %)
    
    $
    410Income tax expense
    
    $
    470
    
    
    
    (66.2
    %)
    
    $
    159Effective tax rate
    
    
    32.9
    %
    
    
    17.9
    %
    
    
    38.8
    %




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Consolidation of Operations
  Liquidity and Capital Resources




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures




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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
  
 Item 6. Exhibits
 Exhibits10.57
    
    Form of 1997 Stock Option/Stock Issuance Plan Grant Notice and Stock Option Agreement.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. MatysikMichael K. MatysikSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)Date: May 10, 2006