##### 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, 2007
 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
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURE
    
    
    26EXHIBIT 10.70EXHIBIT 10.71EXHIBIT 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
 September 30,
    
    
    December 31,(In thousands)
    
    2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    16,561
    
    
    $
    9,819Short-term investments
    
    
    346
    
    
    
    547Accounts receivable, net of allowance for doubtful accounts of $530 and
$907, respectively
    
    
    27,088
    
    
    
    26,971Inventories
    
    
    20,448
    
    
    
    17,617Deferred income taxes, net
    
    
    3,804
    
    
    
    3,902Prepaid expenses and other current assets
    
    
    2,517
    
    
    
    2,121Total current assets
    
    
    70,764
    
    
    
    60,977Other assets
    
    
    208
    
    
    
    209Machinery and equipment, net of accumulated depreciation and amortization of
$12,422 and $10,245, respectively
    
    
    5,398
    
    
    
    5,956Deferred income taxes, net
    
    
    37,661
    
    
    
    40,525Intangible assets, net of accumulated amortization of $8,938 and $6,111,
respectively
    
    
    36,042
    
    
    
    31,869Investment in unconsolidated entities
    
    
    761
    
    
    
    496Goodwill
    
    
    107,613
    
    
    
    107,613Total assets
    
    $
    258,447
    
    
    $
    247,645LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,511
    
    
    $
    11,761Accrued liabilities
    
    
    10,384
    
    
    
    9,890Warranty liability
    
    
    3,169
    
    
    
    2,532Deferred revenue
    
    
    7,739
    
    
    
    7,111Total current liabilities
    
    
    33,803
    
    
    
    31,294Other liabilities
    
    
    213
    
    
    
    679Total liabilities
    
    
    34,016
    
    
    
    31,973Minority interest
    
    
    99
    
    
    
    75Commitments and contingenciesShareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no
shares
issued or outstanding as of September 30, 2007 and December 31, 2006,
respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value,
22,742,994 and 22,598,014 shares issued and outstanding at September 30, 2007 and
December 31, 2006, respectively
    
    
    223,657
    
    
    
    221,213Accumulated other comprehensive income
    
    
    188
    
    
    
    20Retained earnings (deficit)
    
    
    487
    
    
    
    (5,636
    )Total shareholders equity
    
    
    224,332
    
    
    
    215,597Total liabilities and shareholders equity
    
    $
    258,447
    
    
    $
    247,645




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##### Table of Contents



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)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Products
    
    $
    41,145
    
    
    $
    33,890
    
    
    $
    119,623
    
    
    $
    103,466Service
    
    
    3,999
    
    
    
    4,226
    
    
    
    12,080
    
    
    
    12,986Total revenues
    
    
    45,144
    
    
    
    38,116
    
    
    
    131,703
    
    
    
    116,452Cost of Revenues:Products
    
    
    19,749
    
    
    
    16,910
    
    
    
    58,535
    
    
    
    52,101Service
    
    
    3,252
    
    
    
    3,138
    
    
    
    9,379
    
    
    
    9,300Total cost of revenues
    
    
    23,001
    
    
    
    20,048
    
    
    
    67,914
    
    
    
    61,401Gross profit
    
    
    22,143
    
    
    
    18,068
    
    
    
    63,789
    
    
    
    55,051Operating Expenses:Research and development
    
    
    3,391
    
    
    
    2,792
    
    
    
    9,463
    
    
    
    8,637Sales and marketing
    
    
    11,913
    
    
    
    10,045
    
    
    
    34,466
    
    
    
    29,342General and administrative
    
    
    4,462
    
    
    
    4,606
    
    
    
    13,907
    
    
    
    14,360Litigation and related expenses
    
    
    91
    
    
    
    1,257
    
    
    
    3,808
    
    
    
    3,230Licensing income and litigation settlement
    
    
    
    
    
    
    
    
    
    
    (6,000
    )
    
    
    Total operating expenses
    
    
    19,857
    
    
    
    18,700
    
    
    
    55,644
    
    
    
    55,569Operating income (loss)
    
    
    2,286
    
    
    
    (632
    )
    
    
    8,145
    
    
    
    (518
    )Other Income (Expense):Interest income (expense), net
    
    
    103
    
    
    
    18
    
    
    
    199
    
    
    
    (37
    )Other income, net
    
    
    406
    
    
    
    94
    
    
    
    858
    
    
    
    599Total other income
    
    
    509
    
    
    
    112
    
    
    
    1,057
    
    
    
    562Income (loss) before income tax benefit (expense)
and minority interest
    
    
    2,795
    
    
    
    (520
    )
    
    
    9,202
    
    
    
    44Income tax benefit (expense)
    
    
    (1,023
    )
    
    
    209
    
    
    
    (3,103
    )
    
    
    1Income (loss) before minority interest
    
    
    1,772
    
    
    
    (311
    )
    
    
    6,099
    
    
    
    45Minority interest
    
    
    (13
    )
    
    
    13
    
    
    
    24
    
    
    
    39Net income (loss)
    
    $
    1,759
    
    
    $
    (298
    )
    
    $
    6,123
    
    
    $
    84Net income (loss) per share  basic
    
    $
    0.08
    
    
    $
    (0.01
    )
    
    $
    0.27
    
    
    $
    0.00Net income (loss) per share  diluted
    
    $
    0.08
    
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    0.00Weighted average shares outstanding  basic
    
    
    22,726,066
    
    
    
    22,523,266
    
    
    
    22,676,332
    
    
    
    22,480,553Weighted average shares outstanding  diluted
    
    
    23,290,558
    
    
    
    22,523,266
    
    
    
    23,248,930
    
    
    
    22,551,600




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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)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Operating Activities:Net income (loss)
    
    $
    1,759
    
    
    $
    (298
    )
    
    $
    6,123
    
    
    $
    84Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Licensing income and litigation settlement
    
    
    
    
    
    
    
    
    
    
    (6,000
    )
    
    
    Depreciation and amortization
    
    
    1,762
    
    
    
    1,561
    
    
    
    5,074
    
    
    
    4,661Deferred income taxes
    
    
    912
    
    
    
    (345
    )
    
    
    2,864
    
    
    
    (233
    )Stock-based compensation
    
    
    574
    
    
    
    522
    
    
    
    1,749
    
    
    
    1,538Minority interest
    
    
    62
    
    
    
    (13
    )
    
    
    24
    
    
    
    (39
    )Gain on disposal of equipment
    
    
    (5
    )
    
    
    
    
    
    
    (1
    )
    
    
    Changes in operating assets and liabilities, net of
business acquired:Accounts receivable, net
    
    
    243
    
    
    
    2,238
    
    
    
    (117
    )
    
    
    3,136Inventories
    
    
    (259
    )
    
    
    (1,077
    )
    
    
    (2,800
    )
    
    
    697Prepaid expenses and other assets
    
    
    622
    
    
    
    348
    
    
    
    (394
    )
    
    
    1,334Accounts payable
    
    
    (1,881
    )
    
    
    67
    
    
    
    666
    
    
    
    945Accrued liabilities
    
    
    (461
    )
    
    
    (611
    )
    
    
    805
    
    
    
    (2,959
    )Warranty liability
    
    
    264
    
    
    
    (24
    )
    
    
    637
    
    
    
    39Deferred revenue
    
    
    33
    
    
    
    (376
    )
    
    
    628
    
    
    
    (467
    )Net cash flows provided by operating activities
    
    
    3,625
    
    
    
    1,992
    
    
    
    9,258
    
    
    
    8,736Investing Activities:Purchases of short-term investments
    
    
    (346
    )
    
    
    
    
    
    
    (890
    )
    
    
    Maturities of short-term investments
    
    
    395
    
    
    
    
    
    
    
    1,091
    
    
    
    Purchase of patents as part of litigation settlement
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    Purchases of machinery and equipment
    
    
    (866
    )
    
    
    (137
    )
    
    
    (1,688
    )
    
    
    (933
    )Payments related to the purchase of Cardiac Science, Inc.
    
    
    (215
    )
    
    
    (316
    )
    
    
    (777
    )
    
    
    (1,530
    )Proceeds from collection of note
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    238Net cash flows used in investing activities
    
    
    (1,032
    )
    
    
    (215
    )
    
    
    (3,264
    )
    
    
    (2,225
    )Financing Activities:Proceeds from exercise of stock options and issuance of
shares under employee stock purchase plan
    
    
    147
    
    
    
    176
    
    
    
    748
    
    
    
    642Net cash flows provided by financing activities
    
    
    147
    
    
    
    176
    
    
    
    748
    
    
    
    642Net change in cash and cash equivalents
    
    
    2,740
    
    
    
    1,953
    
    
    
    6,742
    
    
    
    7,153Cash and
cash equivalents, beginning of period
    
    
    13,821
    
    
    
    8,746
    
    
    
    9,819
    
    
    
    3,546Cash and cash equivalents, end of period
    
    $
    16,561
    
    
    $
    10,699
    
    
    $
    16,561
    
    
    $
    10,699




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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 (Loss) Per Share




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    1,759
    
    
    $
    (298
    )
    
    $
    6,123
    
    
    $
    84Denominator:Weighted average shares for basic calculation
    
    
    22,726,066
    
    
    
    22,523,266
    
    
    
    22,676,332
    
    
    
    22,480,553Incremental shares from employee stock options,
non-vested stock awards and ESPP
    
    
    564,492
    
    
    
    
    
    
    
    572,598
    
    
    
    71,047Weighted average shares for diluted calculation
    
    
    23,290,558
    
    
    
    22,523,266
    
    
    
    23,248,930
    
    
    
    22,551,600
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Antidilutive shares issuable upon exercise of stock options
    
    
    2,445,283
    
    
    
    3,049,224
    
    
    
    2,487,400
    
    
    
    2,219,438Antidilutive shares issuable upon exercise of warrants
    
    
    250,109
    
    
    
    330,909
    
    
    
    303,109
    
    
    
    330,909Antidilutive shares related to non-vested stock awards and ESPP
    
    
    145,722
    
    
    
    
    
    
    
    145,233
    
    
    
    Total
    
    
    2,841,114
    
    
    
    3,380,133
    
    
    
    2,935,742
    
    
    
    2,550,347
 Accounting for Licensing Income and Litigation Settlement
  Litigation and Related Expenses
   Page 7 of 26




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Customer and Vendor Concentrations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Customer
    
    2007
    
    2006
    
    2007
    
    2006Customer 1
    
    
    13
    %
    
    
    14
    %
    
    
    11
    %
    
    
    12
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Vendor
    
    2007
    
    2006
    
    2007
    
    2006Vendor 1
    
    
    20
    %
    
    
    23
    %
    
    
    15
    %
    
    
    14
    %Vendor 2
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    12
    %
 
 *
    Did not exceed 10%.  Taxes Collected from Customers and Remitted to Governmental Authorities
  Reclassifications
  Recent Accounting Pronouncements
   2. Merger Transaction with Cardiac Science, Inc.
  Page 8 of 26




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3. Segment Reporting
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Cardiac monitoring products
    
    $
    15,715
    
    
    $
    16,697
    
    
    $
    49,070
    
    
    $
    54,230Defibrillation products
    
    
    25,430
    
    
    
    17,193
    
    
    
    70,553
    
    
    
    49,236Service
    
    
    3,999
    
    
    
    4,226
    
    
    
    12,080
    
    
    
    12,986Total
    
    $
    45,144
    
    
    $
    38,116
    
    
    $
    131,703
    
    
    $
    116,452
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Domestic
    
    $
    33,538
    
    
    $
    27,816
    
    
    $
    100,129
    
    
    $
    87,416Foreign
    
    
    11,606
    
    
    
    10,300
    
    
    
    31,574
    
    
    
    29,036Total
    
    $
    45,144
    
    
    $
    38,116
    
    
    $
    131,703
    
    
    $
    116,452
  4. Restructuring Costs
   Page 9 of 26




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Balance at
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    September 30,(in thousands)
    
    2006
    
    
    Expenditures
    
    
    2007Vacated facilities
    
    $
    1,384
    
    
    $
    (511
    )
    
    $
    873Employee severance and
retention costs
    
    
    266
    
    
    
    (266
    )
    
    
    Total
    
    $
    1,650
    
    
    $
    (777
    )
    
    $
    873
 5. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Raw materials
    
    $
    15,846
    
    
    $
    13,887Finished goods
    
    
    4,602
    
    
    
    3,730Total inventories
    
    $
    20,448
    
    
    $
    17,617
 6. Intangible Assets
  AccumulatedUseful life
    
    Cost
    
    
    Amortization
    
    
    NetIntangible assets not subject to amortization:Burdick trade name
    
    
    
    $
    3,400
    
    
    $
    
    
    
    $
    3,400Cardiac Science trade name
    
    
    
    
    11,380
    
    
    
    
    
    
    
    11,380Total intangible assets not subject to amortization
    
    
    
    
    14,780
    
    
    
    
    
    
    
    14,780Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (3,604
    )
    
    
    5,046Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (2,951
    )
    
    
    8,379Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (665
    )
    
    
    735Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (584
    )
    
    
    276Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (910
    )
    
    
    50Patent rights
    
    13 years
    
    
    7,000
    
    
    
    (224
    )
    
    
    6,776Total intangible assets subject to amortization
    
    
    
    
    30,200
    
    
    
    (8,938
    )
    
    
    21,262Total
    
    
    
    $
    44,980
    
    
    $
    (8,938
    )
    
    $
    36,042
   2007
    
    $
    3,8162008
    
    
    3,9572009
    
    
    3,9572010
    
    
    3,2582011
    
    
    2,105Thereafter
    
    
    6,995
 Page 10 of 26




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7. Credit Facility
   8. Warranty Liability
  Nine months ended(in thousands)
    
    September 30, 2007Warranty liability, beginning of the period
    
    $
    2,532Charged to product cost of revenues
    
    
    2,331Warranty expenditures
    
    
    (1,694
    )Warranty liability, end of the period
    
    $
    3,169
 9. Stock-Based Compensation Plans
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Stock options plans:Volatility
    
    
    50.9
    %
    
    
    54.3
    %
    
    
    50.4
    %
    
    
    55.6
    %Expected term (years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.9
    %
    
    
    5.1
    %
    
    
    4.9
    %
    
    
    4.7
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    5.33
    
    
    $
    4.74
    
    
    $
    5.23
    
    
    $
    6.12Employee stock purchase plan:Volatility
    
    
    37.0
    %
    
    
    34.0
    %
    
    
    37.0
    %
    
    
    34.0
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    4.5
    %
    
    
    4.4
    %
    
    
    4.5
    %
    
    
    4.4
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of employee stock purchase rights
    
    $
    2.14
    
    
    $
    2.37
    
    
    $
    2.14
    
    
    $
    2.37Non-vested stock awards:Fair value of non-vested stock awards granted
    
    $
    9.62
    
    
    $
    8.14
    
    
    $
    9.22
    
    
    $
    8.24
 Page 11 of 26




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Outstanding shares - 2002 Plan
    
    
    2,072,393Outstanding shares - 1997 Plan
    
    
    875,312Stock options available for grant
    
    
    1,040,099Outstanding non-vested stock awards
    
    
    174,737Employee stock purchase plan shares available for issuance
    
    
    681,369Total common shares reserved
for future issuance
    
    
    4,843,910
 2002 Plan 
  SharesSubject toOptionsOutstanding, December 31, 2006
    
    
    2,180,550Granted
    
    
    32,500Exercised
    
    
    (25,540
    )Cancelled
    
    
    (22,629
    )Outstanding, March 31, 2007
    
    
    2,164,881Granted
    
    
    Exercised
    
    
    (40,450
    )Cancelled
    
    
    (50,914
    )Outstanding, June 30, 2007
    
    
    2,073,517Granted
    
    
    55,000Exercised
    
    
    (1,002
    )Cancelled
    
    
    (55,122
    )Outstanding, September 30, 2007
    
    
    2,072,393Exercisable, September 30, 2007
    
    
    1,597,186
 1997 Plan 
 Page 12 of 26




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##### Table of Contents



SharesSubject toOptionsOutstanding, December 31, 2006
    
    
    1,159,505Cancelled
    
    
    (134,550
    )Outstanding, March 31, 2007
    
    
    1,024,955Cancelled
    
    
    (49,000
    )Outstanding, June 30, 2007
    
    
    975,955Exercised
    
    
    (125
    )Cancelled
    
    
    (100,518
    )Outstanding, September 30, 2007
    
    
    875,312Exercisable, September 30, 2007
    
    
    822,812
 Non-vested Stock Awards 
  SharesNon-vested balance, December 31, 2006
    
    
    159,409Granted
    
    
    41,450Vested
    
    
    (3,601
    )Cancelled
    
    
    (3,086
    )Non-vested balance, March 31, 2007
    
    
    194,172Granted
    
    
    Vested
    
    
    Cancelled
    
    
    (6,448
    )Non-vested balance, June 30, 2007
    
    
    187,724Granted
    
    
    15,975Vested
    
    
    (19,575
    )Cancelled
    
    
    (9,387
    )Non-vested balance, September 30, 2007
    
    
    174,737
 Employee Stock Purchase Plan 
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10. Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    1,759
    
    
    $
    (298
    )
    
    $
    6,123
    
    
    $
    84Other comprehensive income (loss), net of
related tax effects of $(9), $1,
$(98) and $5 respectively
    
    
    15
    
    
    
    (2
    )
    
    
    168
    
    
    
    (9
    )Total comprehensive income (loss)
    
    $
    1,774
    
    
    $
    (300
    )
    
    $
    6,291
    
    
    $
    75
 11. Commitments and Contingencies
       Note 12. Income Taxes
    
 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.
 Page 14 of 26




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##### Table of Contents



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, 2006 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 disclose and describe the risks and factors that may affect
our business, prospects and results of operations.
  Business Overview
     Critical Accounting Estimates and Policies
  Critical Accounting Estimates
 and
 Page 15 of 26




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Stock-based Compensation.
 Purchase Price Allocations.
  Accounts Receivable.
 Inventories.
 Goodwill.
  Intangible Assets.
 Page 16 of 26




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Valuation of Long-Lived Assets.
 Warranty.
 Deferred Tax Assets and Income Taxes
 Litigation and Other Contingencies.
 Licensing Income and Litigation Settlement.
 Page 17 of 26




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Software Revenue Recognition.
 Sales Returns.
 Critical Accounting Policies
 Revenue Recognition.
      Page 18 of 26




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Accounting for Stock-Based Compensation.
  Results of Operations
 Highlights of Results for the Three and Nine Months Ended September 30, 2007
 
    
    We generated revenue of $45.1 million in the three months ended September 30, 2007, an
increase of approximately 18% over the three month period ended September 30, 2006, which
included overall AED growth of 48%, domestic AED growth of 78% and international AED growth
of 20%.
    
    We resolved all significant legal matters.
    
    We generated diluted earnings per share of $0.08.
    
    We generated cash from operations of $3.6 million.
    
    We entered the full shipment phase with GE for our new
hospital defibrillator (the "R2K" product).
 Looking Forward
    Page 19 of 26




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Revenues
   Three Months Ended
    
    
    
    
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006 to 2007
    
    
    2006
    
    
    2007
    
    
    2006 to 2007
    
    
    2006Defibrillation products
    
    $
    25,430
    
    
    
    47.9
    %
    
    $
    17,193
    
    
    $
    70,553
    
    
    
    43.3
    %
    
    $
    49,236% of revenue
    
    
    56.3
    %
    
    
    
    
    
    
    45.1
    %
    
    
    53.6
    %
    
    
    
    
    
    
    42.3
    %Cardiac monitoring products
    
    
    15,715
    
    
    
    (5.9
    %)
    
    
    16,697
    
    
    
    49,070
    
    
    
    (9.5
    %)
    
    
    54,230% of revenue
    
    
    34.8
    %
    
    
    
    
    
    
    43.8
    %
    
    
    37.2
    %
    
    
    
    
    
    
    46.6
    %Service
    
    
    3,999
    
    
    
    (5.4
    %)
    
    
    4,226
    
    
    
    12,080
    
    
    
    (7.0
    %)
    
    
    12,986% of revenue
    
    
    8.9
    %
    
    
    
    
    
    
    11.1
    %
    
    
    9.2
    %
    
    
    
    
    
    
    11.2
    %Total revenues
    
    $
    45,144
    
    
    
    18.4
    %
    
    $
    38,116
    
    
    $
    131,703
    
    
    
    13.1
    %
    
    $
    116,452
 Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
    Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
   Page 20 of 26




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Gross Profit
   Three Months Ended
    
    
    
    
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006 to 2007
    
    
    2006
    
    
    2007
    
    
    2006 to 2007
    
    
    2006Products
    
    $
    21,396
    
    
    
    26.0
    %
    
    $
    16,980
    
    
    $
    61,088
    
    
    
    18.9
    %
    
    $
    51,365% of products
revenue
    
    
    52.0
    %
    
    
    
    
    
    
    50.1
    %
    
    
    51.1
    %
    
    
    
    
    
    
    49.6
    %Service
    
    
    747
    
    
    
    (31.3
    %)
    
    
    1,088
    
    
    
    2,701
    
    
    
    (26.7
    %)
    
    
    3,686% of service revenue
    
    
    18.7
    %
    
    
    
    
    
    
    25.7
    %
    
    
    22.4
    %
    
    
    
    
    
    
    28.4
    %Total gross profit
    
    $
    22,143
    
    
    
    22.6
    %
    
    $
    18,068
    
    
    $
    63,789
    
    
    
    15.9
    %
    
    $
    55,051% of total revenue
    
    
    49.0
    %
    
    
    
    
    
    
    47.4
    %
    
    
    48.4
    %
    
    
    
    
    
    
    47.3
    %
 Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
   Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
   Operating Expenses
   Page 21 of 26




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Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    Ended
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006 to 2007
    
    
    2006
    
    
    2007
    
    
    2006 to 2007
    
    
    2006Research and development (including
stock-based compensation expense of
$79, $84, $239 and $250)
    
    $
    3,391
    
    
    
    21.5
    %
    
    $
    2,792
    
    
    $
    9,463
    
    
    
    9.6
    %
    
    $
    8,637% of total revenue
    
    
    7.5
    %
    
    
    
    
    
    
    7.3
    %
    
    
    7.2
    %
    
    
    
    
    
    
    7.4
    %Sales and marketing (including
stock-based compensation expense of
$205, $183, $634 and $555)
    
    
    11,913
    
    
    
    18.6
    %
    
    
    10,045
    
    
    
    34,466
    
    
    
    17.5
    %
    
    
    29,342% of total revenue
    
    
    26.4
    %
    
    
    
    
    
    
    26.4
    %
    
    
    26.2
    %
    
    
    
    
    
    
    25.2
    %General and administrative
(including stock-based compensation
expense of $198, $164, $624 and
$495)
    
    
    4,462
    
    
    
    (3.1
    %)
    
    
    4,606
    
    
    
    13,907
    
    
    
    (3.2
    %)
    
    
    14,360% of total revenue
    
    
    9.9
    %
    
    
    
    
    
    
    12.1
    %
    
    
    10.6
    %
    
    
    
    
    
    
    12.3
    %Litigation and related expenses
    
    
    91
    
    
    
    (92.8
    %)
    
    
    1,257
    
    
    
    3,808
    
    
    
    17.9
    %
    
    
    3,230% of total revenue
    
    
    0.2
    %
    
    
    
    
    
    
    3.3
    %
    
    
    2.9
    %
    
    
    
    
    
    
    2.8
    %Licensing income and litigation
settlement
    
    
    
    
    
    
    n/m
    
    
    
    
    
    
    
    (6,000
    )
    
    
    n/m
    
    
    
    % of total revenue
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (4.6
    %)
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    $
    19,857
    
    
    
    6.2
    %
    
    $
    18,700
    
    
    $
    55,644
    
    
    
    0.1
    %
    
    $
    55,569% of total revenue
    
    
    44.0
    %
    
    
    
    
    
    
    49.1
    %
    
    
    42.2
    %
    
    
    
    
    
    
    47.7
    %
 Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
     Page 22 of 26




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Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
     Other Income and Expense
  Income Taxes
  Liquidity and Capital Resources
  Three Months
    
    
    
    
    
    
    Three Months
    
    
    Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    Ended
    
    
    
    
    
    
    EndedSeptember 30,
    
    
    % Change
    
    
    September 30,
    
    
    September 30,
    
    
    % Change
    
    
    September 30,(dollars in thousands)
    
    2007
    
    
    2006 to 2007
    
    
    2006
    
    
    2007
    
    
    2006 to 2007
    
    
    2006Cash flow provided by
operating activities
    
    $
    3,625
    
    
    
    82.0
    %
    
    $
    1,992
    
    
    $
    9,258
    
    
    
    6.0
    %
    
    $
    8,736Cash flow used in
investing activities
    
    
    (1,032
    )
    
    
    (380.0
    %)
    
    
    (215
    )
    
    
    (3,264
    )
    
    
    (46.7
    %)
    
    
    (2,225
    )Cash flow provided by
financing activities
    
    
    147
    
    
    
    (16.5
    %)
    
    
    176
    
    
    
    748
    
    
    
    16.5
    %
    
    
    642Total change in cash
    
    $
    2,740
    
    
    
    40.3
    %
    
    $
    1,953
    
    
    $
    6,742
    
    
    
    (5.7
    %)
    
    $
    7,153
  Page 23 of 26




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 24 of 26




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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
 No.
    
    Description10.70
    
    First Amendment dated as of September 5, 2007 to Exclusivity Agreement by and between Cardiac Science
Corporation and GE Medical Systems Information Technologies, Inc. dated June 10, 2005.10.71*
    
    Fifth Amendment dated as of September 7, 2007 to OEM Purchase Agreement by and between Cardiac
Science Corporation and GE Medical Systems Information Technologies, Inc. dated July 29, 2003.31.1
    
    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.
 
 *
    
    Portions of this exhibit are omitted and were filed separately with the Securities and Exchange
Commission pursuant to Cardiac Science Corporations application requesting confidential treatment
under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Page 25 of 26




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SIGNATURE
  CARDIAC SCIENCE CORPORATIONBy:
    /s/ Michael K. MatysikMichael K. MatysikSenior Vice President and Chief Financial Officer
(Principal Financial Officer)  Page 26 of 26