**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C.  20549**
 
 **FORM
        10-Q**
  
 **(Mark
        One)**
  x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended June 30, 2005**
 
 **OR**
 
 **o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
                  ACT**
 
 **Commission
        file number 0-19567**
 
 **CARDIAC
        SCIENCE, INC.**
 **(Exact
        name of registrant as specified in its charter)**
 
 **DELAWARE**
              **33-0465681****(State
                  or other jurisdiction of**
                **incorporation
                  or organization)**
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
 
 **1900
                  Main Street, Suite 700, Irvine, CA  92614****(Address
                  of principal executive
                  offices)**
 
 **Registrant’s
        telephone number, including area code:  (949)
        797-3800**
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceeding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days.
 
 Yes   x  No   o
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in
        Rules 12b-2 of the Exchange Act).
 
 Yes   x  No   o
 
 The
        number of shares of the Common Stock of the registrant outstanding as of
        August
        5, 2005 was 85,945,368.
 
 
  **CARDIAC
        SCIENCE, INC.**
 **INDEX
        TO FORM 10-Q**
 
 **Page
                  No.****PART
                  I.  FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements:Consolidated
                  Condensed Balance Sheets as of June 30, 2005 and December 31,
                  2004
              3Consolidated
                  Condensed Statements of Operations for the three and six months
                  ended June
                  30, 2005 and 2004
              4Consolidated
                  Condensed Statements of Comprehensive Loss for the three and six
                  months
                  ended June 30, 2005 and 2004
              5Consolidated
                  Condensed Statements of Cash Flows for the six months ended June
                  30, 2005
                  and 2004
              6Notes
                  to Consolidated Condensed Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              16Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              27Item
                  4.
              Controls
                  and Procedures
              27**PART
                  II.  OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              28Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              29Item
                  3.
              Defaults
                  Upon Senior Securities
              29Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              29Item
                  5.
              Other
                  Information
              29Item
                  6.
              Exhibits
              30Signatures
              31
  2
  **PART
        I.  FINANCIAL INFORMATION**
  **Item
        1.**  **Financial Statements**
 
 **CARDIAC
        SCIENCE, INC.**
 **CONSOLIDATED
        CONDENSED BALANCE SHEETS**
 **(Unaudited)**
 
 **In
        thousands, except share data**
  **June
                    30,**
                  **2005**
                
                
                **December
                    31,**
                  **2004****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                7,336
                
                $
                13,913Accounts
                    receivable, net of allowance for doubtful accounts of $4,449
                    at June 30,
                    2005 and $3,611 at December 31, 2004
                
                
                11,875
                
                
                17,978Inventories,
                    net
                
                
                11,208
                
                
                9,680Prepaid
                    expenses and other current assets
                
                
                2,803
                
                
                2,517Total
                    current assets
                
                
                33,222
                
                
                44,088Property
                    and equipment, net
                
                
                4,690
                
                
                4,932Goodwill
                
                
                92,268
                
                
                140,544Intangibles,
                    net
                
                
                8,683
                
                
                9,677Other
                    assets
                
                
                6,156
                
                
                4,093Total
                    assets
                
                $
                145,019
                
                $
                203,334**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                5,943
                
                $
                8,266Accrued
                    expenses
                
                
                6,560
                
                
                6,820Deferred
                    revenue
                
                
                1,547
                
                
                1,940Current
                    portion of long term debt
                
                
                13
                
                
                16Total
                    current liabilities
                
                
                14,063
                
                
                17,042Senior
                    secured promissory notes
                
                
                55,557
                
                
                52,623Deferred
                    revenue
                
                
                617
                
                
                697Other
                    long term liabilities
                
                
                50
                
                
                57Total
                    liabilities
                
                
                70,287
                
                
                70,419Commitments
                    and contingencies (Note 8)Stockholders’
                    equity:Common
                    stock - $.001 par value; 160,000,000 shares authorized, 85,945,368
                    and
                    86,258,913 shares issued at June 30, 2005 and December 31, 2004,
                    respectively; 85,945,368 and 85,981,231 shares outstanding at
                    June 30,
                    2005 and December 31, 2004, respectively
                
                
                86
                
                
                86Additional
                    paid-in capital
                
                
                259,950
                
                
                257,211Accumulated
                    other comprehensive loss
                
                
                (25
                )
                
                (25
                )Accumulated
                    deficit
                
                
                (185,279
                )
                
                (124,357
                )Total
                    stockholders’ equity
                
                
                74,732
                
                
                132,915Total
                    liabilities and stockholders’ equity
                
                $
                145,019
                
                $
                203,334
 
 The
        accompanying notes are an integral part of these unaudited financial
        statements.
 3
  **CARDIAC
        SCIENCE, INC.**
 
 **CONSOLIDATED
        CONDENSED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 
 **In
        thousands, except share and per share data**
 
 **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,********2005**
              
              ******2004**
              
              ******2005**
              
              ******2004**Net
                  revenue
              
              $
              15,626
              
              $
              17,509
              
              $
              30,637
              
              $
              33,113Cost
                  of revenue
              
              
              7,407
              
              
              7,823
              
              
              13,674
              
              
              14,331Gross
                  profit
              
              
              8,219
              
              
              9,686
              
              
              16,963
              
              
              18,782Operating
                  expenses:Sales
                  and marketing
              
              
              5,344
              
              
              6,947
              
              
              10,250
              
              
              12,950Research
                  and development
              
              
              1,813
              
              
              1,456
              
              
              3,270
              
              
              3,125General
                  and administrative
              
              
              5,730
              
              
              4,317
              
              
              10,928
              
              
              8,483Amortization
                  of intangible assets
              
              
              405
              
              
              504
              
              
              808
              
              
              1,007Goodwill
                  impairment charge
              
              
              —
              
              
              —
              
              
              47,269
              
              
              —Total
                  operating expenses
              
              
              13,292
              
              
              13,224
              
              
              72,525
              
              
              25,565Loss
                  from operations
              
              
              (5,073
              )
              
              (3,538
              )
              
              (55,562
              )
              
              (6,783
              )Interest
                  and other expense, net
              
              
              (1,965
              )
              
              (1,783
              )
              
              (5,318
              )
              
              (3,370
              )Loss
                  before income taxes
              
              
              (7,038
              )
              
              (5,321
              )
              
              (60,880
              )
              
              (10,153
              )Provision
                  for income taxes
              
              
              42
              
              
              —
              
              
              42
              
              
              —Net
                  loss
              
              $
              (7,080
              )
              $
              (5,321
              )
              $
              (60,922
              )
              $
              (10,153
              )Net
                  loss per share (basic and diluted)
              
              $
              (0.08
              )
              $
              (0.07
              )
              $
              (0.71
              )
              $
              (0.13
              )Weighted
                  average number of shares used in the computation of net loss per
                  share
                  (basic and diluted)
              
              
              85,945,368
              
              
              80,674,736
              
              
              85,981,864
              
              
              80,603,773
 
 The
        accompanying notes are an integral part of these unaudited financial statements.
  4
  **CARDIAC
        SCIENCE, INC.**
 
 **CONSOLIDATED
        CONDENSED STATEMENTS OF COMPREHENSIVE LOSS**
 **(Unaudited)**
 
 **In
        thousands**
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**
              
              **June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**Net
                  loss
              
              $
              (7,080
              )
              $
              (5,321
              )
              $
              (60,922
              )
              $
              (10,153
              )Other
                  comprehensive income loss:Foreign
                  currency translation adjustments
              
              
              —
              
              
              —
              
              
              —
              
              
              (8
              )Comprehensive
                  loss
              
              $
              (7,080
              )
              $
              (5,321
              )
              $
              (60,922
              )
              $
              (10,161
              )
 
 The
        accompanying notes are an integral part of these unaudited financial
        statements
 5
  **CARDIAC
        SCIENCE, INC.**
 
 **CONSOLIDATED
        CONDENSED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 
 **In
        thousands**
 
 **Six
                  Months Ended****June
                  30, 2005**
              
              **June
                  30, 2004**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (60,922
              )
              $
              (10,153
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              1,148
              
              
              1,334Amortization
                  of intangible assets
              
              
              1,016
              
              
              1,007Provision
                  for doubtful accounts
              
              
              995
              
              
              624Inventory
                  obsolescence
              
              
              340
              
              
              —Accrued
                  interest and amortization of debt discount/issuance costs
              
              
              3,577
              
              
              3,334Value
                  of consideration for filing delays
              
              
              1,449
              
              
              —Gain
                  on sale of assets
              
              
              —
              
              
              (280
              )Goodwill
                  impairment charge
              
              
              47,269
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              5,108
              
              
              2,611Inventories
              
              
              (1,845
              )
              
              (892
              )Placement
                  of Powerheart CRMs at customer locations
              
              
              (20
              )
              
              —Prepaid
                  expenses and other assets
              
              
              (215
              )
              
              (1,589
              )Accounts
                  payable and accrued expenses
              
              
              (2,478
              )
              
              (90
              )Deferred
                  revenue
              
              
              (473
              )
              
              (423
              )Net
                  cash used in operating activities
              
              
              (5,051
              )
              
              (4,517
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (909
              )
              
              (916
              )Proceeds
                  from sale of property and equipment
              
              
              —
              
              
              23Acquisition
                  costs paid
              
              
              —
              
              
              (50
              )Proceeds
                  from sale of assets of subsidiary, net of costs
              
              
              —
              
              
              672Purchase
                  of intangible assets
              
              
              (22
              )
              
              (37
              )Proceeds
                  (payments) related to acquisitions
              
              
              —
              
              
              (25
              )Net
                  cash (used in) provided by investing activities
              
              
              (931
              )
              
              (333
              )Cash
                  flows from financing activities:Payments
                  on long term obligations
              
              
              (10
              )
              
              (32
              )Proceeds
                  from exercise of common stock options and warrants
              
              
              —
              
              
              460Cash
                  consideration paid for filing delay
              
              
              (556
              )
              
              —Costs
                  of equity issuances
              
              
              (29
              )
              
              (30
              )Net
                  cash provided by financing activities
              
              
              (595
              )
              
              398Effect
                  of exchange rates on cash and cash equivalents
              
              
              —
              
              
              (8
              )Net
                  decrease in cash and cash equivalents
              
              
              (6,577
              )
              
              (4,460
              )Cash
                  and cash equivalents at beginning of period
              
              
              13,913
              
              
              8,871Cash
                  and cash equivalents at end of period
              
              $
              7,336
              
              $
              4,411
 
 The
        accompanying notes are an integral part of these unaudited financial
        statements
 6
  **CARDIAC
        SCIENCE, INC.**
 
 **CONSOLIDATED
        CONDENSED NOTES TO FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **(In
        thousands, except share and per share amounts)**
 
 **1.
        Organization and Description of the Business**
 
 Cardiac
        Science, Inc. (the “Company”) was incorporated in May 1991 and develops,
        manufactures and markets portable automatic public-access defibrillators
        (AEDs)
        and provides comprehensive AED/CPR training and AED program management services.
        In addition, the Company also markets a unique fully-automatic in-hospital
        bedside defibrillator-monitor (the “Powerheart CRM” or “CRM”) that continuously
        monitors and automatically treats hospitalized cardiac patients. The Company’s
        core technology platform consists of its proprietary arrhythmia detection
        and
        discrimination software (“RHYTHMx ® ”),
        which
        is combined with its proprietary STAR ® Biphasic
        defibrillation hardware and disposable electrode pad technology to create
        a
        complete line of automatic public-access defibrillators, (the “Powerheart AED”
        or “G3 AED”) for use in a variety of out-of-hospital settings. The Company’s
        Powerheart ® brand
        products are marketed by its direct sales force and network of independent
        distributors in the United States and around the world.
 
 On
        July
        1, 2000, the Company acquired Cadent Medical Corporation, a privately-held
        company, for an aggregate of 4,500,000 shares of the Company’s common
        stock.
 
 On
        September 26, 2001, the Company acquired Survivalink Corporation
        (“Survivalink”), a privately-held company, for $10,500 in cash, $25,800 in
        senior secured promissory notes, and 18,150,000 shares of the Company’s common
        stock.
 
 On
        November 30, 2001, the Company acquired 94.7% of Artema Medical AB and
        Subsidiaries (“Artema”) for 4,150,976 shares of common stock and approximately
        $215 in cash. During 2003, the Company acquired the remaining minority interest
        for $843 in cash. On September 1, 2003, the Company transferred ownership
        of the
        shares in Cardiac Science International A/S, its Danish operations and a
        subsidiary of Artema, from Artema to Cardiac Science, Inc. in exchange for
        forgiveness of intercompany debt. Then on September 21, 2003, the Company
        sold
        100% of its shares in Artema to an outside party for $600 in cash.
 
 On
        May
        29, 2003, the Company acquired Lifetec Medical Limited, its U.K. distributor,
        for $383 in cash.
 
 On
        October 21, 2003, the Company acquired substantially all of the assets and
        liabilities of Complient Corporation (“Complient”), a privately-held company,
        for 10,250,000 shares of the Company’s common stock.
 
 On
        February 28, 2005, the Company signed a definitive merger agreement with
        Quinton
        Cardiology Systems, Inc (“Quinton”). The transaction was approved by the boards
        of directors of both companies and is anticipated to close during the third
        quarter of 2005, subject to the approval of its respective shareholders and
        other customary closing conditions. The merger agreement calls for each Company
        shareholder to receive 0.10 of a share of common stock of the new holding
        company for each share of Company common stock owned prior to the transaction
        and each Quinton shareholder to receive approximately 0.77 of a share of
        common
        stock of the new holding company for each share of Quinton common stock owned
        prior to the transaction. The number of all Company and Quinton stock options
        and warrants outstanding at the effective time of the transaction, as well
        as
        their respective exercise prices, will be adjusted in accordance with the
        same
        exchange ratios. In connection with the transaction, the Company’s senior note
        holders have agreed to convert the entire balance of principal and accrued
        interest under their senior notes (the “Senior Notes”), or approximately
        $61,000, as well as warrants to purchase 13,438,599 shares
        of
        the Company’s common stock, into
        an
        aggregate of $20,000 in cash and 2,843,915 shares, or approximately 13 percent
        immediately following the transaction, of the new holding company’s common
        stock.
 
 **2.
        Continued Existence**
 
 The
        accompanying consolidated condensed financial statements have been prepared
        on
        the basis that the Company will continue as a going concern and that the
        Company
        will recover its assets and satisfy its liabilities in the normal course
        of
        business. From inception, the Company has incurred substantial losses and
        negative cash flows from operations. As of June 30, 2005, the Company had
        cash
        on hand of $7,336, working capital of $19,159, long term debt of $55,575,
        and an
        accumulated deficit of $185,279.
 
 The
        Company believes that its current cash balance, in combination with net cash
        expected to be generated from operations and its unused line of credit of
        $5,000, will fund ongoing operations through the end of 2005. The Company’s
        expected net cash from operations is predicated on achieving certain revenue
        levels and maintaining its cost of goods, operating expenses, and DSO ratio.
        The
        expected results for 2005 assume the completion of the pending merger with
        Quinton in the third quarter of 2005. If the proposed merger is not consummated,
        or is materially delayed for any reason, the Company’s expected revenues,
        operating expenses and net loss for 2005 may be negatively impacted.
        Additionally, in the event the merger is not consummated in either the third
        or
        fourth quarter of 2005, the Company would need to seek additional funding
        through equity or debt financings to sustain its current level of operations.
  7
 
 In
        addition, the Company’s line of credit and Senior Notes require maintenance of
        certain financial covenants, of which the Company was in violation during
        2004
        and 2005. Even though the Company has obtained waivers and/or amendments
        for all
        covenant violations, if in the future, it fails to comply with these financial
        covenants as amended, it could be unable to use its line of credit or be
        in
        default under the Senior Notes. If the Company is in default, it may be subject
        to claims by the senior note holders seeking to enforce their security interest
        in its assets. Such claims, if they arise, may substantially restrict or
        even
        eliminate the Company’s ability to utilize its assets in conducting its
        business, and may cause it to incur substantial legal and administrative
        costs.
 
 In
        the
        event that the Company requires additional funding, it will attempt to raise
        the
        required capital through either debt or equity arrangements. The Company
        cannot
        provide any assurance that the required capital would be available on acceptable
        terms, if at all, or that any financing activity would not be dilutive to
        its
        current shareholders. If the Company is not able to raise additional funds,
        it
        may be required to significantly curtail its operations and this would have
        an
        adverse effect on its financial position, results of operations and cash
        flows
        and as such, there may be substantial doubt about the Company’s ability to
        continue as a going concern.
 
 **3.
        Summary of Significant Accounting Policies**
 
 In
        the
        opinion of the Company’s management, the accompanying consolidated condensed
        unaudited financial statements include all adjustments (which consist only
        of
        normal recurring adjustments) necessary for a fair statement of its financial
        position at June 30, 2005 and results of operations and cash flows for the
        periods presented. Although the Company believes that the disclosures in
        these
        financial statements are adequate to make the information presented not
        misleading, certain information and disclosures normally included in financial
        statements prepared in accordance with generally accepted accounting principles
        have been condensed or omitted and should be read in conjunction with the
        Company’s audited financial statements included in the Company’s 2004 Annual
        Report on Form 10-K. Results of operations for the six months ended June
        30,
        2005 are not necessarily indicative of results for the full year.
 
 *Inventories*
 
 Inventories
        are valued at the lower of cost (estimated using the first-in, first-out
        method)
        or market. The Company periodically evaluates the carrying value of inventories
        and maintains a reserve for obsolescence to adjust the carrying value, as
        necessary, to the lower of cost or market. The reserve is based on its
        assessment of future product demand, historical experience, and technical
        obsolescence, as well as other factors affecting the recoverability of the
        asset
        through future sales. Inventories consist of the following as of:
  ******June
                  30, 2005**
              
              **December
                  31, 2004**Raw
                  materials
              
              $
              4,461
              
              $
              3,705Work
                  in process
              
              
              203
              
              
              13Finished
                  goods
              
              
              7,964
              
              
              7,146Reserve
                  for obsolescence
              
              
              (1,420
              )
              
              (1,184
              )$
              11,208
              
              $
              9,680
  *Goodwill
        and Intangibles*
 
 In
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142
“Goodwill and Other Intangible Assets,” goodwill and other intangible assets
        with indefinite lives are no longer subject to amortization but are tested
        for
        impairment annually or whenever events or changes in circumstances indicate
        that
        the asset might be impaired. The Company operates in one operating segment
        and
        has one reporting unit; therefore, goodwill is tested for impairment at the
        consolidated level against the fair value of the Company. Per SFAS No. 142,
        the
        fair value of a reporting unit refers to the amount at which the unit as
        a whole
        could be bought or sold in a current transaction between willing parties.
        Quoted
        market prices in active markets are the best evidence of fair value and shall
        be
        used as the basis on the last day of the year for the measurement, if available.
        The Company assesses potential impairment on an annual basis on the last
        day of
        the year and compares its market capitalization to its carrying amount,
        including goodwill. A significant decrease in its stock price could indicate
        a
        material impairment of goodwill which, after further analysis, could result
        in a
        material charge to operations. If goodwill is considered impaired, the
        impairment loss to be recognized is measured by the amount by which the carrying
        amount of the goodwill exceeds the implied fair value of that goodwill. Inherent
        in the Company’s fair value determinations are certain judgments and estimates,
        including projections of future cash flows, the discount rate reflecting
        the
        risk inherent in future cash flows, the interpretation of current economic
        indicators and market valuations, and strategic plans with regard to operations.
        A change in these underlying assumptions would cause a change in the results
        of
        the tests, which could cause the fair value of the reporting unit to be less
        than its respective carrying amount. In addition, to the extent that there
        are
        significant changes in market conditi ons
        or
        overall economic conditions, or strategic plans change, it is possible that
        future goodwill impairments could result, which could have a material impact
        on
        the financial position and results of operations.
  8
 
 During
        the quarter ended March 31, 2005, the Company’s stock price declined
        significantly resulting in its market capitalization falling below the carrying
        value of equity. Therefore, the Company performed an impairment test and
        obtained third-party valuations to assist with this analysis. The fair value
        estimates used in the initial impairment test, which were computed primarily
        based on the present value of future cash flows, indicated that the carrying
        amount exceeded the fair value and led the Company to conclude that goodwill
        was
        impaired. The implied fair value of goodwill was then determined through
        the
        allocation of the fair value to the underlying assets and liabilities. During
        the quarter ended March 31, 2005, a non-cash goodwill impairment charge of
        $47,269 was recorded to adjust the carrying value of the Company’s goodwill to
        its implied fair value. At June 30, 2005, the market capitalization of the
        Company exceeded its carrying value.
 
 Other
        intangible assets with finite lives continue to be subject to amortization,
        and
        any impairment is determined in accordance with SFAS No. 144 “Accounting for the
        Impairment or Disposal of Long-Lived Assets. Estimated intangible asset
        amortization expense for the years ending December 31, 2005, 2006, 2007,
        2008,
        2009, and thereafter is $2,029, $1,981, $1,744, $1,696, $1,191, and $1,036,
        respectively.
 
 Goodwill
        and other intangible assets consist of the following as of:
 **June
                    30, 2005**
                
                
                **December
                    31, 2004****Cost**
                
                
                **Accumulated**
                  **Amortization**
                
                
                **Net**
                
                
                **Cost**
                
                
                **Accumulated**
                  **Amortization**
                
                
                **Net**Goodwill
                
                $
                92,268
                
                $
                3⁄4
                
                $
                92,268
                
                $
                140,544
                
                $
                3⁄4
                
                $
                140,544Intangible
                    assets subject to amortization:Patents
                    and patent applications
                
                
                10,487
                
                
                (5,071
                )
                
                5,416
                
                
                10,465
                
                
                (4,505
                )
                
                5,960Customer
                    base
                
                
                4,082
                
                
                (1,624
                )
                
                2,458
                
                
                4,082
                
                
                (1,381
                )
                
                2,701Covenants
                    not to compete
                
                
                726
                
                
                (403
                )
                
                323
                
                
                726
                
                
                (282
                )
                
                444URL
                    website address
                
                
                656
                
                
                (227
                )
                
                429
                
                
                656
                
                
                (162
                )
                
                494Trade
                    name
                
                
                378
                
                
                (378
                )
                
                3⁄4
                
                
                378
                
                
                (378
                )
                
                3⁄4Purchased
                    software
                
                
                128
                
                
                (71
                )
                
                57
                
                
                128
                
                
                (50
                )
                
                78$
                16,457
                
                $
                (7,774
                )
                $
                8,683
                
                $
                16,435
                
                $
                (6,758
                )
                $
                9,677
 
 The
        decrease in goodwill during the six months ended June 30, 2005 was as
        follows:
  Goodwill
                  at December 31, 2004
              
              $
              140,544Refund
                  of Complient purchase price shares in escrow
              
              
              (902
              )Goodwill
                  impairment charge
              
              
              (47,269
              )Other
              
              
              (105
              )Goodwill
                  at June 30, 2005
              
              $
              92,268
 
 *Product
        Warranty*
 
 The
        Company’s products are generally under warranty against defects in material and
        workmanship for a period of one to seven years. Warranty costs are estimated
        at
        the time of sale based on historical experience. Estimated warranty expenses
        are
        recorded as an accrued liability, with a corresponding provision to cost
        of
        sales.
 
 Changes
        in the product warranty accrual for the six months ended June 30 were as
        follows:
  **2005**
              
              **2004**Warranty
                  accrual, Beginning of period
              
              $
              617
              
              $
              836Change
                  in liability for warranties issued during the period
              
              
              474
              
              
              1,372Warranty
                  expenditures
              
              
              (632
              )
              
              (705
              )Warranty
                  accrual, End of period
              
              $
              459
              
              $
              1,503
 
 During
        the quarter ended June 30, 2005, the Company completed the recall/corrective
        actions that were initiated in 2004 and submitted final notification to the
        FDA
        requesting formal close out of these actions.
 
 The
        total
        cost of these recall actions is estimated at approximately $1,580. In 2004,
        the
        Company received from its suppliers of the faulty components credits against
        amounts due to these suppliers totaling $1,240, which were recorded to accrued
        expenses to establish a warranty accrual for these recall matters. During
        the
        quarter ended June 30, 2005, the Company recorded an additional $340 to this
        reserve for actual and remaining costs to close out the recall actions. Through
        June 30, 2005, actual recall related costs incurred totaling approximately
        $1,530 have been charged against this reserve. At this time, the Company
        believes the remaining costs related to closing out the recall actions will
        be
        inconsequential and covered by the remaining reserve.
  9
 
 The
        decrease in warranty reserve requirements in 2005 compared with 2004, exclusive
        of the recall activities discussed above, results primarily from AED battery
        design changes in 2003 and early 2004 which extended the life of the battery
        and
        resulted in a significant reduction in no cost battery replacements, and
        therefore, a reduction in the overall warranty reserve necessary.
 
 *Stock
        Based Compensation*
 
 On
        December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure,”
        which amends SFAS No. 123 “Accounting for Stock-Based Compensation.” SFAS No.
        148 allows for three methods of transition for those companies that adopt
        SFAS
        No. 123’s provisions for fair value recognition. SFAS No. 148’s transition
        guidance and provisions for annual and interim disclosures are effective
        for
        fiscal periods ending after December 15, 2002. The Company has not adopted
        fair
        value accounting for employee stock options under SFAS No. 123 and SFAS No.
        148.
 
 The
        Company has adopted the disclosure-only provisions of SFAS No. 123. SFAS
        No. 123
        defines a fair value based method of accounting for an employee stock option.
        Fair value of the stock option is determined considering factors such as
        the
        exercise price, the expected life of the option, the current price of the
        underlying stock, expected dividends on the stock, and the risk-free interest
        rate for the expected term of the option. Under the fair value based method,
        compensation cost is measured at the grant date based on the fair value of
        the
        award and is recognized over the service period. Pro forma disclosures are
        required for entities that elect to continue to measure compensation cost
        under
        the intrinsic method provided by Accounting Principles Board Opinion (“APB”) No.
        25.
 
 Additionally,
        in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No.
        96-18 “Accounting for Equity Instruments That are Issued to Other Than Employees
        for Acquiring, or in Conjunction with Selling Goods or Services,” the Company
        measures stock-based non-employee compensation at fair value.
 
 Under
        SFAS No. 123, stock-based compensation expense related to stock options granted
        to consultants is recognized as the stock options are earned. The fair value
        of
        the stock options granted is calculated at each reporting date using the
        Black-Scholes option pricing model. As a result, the stock-based compensation
        expense will fluctuate as the fair market value of the Company’s stock
        fluctuates.
 
 *Pro
        forma Effect of Stock-Based Compensation*
 
 In
        calculating pro forma information as required by SFAS No. 123, the fair value
        was estimated at the date of grant using a Black-Scholes option pricing model
        with the following assumptions for the options of the Company’s common stock
        granted during the quarters ended June 30:
  **2005**
              
              **2004**Risk-free
                  rate
              
              
              4.00
              %
              
              2.47
              %Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %Volatility
              
              
              75.1
              %
              
              63.0
              %Expected
                  life of option
              
              
              4
                  years
              
              
              4
                  years
 
 Had
        compensation costs been determined based upon the fair value at the grant
        date,
        consistent with the methodology prescribed under SFAS No. 123, the Company’s
        total stock-based compensation cost, pro forma net loss, and pro forma net
        loss
        per share, basic and diluted, would have been as follows:
 **Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                  **2005**
                
                **June
                    30,**
                  **2004**
                
                **June
                    30,**
                  **2005**
                
                **June
                    30,**
                  **2004**Net
                    loss, as reported
                
                $
                (7,080
                )
                $
                (5,321
                )
                $
                (60,922
                )
                $
                (10,153
                )Deduct:
                    Compensation expense determined under fair value based
                    method
                
                
                (720
                )
                
                (834
                )
                
                (1,536
                )
                
                (1,842
                )Pro
                    forma net loss
                
                $
                (7,800
                )
                $
                (6,155
                )
                $
                (62,458
                )
                $
                (11,995
                )Net
                    loss per share, as reported (basic and diluted)
                
                $
                (0.08
                )
                $
                (0.07
                )
                $
                (0.71
                )
                $
                (0.13
                )Pro
                    forma net loss per share (basic and diluted)
                
                $
                (0.09
                )
                $
                (0.08
                )
                $
                (0.73
                )
                $
                (0.15
                )
 10
  *Recent
        Pronouncements*
 
 In
        November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an Amendment of
        ARB No. 43, Chapter 4, ‘Inventory Pricing,’” to clarify the accounting for
        abnormal amounts of idle facility expense, freight, handling costs and wasted
        material. This statement requires those items be recognized as current-period
        charges. The provisions of this statement shall be effective for inventory
        costs
        incurred during fiscal years beginning after June 15, 2005. The Company does
        not
        expect adoption of this statement to have a material impact on its financial
        statements.
 
 In
        December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment”
        or SFAS No. 123R. SFAS No. 123R revises SFAS No. 123
“Accounting
        for Stock-Based Compensation” and supersedes APB No. 25 “Accounting for
        Stock Issued to Employees” and related interpretations and SFAS No. 148
“Accounting for Stock-Based Compensation-Transition and Disclosure.”
        SFAS No. 123R requires compensation cost relating to all share-based
        payments to employees to be recognized in the financial statements based
        on
        their fair values. In April 2005, the Securities
        and Exchange Commission (“SEC”) delayed
        the effective date of SFAS No. 123R to annual, rather than interim, reporting
        periods beginning after June 15, 2005. The pro forma disclosures previously
        permitted under SFAS No. 123 will no longer be an alternative to financial
        statement recognition. The Company is evaluating the requirements of
        SFAS No. 123R and expects that the adoption will have a material impact
        on
        the Company’s consolidated financial position or results of operation. The
        Company has not determined the method of adoption and it has not determined
        whether the adoption will result in amounts recognized in the income statement
        that are similar to the current pro forma disclosures under SFAS No.
        123.
 
 In
        December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets --
        an amendment of Accounting Principles Board ("APB") Opinion No. 29 ‘Accounting
        for Non-monetary Transactions.’” The guidance in APB No. 29 is based on the
        principle that exchanges of non-monetary assets should be measured based
        on the
        fair value of the assets exchanged. The guidance in that Opinion, however,
        included certain exceptions to that principle. SFAS No. 153 amends APB No.
        29 to
        eliminate the exception for non-monetary exchanges of similar productive
        assets
        and replaces it with a general exception for exchanges of non-monetary assets
        that do not have commercial substance. A non-monetary exchange has commercial
        substance if the future cash flows of the entity are expected to change
        significantly as a result of the exchange. The provisions of SFAS No. 153
        are
        applicable for non-monetary asset exchanges occurring in fiscal years beginning
        after June 15, 2005. The Company does not expect adoption of this statement
        to
        have a material impact on its financial statements.
 
 In
        December 2004, the FASB issued FSP No. 109-2 “Accounting and Disclosure Guidance
        for the Foreign Earnings Repatriation Provision within the American Jobs
        Creation Act of 2004” ("FSP No. 109-2"). FSP No. 109-2 provides enterprises more
        time (beyond the financial-reporting period during which the American Jobs
        Creation Act took effect) to evaluate the impact on the enterprise's plan
        for
        reinvestment or repatriation of certain foreign earnings for purposes of
        applying SFAS No. 109. The FSP, issued on December 21, 2004, went into effect
        upon being issued. The Company is not yet in a position to decide on whether,
        and to what extent, it might repatriate foreign earnings that have not yet
        been
        remitted to the U.S. The Company expects to conclude its analysis of this
        repatriation incentive during 2005.
 
 In
        March
        2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107 “Share-Based
        Payment” which provides interpretive guidance related to the interaction between
        SFAS No. 123R and certain SEC rules and regulations, as well as provides
        the SEC
        staff’s views regarding the valuation of share-based payment arrangements for
        public companies. SAB No. 107 does not change the accounting required by
        SFAS
        No. 123R.
 
 In
        May
        2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections - a
        replacement of APB Opinion No. 20 and FASB No. 3.” SFAS No. 154 requires that
        all voluntary changes in accounting principles are retrospectively applied
        to
        prior financial statements as if that principle had always been used, unless
        it
        is impracticable to do so. When it is impracticable to calculate the effects
        on
        all prior periods, SFAS No. 154 requires that the new principle be applied
        to
        the earliest period practicable. SFAS No. 154 also provides that a change
        in
        method of depreciating or amortizing a long-lived non-financial asset be
        accounted for as a change in estimate effected by a change in accounting
        principle, and also provides that correction of errors in previously issued
        financial statements should be termed a “restatement.” SFAS No. 154 is effective
        for accounting changes and error corrections occurring in fiscal years beginning
        after December 15, 2005. The Company does not expect adoption of this statement
        to have a material impact on its financial statements.
 
 **4.
        Segment reporting**
 
 The
        Company follows the provisions of SFAS No. 131 “Disclosures about Segments of an
        Enterprise and Related Information *.”* SFAS
        No.
        131 established standards for reporting information about operating segments
        in
        annual financial statements and requires selected information about operating
        segments in interim financial reports issued to stockholders. It also
        established standards for related disclosures about products and services,
        geographic areas and major customers. An operating segment is defined as
        a
        component of an enterprise that engages in business activities from which
        it may
        earn revenues and incur expenses whose separate financial information is
        available and is evaluated regularly by the Company’s chief operating decision
        makers, or decision making group, to perform resource allocations and
        performance assessments.
  11
 
 The
        Company’s chief operating decision makers are the Chief Executive Officer and
        other senior executive officers of the Company. Based on evaluation of the
        Company’s financial information, management believes that the Company operates
        in one reportable segment with its various product lines that service the
        external defibrillation and cardiac monitoring industry. The product lines
        include AEDs and related training, services, and accessories; Powerhearts,
        electrodes and related accessories; and emergency defibrillators, monitors,
        training products and related accessories.
 
 The
        Company’s chief operating decision makers evaluate revenue performance of
        product lines, both domestically and internationally, however, operating,
        strategic and resource allocation decisions are not based on product line
        performance, but rather on the Company’s overall performance in its operating
        segment.
 
 The
        following is a breakdown of net revenue by product line:
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**
              
              **June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**AEDs
                  and related accessories
              
              $
              13,603
              
              $
              13,835
              
              $
              26,475
              
              $
              25,887AED/CPR
                  training and program management services
              
              
              1,610
              
              
              2,043
              
              
              3,348
              
              
              3,782Total
                  AED related revenue
              
              
              15,213
              
              
              15,878
              
              
              29,823
              
              
              29,669Powerheart
                  CRMs, electrodes and accessories
              
              
              333
              
              
              254
              
              
              633
              
              
              587Patient
                  monitors, training products and accessories
              
              
              80
              
              
              1,377
              
              
              181
              
              
              2,857$
              15,626
              
              $
              17,509
              
              $
              30,637
              
              $
              33,113
 
 The
        following is a breakdown of net sales by geographic location:
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**
              
              **June
                  30,**
                **2005**
              
              **June
                  30,**
                **2004**United
                  States
              
              $
              10,796
              
              $
              12,494
              
              $
              20,287
              
              $
              23,705Foreign
              
              
              4,830
              
              
              5,015
              
              
              10,350
              
              
              9,408$
              15,626
              
              $
              17,509
              
              $
              30,637
              
              $
              33,113
 
 The
        following is a breakdown of the Company’s long-lived assets by geographic
        location as of:
  **June
                  30,**
                **2005**
              
              **December
                  31,**
                **2004**United
                  States
              
              $
              4,575
              
              $
              4,773Foreign
              
              
              115
              
              
              159$
              4,690
              
              $
              4,932
 
 **5.
        Line of Credit**
  In
        February 2004, the Company secured a $5,000 line of credit with Silicon Valley
        Bank. The line of credit may be used to provide additional working capital,
        as
        needed, to fund the Company’s continued growth. This 24-month facility is
        collateralized by accounts receivable, inventory and cash and cash equivalents,
        has an interest rate of the bank’s prime rate plus .75% (with a floor of 5%)
        payable monthly, and requires the Company to maintain certain financial
        covenants. In February 2005, the Company obtained a waiver from the bank
        for the
        quarter and year ended December 31, 2004 for non-compliance with certain
        financial covenants required by the line of credit agreement and which also
        modified one of the financial covenants for 2005. In May 2005, the Company
        obtained a waiver and amendment from the bank to exclude the first quarter
        goodwill impairment charge from the EBITDA calculation for 2005. As of June
        30,
        2005, the Company was not in compliance with the cumulative EBITDA covenant,
        as
        amended. However, in August 2005, the Company obtained a waiver of such
        non-compliance from the bank for the quarter ended June 30, 2005. There was
        no
        outstanding balance on the line at June 30, 2005 and 2004, however, there
        were
        letters of credit totaling $157 at June 30, 2005 issued as collateral for
        performance bonds that reduce the available balance on the line of
        credit.
 
 **6.
        Notes Payable**
 
 In
        May
        2002, the Company entered into a Senior Note and Warrant Purchase Agreement
        (the
“Agreement”) with investors, pursuant to which the investors loaned the Company
        $50,000.  In March 2004, the Company amended the Agreement in order
        to ease
        certain financial covenants into 2005 to reflect the Company’s actual and
        expected financial results. In exchange for these modifications, the Company
        issued the senior note holders 500,000 additional warrants to purchase shares
        of
        common stock at $3.95 per share.  The warrants were valued at $1,301
        using
        a Black-Scholes model.  The significant assumptions used in the model
        were:
        stock price of $3.98; risk free rate of 3.2%; volatility of 65%; dividend
        yield
        of 0%; and contractual term of seven years. The value of the warrants is
        being
        amortized over the remaining term of the Senior Notes using the effective
        interest method.
  12
  Under
        the
        antidilution provisions of the Agreement, which were triggered by the September
        2003 and July 2004 private placements and the July 2003 warrant issuance
        to GE
        Healthcare, an additional 205,451 warrants were issuable to the senior note
        holders at exercise prices ranging from $2.97 to $3.88.  In addition,
        the
        exercise prices of the original warrants issued were also reduced to: (i)
        $2.97
        for the 10,000,000 warrants that had an original exercise price of $3.00,
        (ii)
        $3.88 for the 3,000,000 warrants that had an original exercise price of $4.00,
        and (iii) $3.86 for the 500,000 warrants that had an original exercise price
        of
        $3.95.
  In
        January 2005, the Company entered into an amendment and limited waiver (the
        “Amendment”) to the Agreement with the senior note holders.  Pursuant to
        the terms of the Amendment, the Company and the senior note holders agreed
        to:
        (i) extend the maturity date of the $50,000 in aggregate principal amount
        of
        Senior Notes issued under the Agreement by twelve months to May 29, 2008;
        (ii)
        defer all cash interest payments until maturity; and (iii) modify certain
        financial covenants regarding minimum EBITDA, minimum debt to capitalization
        and
        maximum capital expenditures, and delete certain other financial covenants
        for
        2005 through maturity.  Additionally, the senior note holders waived
        certain covenant violations, including all financial covenant violations
        for the
        quarter and year ended December 31, 2004.  In exchange for the foregoing
        amendments and waiver contained in the Amendment, the Company and the senior
        note holders agreed to reduce the aggregate number of warrants to purchase
        shares of common stock issued in connection with the Agreement to 13,438,599
        and
        reduce the exercise price of those warrants to $2.00 per share, down from
        the
        original weighted average price of approximately $3.21 per share. The fair
        value
        of the change in the exercise price of the warrants was valued at $2,777
        using a
        Black-Scholes model. The significant assumptions used in the model were:
        stock
        price of $1.70; risk free rate of 3.5%; volatility of 75%; dividend yield
        of 0%;
        and contractual term of approximately 4.3 years. The value of this change
        to the
        warrant exercise price is being amortized over the remaining term of the
        Senior
        Notes using the effective interest method.
 
 In
        May
        2005, the Company obtained an amendment from the senior note holders to exclude
        the first quarter goodwill impairment charge from the financial covenant
        calculations for 2005. . At
        March
        31, 2005 and June 30, 2005, the Company was in compliance with all covenants
        required by the Agreement, as amended.
 
 **7.
        Common Stock**
 
 In
        July
        2004, the Company completed a private placement of common stock and warrants
        raising $12,370 in gross proceeds. The holders of the Senior Notes were the
        lead
        investors. In connection with the private placement, the Company issued
        5,219,409 shares of its common stock at a price of $2.37 per share and five-year
        warrants to purchase 2,087,763 additional shares of its common stock at an
        exercise price of $2.84 per share. Proceeds of the offering are providing
        additional working capital and are funding product development initiatives.
 In
        January 2005, as consideration for delays in filing a contractually required
        registration statement in connection with the July 2004 financing, the Company
        agreed with the investors to: (i) make a cash payment of $556, (ii) issue
        an
        additional aggregate of 476,637 shares of common stock, valued at $810 or
        $1.70
        per share which was the closing market price the day before the agreement
        was
        signed, and (iii) reduce the exercise price on the investors’ warrants to $2.50
        per share. The fair
        value of the change in the exercise price of the warrants was valued at $83
        using a Black-Scholes model. The significant assumptions used in the model
        were:
        stock price of $1.70; risk free rate of 3.75%; volatility of 75%; dividend
        yield
        of 0%; and contractual term of approximately 6.5 years. The total value of
        consideration given to these investors of $1,449 was recorded to other
        non-operating expense in the quarter ended March 31, 2005.
 
 **8.
        Litigation and Other Contingencies**
 
 In
        February 2003, the Company filed a
        patent
        infringement action against Philips Medical Systems North America, Inc.,
        Philips
        Electronics North America Corporation and Koninklijke Philips Electronics
        N.V.
        (“Philips”) in the United States District Court for the District of Minnesota.
        The suit alleges that Philips’ automated external defibrillators sold under the
        names “HeartStart OnSite Defibrillator,”“HeartStart,”“HeartStart FR2,” and the
“HeartStart Home Defibrillator,” infringe at least ten of the
        Company’s United
        States patents. In the same action, Philips counterclaimed for infringement
        of
        certain of its patents and the
        Company has sought a
        declaration from the Court that the
        Company’s products
        do not infringe such patents. Many of the Philips defibrillators’ are promoted
        by Philips as including, among other things, pre-connected disposable
        defibrillation electrodes and daily self-testing of electrodes and battery,
        features that the suit alleges are key competitive advantages of the
        Company’s Powerheart and Survivalink AEDs and are covered under the
        Company’s patents.
        At this stage, the
        Company is unable
        to predict the outcome of this litigation. The
        Company has not
        established an accrual for this matter because a loss is not determined to
        be
        probable.
 
 On
        April
        30, 2003, the
        Company filed a
        Complaint against Defibtech, LLC for patent infringement in the United States
        District Court for the District of Minnesota. The Complaint alleged that
        Defibtech’s Sentry and Reviver AEDs infringe the
        Company’s patented
        disposable electrode pre-connect technology as well as other patents. Defibtech
        answered the Complaint and asserted counterclaims alleging that the
        Company has engaged
        in activities that constitute tortious interference with present and prospective
        contractual relations, common law business disparagement and statutory business
        disparagement. The
        Company responded to the counterclaims with a complete and general denial of the
        allegations. On
        August
        8, 2005, the
        Company executed a settlement agreement with Defibtech, LLC. The
        Company’s allegations of infringement by Defibtech of United States Patent No.’s
        5,579,919, 5,700,281 and 6,038,473 and all of Defibtech’s assorted counterclaims
        have been fully resolved. Other terms and conditions of the settlement remain
        confidential. As a condition of settlement, the Company will receive a cash
        payment in the amount of $925.
  13
 
 On
        March
        19, 2004, William S. Parker filed suit against the
        Company for
        patent infringement in the United States District Court for the Eastern Division
        of Michigan. The Parker patent generally covers the use of a synthesized
        voice
        to instruct a person to perform certain tasks. The Complaint alleges that
        certain of the
        Company’s AEDs
        infringe the patent. The patent is now expired. The
        Company has filed an
        Answer to the Complaint stating the patent is not infringed and is otherwise
        invalid and unenforceable. The patent has been submitted before the United
        States Patent and Trademark Office for reexamination. On October 25, 2004,
        the
        District Court issued an order staying the litigation pending resolution
        of the
        reexamination. At this stage of the litigation, the
        Company is unable
        to predict the outcome of this litigation. The
        Company has not
        established an accrual for this matter because a loss is not determined to
        be
        probable.
 
 In
        March
        2005, six complaints were filed in the Chancery Court of Delaware concerning
        the
        Company’s merger agreement with Quinton and the transaction contemplated
        thereby. These six actions were later consolidated into what is referred
        to as
        the consolidated action. On May 17, 2005, an amended complaint was filed
        in the
        consolidated action. The six original complains were:
  ·  *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.
  In
        March
        2005, the following complaints, which are referred to as the California actions,
        were filed in the Superior Court of Orange County, California concerning
        such
        merger agreement and transaction:
  ·  *Albert
        Rosenfeld v. Cardiac Science, Inc.* ,
        et al.
        Case No. 05CC00057; and
  ·  *Jerrold
        Schaffer v. Cardiac Science, Inc.* ,
        et al.,
        Case No. 05CC00059.
  On
        April
        1, 2005, a complaint was filed in the Chancery Court of Delaware, *Oppenheim
        Pramerica Asset Management v. Cardiac Science, Inc. et al.* ,
        Case
        No. 1222-N, which is referred to as the Oppenheim action. The Oppenheim action
        has not been consolidated with the consolidated action. On May 10, 2005,
        an
        amended complaint was filed by the plaintiffs in the Oppenheim
        action.
 
 Generally,
        the complaints allege that the Company’s board of directors breached its
        fiduciary obligations with respect to the proposed merger transaction with
        Quinton because the board of directors did not negotiate sufficient compensation
        for the Company’s shareholders and because the board of directors engaged in
        self-dealing in connection with the Company’s senior note holders. The amended
        complaints filed in Delaware also allege that the preliminary joint proxy
        statement/prospectus filed with the SEC in connection with the merger
        transaction did not adequately disclose material information about the
        transaction. The complaints seek, among other things, injunctive relief
        enjoining the transaction, recessionary damages if the transaction is completed
        and an order that the Company’s board of directors hold an auction to obtain the
        best value for the Company’s shareholders.
  In
        June
        2005, pursuant to an agreement of the parties to these actions, plaintiffs’
        counsel withdrew their motion for preliminary injunction and, on June 24,
        2005,
        counsel for the parties in the consolidated action and the Oppenheim action
        executed a memorandum of understanding. As a result, plaintiffs’ counsel agreed
        to dismiss all disclosure related claims with prejudice and to release all
        parties associated with the transaction in connection with such claims in
        exchange for the Company’s agreement to include certain additional disclosures
        in the joint proxy statement/prospectus. Plaintiffs’ counsel in the consolidated
        action also agreed to dismiss the remainder of their complaint without
        prejudice. Plaintiffs in the Delaware actions intend to apply to the Chancery
        Court of Delaware for attorneys’ fees. The agreement with plaintiffs’ counsel in
        the Delaware actions is subject to final approval by the Chancery Court of
        Delaware. The Company expects that certain of the costs and fees associated
        with
        these claims will be eligible for reimbursement under the Company’s insurance
        policies.
  14
  While
        the
        Oppenheim action (other than the disclosure claims) and the California actions
        have not been dismissed, currently no motion to preliminarily enjoin the
        transaction is pending and the Company believes that no pending action is
        likely
        to prevent completion of the transaction.
  Plaintiffs
        in the consolidated, California or Oppenheim actions may seek other remedies
        for
        their purported claims, including damages. The Company will vigorously contest
        any such claim for damages or other remedies.
  In
        the
        ordinary course of business, various lawsuits and claims are filed against
        the
        Company. While the outcome of these matters is currently not determinable,
        management believes that the ultimate resolution of these matters will not
        have
        a material adverse effect on the Company’s operations or financial position.
 
 **9.
        Subsequent Events**
  On
        July
        29, 2005, the SEC declared
        effective CSQ Holding Company’s registration statement on Form S-4 related to
        the Company’s proposed merger with Quinton. CSQ Holding Company is a
        newly-formed corporation that has been established to facilitate the merger
        of
        Quinton and Cardiac Science. A special meeting of shareholders to vote on
        the
        proposed merger is scheduled for August 31, 2005. If approved by respective
        shareholders of the Company and Quinton, the merger is anticipated to be
        consummated immediately after the special meeting.
  15
  **Item
        2.****Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
  **(In
        thousands, except share and per share data)**
 
 The
        following discussion should be read in conjunction with the consolidated
        financial statements and notes thereto appearing elsewhere in this report.
 
 ***A
        Warning About Forward-Looking Information and the Safe Harbor Under the
        Securities Litigation Reform Act of 1995***
  *This
        Quarterly Report on Form 10-Q contains certain forward-looking statements
        within
        the meaning of Section 27A of the Securities Act of 1933, as amended, and
        Section 21E of the Securities Exchange Act of 1934, as amended, and we intend
        that such forward looking statements be subject to the safe harbors created
        thereby. In some cases, you can identify forward-looking statements by words
        like "may,”  "will,”  "should,”  "could,” 
        "believes,”  "intends,”  "expects,”  "anticipates,” 
        "plans,”  "estimates,”  "predicts,”  "potential,” 
        "continue”  and similar expressions. These forward-looking statements
        relate to, among other things, (i) future expenditures and results, (ii)
        business strategies, and (iii) the need for, and availability of, additional
        financing.*
   *The
        forward-looking statements included herein are based on current expectations,
        which involve a number of risks and uncertainties and assumptions regarding
        our
        business and technology. These assumptions involve judgments with respect
        to,
        among other things, future economic and competitive conditions, and future
        business decisions, all of which are difficult or impossible to predict
        accurately and many of which are beyond our control. Although we believe
        that
        the assumptions underlying the forward-looking statements are reasonable,
        any of
        the assumptions could prove inaccurate and, therefore, there can be no assurance
        that the results contemplated in forward-looking statements will be realized
        and
        actual results may differ materially. In light of the significant uncertainties
        inherent in the forward-looking information included herein, the inclusion
        of
        such information should not be regarded as a representation by us or any
        other
        person that our objectives or plans will be achieved. We undertake no obligation
        to publicly release the result of any revisions to these forward-looking
        statements that may be made to reflect events or circumstances after the
        date
        hereof, or to reflect the occurrence of unanticipated events. Readers should
        carefully review the risk factors described in the documents that we file
        from
        time to time with the Securities and Exchange Commission, including Quarterly
        Reports on Form 10-Q, Annual Reports on Form 10-K and subsequent current
        reports
        on Form 8-K.*
  **Results
        of Operations**
 
 **Quarter
        Ended June 30, 2005 Compared to the Quarter Ended June 30,
        2004**
  *Revenue*
 
 The
        following is a summary of net revenue by product line for the quarters ended
        June 30:
  **2005**
                
                **2004**
                
                **Change**AEDs
                    and related accessories
                
                $
                13,603
                
                
                87.1
                %
                $
                13,835
                
                
                79.0
                %
                $
                (232
                )
                
                (1.7
                )%AED/CPR
                    training and program management services
                
                
                1,610
                
                
                10.3
                %
                
                2,043
                
                
                11.7
                %
                
                (433
                )
                
                (21.2
                )%AED
                    related revenue
                
                
                15,213
                
                
                97.4
                %
                
                15,878
                
                
                90.7
                %
                
                (665
                )
                
                (4.2
                )%Powerheart
                    CRMs, electrodes and accessories
                
                
                333
                
                
                2.1
                %
                
                254
                
                
                1.4
                %
                
                79
                
                
                31.1
                %Patient
                    monitors, training products and accessories
                
                
                80
                
                
                0.5
                %
                
                1,377
                
                
                7.9
                %
                
                (1,297
                )
                
                (94.2
                )%Total
                    net revenue
                
                $
                15,626
                
                
                100.0
                %
                $
                17,509
                
                
                100.0
                %
                $
                (1,883
                )
                
                (10.8
                )%
 
 Net
        revenue for the quarter ended June 30, 2005 decreased $1,883 or 10.8% compared
        to the quarter ended June 30, 2004. The decrease in net revenue was primarily
        the result of exiting the CPR Prompt and patient monitoring product lines
        in the
        second half of 2004 which accounted for $1,302 of revenue in the second quarter
        of 2004. Revenue from the sale of AEDs and related services decreased $665
        or
        4.2% quarter over quarter. The decrease in AED related revenue was primarily
        due
        to lower AED training and program management services revenue. Sales of
        Powerheart CRMs were $154 for the quarter ended June 30, 2005 compared to
        $96
        for the same quarter in 2004. Sales of our Powerheart proprietary disposable
        defibrillation electrodes used with the first generation Powerheart and the
        Powerheart CRM were $179 for the quarter ended June 30, 2005 compared to
        $158
        for the same quarter in 2004.
 
 *Gross
        Margin*
 
 Total
        cost of revenue for the quarter ended June 30, 2005 was $7,407 compared to
        $7,823 for the same quarter in 2004. Gross margin as a percentage of revenue
        was
        52.6% for the quarter ended June 30, 2005, compared to 55.3% for the same
        quarter in 2004. The decrease in gross margin was primarily related to costs
        of
        $340 during in the quarter ended June 30, 2005 associated with the completion
        of
        product recalls that were initiated in 2004. These costs reduced gross margin
        for the quarter ended June 30, 2005 by 2.1 percentage points. Cost of service
        revenue was $910 for the quarter ended June 30, 2005 with a gross margin
        of
        43.5% compared to $1,481 with a gross margin of 27.5% for the same quarter
        in
        2004. The increase in service revenue gross margin for the second quarter
        of
        2005 compared to the second quarter of 2004 was the result of costs associated
        with a deadline to fulfill certain installation services and AED training
        for
        New York City Schools during the quarter ended June 30, 2004 which resulted
        in
        lower margins in service revenue for that period.
  16
 
 During
        the quarters ended June 30, 2005 and 2004, sales of first generation Powerhearts
        or CRMs previously written off in 2003 totaled $6 and $61, respectively,
        and had
        a slight favorable impact to the margin for the respective periods. The majority
        of the inventory written off in 2003 is still on hand. We will continue to
        try
        to sell some of these units internationally, but it is still uncertain as
        to how
        many units we will be able to sell and at what price. Eventually we will
        scrap
        the units or use them for spare parts.
 
 *Operating
        Expenses*
 
 The
        following is a summary of operating expenses as a percentage of net revenue
        for
        the quarters ended June 30:
  **2005**
              
              **2004**
              
              **Change**Sales
                  and marketing
              
              $
              5,344
              
              
              34.2
              %
              $
              6,947
              
              
              39.7
              %
              $
              (1,603
              )
              
              (23.1
              )%Research
                  and development
              
              
              1,813
              
              
              11.6
              
              
              1,456
              
              
              8.3
              
              
              357
              
              
              24.5General
                  and administrative
              
              
              4,208
              
              
              26.9
              
              
              4,317
              
              
              24.6
              
              
              (109
              )
              
              (2.5
              )Merger
                  and related shareholder litigation
              
              
              1,522
              
              
              9.8
              
              
              —
              
              
              —
              
              
              1,522
              
              
              n/aAmortization
              
              
              405
              
              
              2.6
              
              
              504
              
              
              2.9
              
              
              (99
              )
              
              (19.6
              )Total
                  operating expenses
              
              $
              13,292
              
              
              85.1
              %
              $
              13,224
              
              
              75.5
              %
              $
              68
              
              
              0.5
              %
 
 Sales
        and
        marketing expenses decreased $1,603 or 23.1% for the quarter ended June 30,
        2005
        compared to the same quarter in 2004. Sales and marketing expenses as a
        percentage of revenue were 34.2% for the quarter ended June 30, 2005 down
        from
        39.7% for the same period in 2004. The decrease is primarily attributable
        to:
        (i) lower direct marketing activities in the U.S. ($623), (ii) reduced sales
        expenses related to our AED training services ($401), (iii) a reduction in
        U.S.
        selling costs, primarily in the indirect sales channel reflecting our shift
        from
        smaller, local dealers to larger national distribution partners ($230), and
        (iv)
        lower international selling costs ($145).
 
 Research
        and development expenses increased by $357 or 24.5% for the quarter ended
        June
        30, 2005 compared to the same quarter in 2004. In the quarter ended June
        30,
        2005, research and development expenses were 11.6% of net revenue, up from
        8.3%
        of net revenue in the same quarter in 2004. The increase is primarily due
        to
        higher project development costs for the traditional in-hospital defibrillator
        product for GE Healthcare which is expected to be released in the third quarter
        of 2005 ($355).
 
 General
        and administrative expenses decreased $109 or 2.5% during the quarter ended
        June
        30, 2005 compared with the same quarter in 2004. As a percentage of revenue,
        general and administrative expenses increased to 26.9% in the quarter ended
        June
        30, 2005 from 24.6% in the same quarter in 2004. The absolute dollar value
        decrease was primarily due to: (i) a reduction in costs related to the Complient
        business, primarily headcount and facilities ($344), (ii) a reduction of
        headcount and related expenses from consolidating our international operations
        in the second half of 2004 ($208), and (iii) a decrease in commercial insurance
        resulting from a 2004 premium refund ($185). This decrease is primarily offset
        by: (i) an
        increase in bad debt expense primarily related to the potential uncollectibility
        of one foreign account ($368) ,
        (ii)
        settlement of certain litigation ($105), and (iii) increased regulatory and
        quality assurance activities ($138).
 
 During
        the quarter ended June 30, 2005, operating expenses included $1,522 of new
        expenses related to the proposed merger transaction with Quinton ($1,128)
        and
        related shareholder litigation ($394). These expenses were primarily comprised
        of legal, accounting, and consulting fees.
 
 Amortization
        of intangible assets included in operating expenses was $405 for the quarter
        ended June 30, 2005, a decrease of $99 or 19.6% from the $504 for the same
        quarter in 2004.
 
 *Interest
        and Other Expense, Net*
 
 Net
        interest and other expense increased by $182 or 10.2 % to $1,965 for the
        quarter
        ended June 30, 2005 compared to $1,783 for the same quarter in 2004. This
        increase was primarily due to an increase of interest expense and amortization
        of related warrant expense and debt issuance costs related to the Senior
        Notes,
        including the impact of the warrant exercise price modification in January
        2005
        ($64) and higher realized and unrealized losses of foreign currency activity
        primarily related to the large UK government sale in pounds ($209), partially
        offset by higher interest and other non-operating income ($97). Total interest
        expense was $1,811 for the quarter ended June 30, 2005 compared to $1,741
        for
        the same quarter in 2004.
  17
 
 **Six
        Months Ended June 30, 2005 Compared to Six Months Ended June 30,
        2004**
 
 *Revenue*
 
 The
        following is a summary of net revenue by product line for the six months
        ended
        June 30:
  **2005**
                
                **2004**
                
                **Change**AEDs
                    and related accessories
                
                $
                26,475
                
                
                86.4
                %
                $
                25,887
                
                
                78.2
                %
                $
                588
                
                
                2.3
                %AED/CPR
                    training and program management services
                
                
                3,348
                
                
                10.9
                %
                
                3,782
                
                
                11.4
                %
                
                (434
                )
                
                (11.5
                )%AED
                    related revenue
                
                
                29,823
                
                
                97.3
                %
                
                29,669
                
                
                89.6
                %
                
                154
                
                
                0.5
                %Powerheart
                    CRMs, electrodes and accessories
                
                
                633
                
                
                2.1
                %
                
                587
                
                
                1.8
                %
                
                46
                
                
                7.8
                %Patient
                    monitors, training products and accessories
                
                
                181
                
                
                0.6
                %
                
                2,857
                
                
                8.6
                %
                
                (2,676
                )
                
                (93.7
                )%Total
                    net revenue
                
                $
                30,637
                
                
                100.0
                %
                $
                33,113
                
                
                100.0
                %
                $
                (2,476
                )
                
                (7.5
                )%
 
 Net
        revenue for the six months ended June 30, 2005 decreased $2,476 or 7.5% compared
        to the six months ended June 30, 2004. This decrease was primarily the result
        of
        exiting the CPR Prompt and patient monitoring product lines in the second
        half
        of 2004 which accounted for $2,691 of revenue in the six months ended June
        30,
        2004. Sales of AEDs and related services for the six months ended June 30,
        2005
        were slightly increased at $29,823 compared to $29,669 for the same period
        in
        2004. Sales of Powerheart CRMs were $283 for the six months ended June 30,
        2005
        compared to $155 for the same period in 2004. Sales of our Powerheart
        proprietary disposable defibrillation electrodes used with the first generation
        Powerheart and the Powerheart CRM were $350 for the six months ended June
        30,
        2005 compared to $432 for the same period in 2004.
 
 *Gross
        Margin*
 
 Total
        cost of revenue for the six months ended June 30, 2005 was $13,674 compared
        to
        $14,331 for the six months ended June 30, 2004. Gross margins as a percentage
        of
        revenue were 55.4 % for the six months ended June 30, 2005 compared to 56.7%
        for
        the six months ended June 30, 2004. The decrease in gross margin was primarily
        related to costs of $340 during the quarter ended June 30, 2005 associated
        with
        the completion of product recalls that were initiated in 2004. These costs
        reduced gross margin for the six months ended June 30, 2005 by 1.1 percentage
        points. Cost of service revenue was $1,758 for the six months ended June
        30,
        2005 with a gross margin of 47.5% compared to $2,360 with a gross margin
        of
        37.6% for the same period in 2004. The increase in service revenue gross
        margin
        for the six months ended June 30, 2005 compared to the same period of 2004
        was
        the result of costs associated with a deadline to fulfill certain installation
        services and AED training for New York City Schools during the quarter ended
        June 30, 2004 which resulted in lower margins in service revenue for that
        period.
  During
        the six months ended June 30, 2005 and 2004, sales of first generation
        Powerhearts or CRMs previously written off in 2003 totaled $6 and $61,
        respectively, and had a slight favorable impact to the margin for the respective
        periods. The majority of the inventory written off in 2003 is still on hand.
        We
        will continue to try to sell some of these units internationally, but it
        is
        still uncertain as to how many units we will be able to sell and at what
        price.
        Eventually we will scrap the units or use them for spare parts.
 
 *Operating
        Expenses*
 
 The
        following is a summary of operating expenses as a percentage of net revenue
        for
        the six months ended June 30:
  **2005**
              
              **2004**
              
              **Change**Sales
                  and marketing
              
              $
              10,250
              
              
              33.5
              %
              $
              12,950
              
              
              39.1
              %
              $
              (2,700
              )
              
              (20.8
              )%Research
                  and development
              
              
              3,270
              
              
              10.7
              
              
              3,125
              
              
              9.4
              
              
              145
              
              
              4.6General
                  and administrative
              
              
              8,776
              
              
              28.6
              
              
              8,483
              
              
              25.6
              
              
              293
              
              
              3.5Merger
                  and related shareholder litigation
              
              
              2,152
              
              
              7.0
              
              
              —
              
              
              —
              
              
              2,152
              
              
              n/aAmortization
              
              
              808
              
              
              2.6
              
              
              1,007
              
              
              3.1
              
              
              (199
              )
              
              (19.8
              )Goodwill
                  impairment
              
              
              47,269
              
              
              154.3
              
              
              —
              
              
              —
              
              
              47,269
              
              
              n/aTotal
                  operating expenses
              
              $
              72,525
              
              
              236.7
              %
              $
              25,565
              
              
              77.2
              %
              
              46,960
              
              
              183.7
              %
 
 Sales
        and
        marketing expenses decreased $2,700 or 20.8% for the six months ended June
        30,
        2005 compared to the same period in 2004. Sales and marketing expenses as
        a
        percentage of revenue were 33.5% for the six months ended June 30, 2005 down
        from 39.1% for the same period in 2004. The decrease is primarily attributable
        to: (i) a reduction in U.S. selling costs, primarily in the indirect sales
        channel reflecting our shift from smaller, local dealers to larger national
        distribution partners ($362), (ii) reduced sales expenses related to our
        AED
        training services ($814), (iii) lower direct marketing activities in the
        U.S.
        ($722), and (iv) lower international selling costs ($283).
  18
 
 Research
        and development expenses increased $145 or 4.6% for the six months ended
        June
        30, 2005 compared to the same period in 2004. In the six months ended June
        30,
        2005, research and development expenses were 10.7% of net revenue, up from
        9.4%
        of net revenue in the same period in 2004. The increase is primarily due
        to
        higher payroll and project costs for product development focused on completing
        the traditional in-hospital defibrillator product for GE Healthcare which
        is
        expected to be released in the third quarter ($205), offset by the reduction
        of
        the Complient engineering group ($107).
 
 General
        and administrative expenses increased $293 or 3.5% during the six months
        ended
        June 30, 2005 compared with the same period in 2004. As a percentage of revenue,
        general and administrative expenses increased to 28.6% in the six months
        ended
        June 30, 2005 from 25.6% in the same period in 2004. The increase was primarily
        due to: (i) an increase in bad debt expense primarily related to the potential
        uncollectibility of one foreign account ($380), (ii) higher legal costs
        primarily related to the Philips litigation ($352), (iii) settlement of certain
        litigation ($216), and (iv) increased regulatory and quality assurance
        activities ($332). This increase is primarily offset by a reduction in costs
        related to the Complient business, primarily headcount and facilities ($729)
        and
        a reduction of headcount and related expenses from consolidating our
        international operations in the second half of 2004 ($419).
 
 During
        the six months ended June 30, 2005, operating expenses included $2,152 of
        new
        expenses related to the proposed merger transaction with Quinton ($1,758)
        and
        related shareholder litigation ($394). These expenses were primarily comprised
        of legal, accounting, and consulting fees.
 
 Amortization
        of intangible assets included in operating expenses was $808 for the six
        months
        ended June 30, 2005, a decrease of $199 or 19.8% from the $1,007 for the
        same
        period in 2004.
 
 During
        the quarter ended March 31, 2005, our stock price declined significantly
        resulting in our market capitalization falling below the carrying amount
        of
        equity. Therefore, in accordance with SFAS 142, we performed an impairment
        test
        and obtained third-party valuations to assist with this analysis. The fair
        value
        estimates used in the initial impairment test, which were computed primarily
        based on the present value of future cash flows, indicated that the carrying
        amount exceeded the fair value and led us to conclude that goodwill was
        impaired. The implied fair value of goodwill was then determined through
        the
        allocation of the fair value to the underlying assets and liabilities. During
        the quarter ended March 31, 2005, a non-cash goodwill impairment charge of
        $47,269 was recorded to adjust the carrying value of our goodwill to the
        implied
        fair value. At June 30, 2005, our market capitalization exceeded our carrying
        value; therefore, no additional impairment charge was recorded.
 
 *Interest
        and Other Expense, Net*
 
 Net
        interest and other expense increased by $1,948 or 57.8% to $5,318 for the
        six
        months ended June 30, 2005 compared to $3,370 for the same period in 2004.
        This
        increase was primarily due to: (i) a charge relating to the issuance of shares
        and a cash payment as consideration for delays in filing a contractually
        required registration statement in connection with the prior offering ($1,449),
        (ii) an increase of interest expense and amortization of related warrant
        expense
        and debt issuance costs related to the Senior Notes, including the impact
        of the
        additional warrants issued in March 2004 and the warrant exercise price
        modification in January 2005 ($244), and (iii) higher realized and unrealized
        losses of foreign currency activity primarily related to the large UK government
        sale in pounds ($385). These increases in expenses were partially offset
        by
        higher interest and other non-operating income ($142). Total interest expense
        was $3,614 for the six months ended June 30, 2005 compared to $3,358 for
        the
        same period in 2004.
 
 **Liquidity
        and Capital Resources**
  **June
                  30,**
                **2005**
              
              **December
                  31,**
                **2004**Working
                  capital
              
              $
              19,159
              
              $
              27,046Current
                  ratio (current assets to current liabilities)
              
              
              2.4
                  : 1.0
              
              
              2.6
                  : 1.0Cash
                  and cash equivalents
              
              $
              7,336
              
              $
              13,913Accounts
                  receivable, net
              
              $
              11,875
              
              $
              17,978Inventories,
                  net
              
              $
              11,208
              
              $
              9,680Short-term
                  and long-term borrowings
              
              $
              55,588
              
              $
              52,664
 
 The
        decrease in our current ratio, working capital and cash and cash equivalents
        is
        primarily due to cash used from operations during the six months ended June
        30,
        2005.
 
 At
        June
        30, 2005, our days sales outstanding on accounts receivable (“DSO”) was
        approximately 69 days compared to approximately 79 days at December 31, 2004,
        calculated based on a quarterly period using the ending net accounts receivable
        balance. We anticipate that our DSO will continue to average less than 90
        days
        during 2005.
  19
 
 In
        February 2004, we secured a $5,000 line of credit with Silicon Valley Bank.
        The
        line of credit may be used to provide additional working capital, as needed,
        to
        fund our continued growth. This 24-month facility is collateralized by accounts
        receivable, inventory and cash and cash equivalents, has an interest rate
        of the
        bank’s prime rate plus .75% (with a floor of 5%) payable monthly, and requires
        us to maintain certain financial covenants. In February 2005, we obtained
        a
        waiver from the bank for the quarter and year ended December 31, 2004 for
        non-compliance with certain financial covenants required by the line of credit
        agreement and which also modified one of the financial covenants for 2005.
        In
        May 2005, we obtained an amendment from the bank to exclude the first quarter
        goodwill impairment charge from the EBITDA calculation for 2005. As of June
        30,
        2005, we were not in compliance with the cumulative EBITDA covenant, as amended.
        However, in August 2005, we obtained a waiver for such non-compliance from
        the
        bank for the quarter ended June 30, 2005. There was no outstanding balance
        on
        the line at June 30, 2005 or through the date of this filing, however, there
        were letters of credit totaling $157 at June 30, 2005 issued as collateral
        for
        performance bonds that reduce the available balance on the line of
        credit.
 
 From
        inception, our sources of funding for operations and mergers and acquisition
        activity were derived from placements of debt and equity securities. In 2001,
        we
        raised approximately $37,000 in a series of private equity placements and
        through the receipt of proceeds from the exercise of outstanding options
        and
        warrants. In May 2002, we issued notes payable in the aggregate principal
        amount
        of $50,000. With the proceeds from these notes, we repaid the $26,468 plus
        accrued interest in senior promissory notes relating to the Survivalink
        acquisition. In September 2003, we raised $8,375 in a private equity placement
        of 2,233,334 shares of our common stock at $3.75 per share to a small group
        of
        institutional and accredited investors. In connection with this offering,
        we
        also issued 223,333 five-year warrants with an exercise price of $5.00 per
        share. In July 2004, we raised gross proceeds of approximately $12,370 in
        a
        private equity placement of 5,219,409 shares of our common stock at $2.37
        per
        share. In connection with this offering, we issued five-year warrants to
        purchase 2,087,763 shares of common stock at an exercise price of $2.84 per
        share. In January 2005, as consideration for delays in filing the contractually
        required registration statement for the July 2004 private placement, we agreed
        with the investors to make a cash payment of $556, to issue an additional
        aggregate of 476,637 shares of common stock at the market value on the date
        of
        the agreement, and to reduce the exercise price on all the investors’ warrants
        issued in such private placement to $2.50 per share. We incurred a charge
        of
        $1,449 in the quarter ended March 31, 2005 as a result of this agreement.
 
 In
        May
        2002, we entered into a Senior Note and Warrant Purchase Agreement (the
“Agreement”) with investors, pursuant to which the investors loaned the Company
        $50,000. Under the original terms of the Agreement, the Senior Notes issued
        thereunder were due and payable in cash on May 30, 2007, unless accelerated
        pursuant to the terms of the Agreement, and accrue interest at 6.9% per annum.
        During the first three years of the term of the Senior Notes, accrued and
        unpaid
        interest on the Senior Notes would, at the option of the Company, a) be due
        and
        payable in cash, or b) accrue and be paid in kind, in each case quarterly
        in
        arrears, and then due on the termination date of the Senior Notes. After
        the end
        of the third year of the term of the Senior Notes, any additional accrued
        and
        unpaid interest on the Senior Notes would be due and payable in cash quarterly
        in arrears, and on the termination date of the Senior Notes. The Senior Notes
        have certain monthly and quarterly financial and non-financial covenants.
        The
        Senior Notes are collateralized by our assets and the assets of our
        subsidiaries, to the extent permitted by law. Proceeds from the Senior Notes
        were used to repay $26,468 of senior promissory notes plus accrued interest
        issued in connection with the acquisition of Survivalink and the remaining
        proceeds were used for working capital purposes.
 
 In
        connection with the Senior Notes, the investors were issued warrants (the
        “Warrants”) for the purchase of an aggregate of 10,000,000 shares of our common
        stock at an exercise price of $3.00 per share, and an aggregate of 3,000,000
        shares of common stock at an exercise price of $4.00 per share. The Warrants
        are
        immediately exercisable, expire by their terms on May 30, 2009 and are subject
        to certain limited antidilution adjustments. After two years, we have the
        right
        to force the exercise of the Warrants pursuant to the terms of the Agreement.
        The proceeds from the Senior Notes were allocated between the Senior Notes
        and
        the Warrants based on their relative fair values which resulted in a discount
        being recorded on the Senior Notes pursuant to APB No. 14 “Accounting for
        Convertible Debt and Debt Issued with Stock Purchase Warrants.” We considered a
        number of factors, including an independent valuation, when determining the
        fair
        value of the Warrants. The significant assumptions used in the Black-Scholes
        model were: stock price of $2.90, adjusted downward for a dilution factor
        to
        $2.68; risk free rate of 4.98%; volatility of 0.90; dividend yield of 0%;
        and
        contractual term of 7 years. Such allocation resulted in a discount being
        recorded on the Senior Notes in the amount of $11,815, which is being amortized
        over the term of the Senior Notes using the effective interest method. In
        addition, we paid approximately $2,760 in debt issuance costs which are being
        amortized over the term of the Senior Notes using the effective interest
        method.
 
 In
        March
        2004, we amended the Agreement in order to ease certain financial covenants
        into
        2005 to reflect our actual and expected financial results. In exchange for
        these
        modifications, we issued the senior note holders 500,000 additional warrants
        to
        purchase shares of common stock at $3.95 per share. The warrants were valued
        at
        $1,301 using a Black-Scholes model. The significant assumptions used in the
        model were: stock price of $3.98; risk free rate of 3.2%; volatility of 0.65;
        dividend yield of 0%; and contractual term of seven years. The value of the
        warrants is being amortized over the remaining term of the Senior Notes using
        the effective interest method.
 
 Under
        the
        antidilution provisions of the Agreement, which were triggered by the September
        2003 and July 2004 private placements and the July 2003 warrant issuance
        to GE
        Healthcare, an additional 205,451 warrants were issuable to the senior note
        holders at exercise prices ranging from $2.97 to $3.88. In addition, the
        exercise prices of the original warrants issued were also reduced to: (i)
        $2.97
        for the warrants to purchase 10,000,000 shares that had an original exercise
        price of $3.00, (ii) $3.88 for the warrants to purchase 3,000,000 shares
        that
        had an original exercise price of $4.00, and (iii) $3.86 for the warrants
        to
        purchase 500,000 shares that had an original exercise price of
        $3.95.
  20
 
 In
        January 2005, we entered into an amendment and limited waiver (the “Amendment”)
        to the Agreement with the senior note holders. Pursuant to the terms of the
        Amendment, we and the senior note holders agreed to: (i) extend the maturity
        date of the $50,000 in aggregate principal amount of Senior Notes issued
        under
        the Agreement by twelve months to May 29, 2008; (ii) defer all cash interest
        payments until maturity; and (iii) modify certain financial covenants regarding
        minimum EBITDA, minimum debt to capitalization and maximum capital expenditures,
        and delete certain other financial covenants for 2005 through maturity.
        Additionally, the senior note holders waived certain covenant violations,
        including all financial covenant violations for the quarter and year ended
        December 31, 2004. In exchange for the foregoing amendments and waiver contained
        in the Amendment, we and the senior note holders agreed to reduce the number
        of
        warrants to purchase shares of common stock issued in connection with the
        Agreement to 13,438,599 and reduce the exercise price of those warrants to
        $2.00
        per share, down from the original weighted average price of approximately
        $3.21
        per share. The
        fair
        value of the change in the exercise price of the warrants was valued at $2,777
        using a Black-Scholes model. The significant assumptions used in the model
        were:
        stock price of $1.70; risk free rate of 3.5%; volatility of 75%; dividend
        yield
        of 0%; and contractual term of approximately 4.3 years. The value of this
        change
        to the warrant exercise price is being amortized over the remaining term
        of the
        Senior Notes using the effective interest method.
 
 In
        May
        2005, we obtained an amendment from the senior note holders to exclude the
        first
        quarter goodwill impairment charge from the financial covenant calculations
        for
        2005. At June 30, 2005, we were in compliance with all covenants required
        by the
        Agreement, as amended.
 
 The
        accompanying consolidated financial statements have been prepared on the
        basis
        that we will continue as a going concern and that we will recover our assets
        and
        satisfy our liabilities in the normal course of business. From inception,
        we
        have incurred substantial losses and negative cash flows from operations.
        As of
        June 30, 2005, we had cash on hand of $7,336, working capital of $19,159,
        long
        term debt of $55,575, and an accumulated deficit of $185,279.
 
 We
        believe that our current cash balance, in combination with net cash expected
        to
        be generated from operations and our unused line of credit of $5,000, will
        fund
        ongoing operations through the end of 2005. Our expected net cash from
        operations is predicated on achieving certain revenue levels and maintaining
        our
        cost of goods, operating expenses, and DSO ratio. Our expected results for
        2005
        assume the completion of the pending merger with Quinton in the third quarter
        of
        2005. If the proposed merger is not consummated, or is materially delayed
        for
        any reason, our expected revenues, operating expenses and net loss for 2005
        may
        be negatively impacted. Additionally, in the event the merger is not consummated
        in either the third or fourth quarter of 2005, we would need to seek additional
        funding through equity or debt financings to sustain our current level of
        operations.
 
 In
        addition, our line of credit and our Senior Notes require maintenance of
        certain
        financial covenants, of which we were in violation during 2004 and 2005.
        Even
        though we have obtained waivers and/or amendments for all covenant violations,
        if in the future, we fail to comply with these financial covenants as amended,
        we could be unable to use our line of credit or be in default under the Senior
        Notes. If we are in default, we may be subject to claims by the senior note
        holders seeking to enforce their security interest in our assets. Such claims,
        if they arise, may substantially restrict or even eliminate our ability to
        utilize our assets in conducting our business, and may cause us to incur
        substantial legal and administrative costs.
 
 In
        the
        event that we require additional funding, we will attempt to raise the required
        capital through either debt or equity arrangements. We cannot provide any
        assurance that the required capital would be available on acceptable terms,
        if
        at all, or that any financing activity would not be dilutive to our current
        shareholders. If we are not able to raise additional funds, we may be required
        to significantly curtail our operations and this would have an adverse effect
        on
        our financial position, results of operations and cash flows and as such,
        there
        may be substantial doubt about our ability to continue as a going concern.
 
 *Cash
        Flows*
 
 The
        following table presents the abbreviated cash flows for the six months ended
        June 30:
  **2005**
              
              **2004**Net
                  cash used in operating activities
              
              $
              (5,051
              )
              $
              (4,517
              )Net
                  cash used in investing activities
              
              
              (931
              )
              
              (333
              )Net
                  cash provided by (used in) financing activities
              
              
              (595
              )
              
              398Effect
                  of exchange rates on cash and cash equivalents
              
              
              —
              
              
              (8
              )Net
                  decrease in cash and cash equivalents
              
              
              (6,577
              )
              
              (4,460
              )Cash
                  and cash equivalents, beginning of year
              
              
              13,913
              
              
              8,871Cash
                  and cash equivalents, end of year
              
              $
              7,336
              
              $
              4,411
 
 21
  Cash
        used
        in operating activities for the six months ended June 30, 2005 increased
        by $534
        compared to the same period in 2004. This increase is primarily due to an
        increase in the operating loss, exclusive of the $47,269 goodwill impairment
        in
        the six months ended June 30, 2005, of $1,510, an increase in the change
        in
        inventories of $953, and an increase in the change in accounts payable and
        accrued expenses of $2,388, partially offset by an increase in the change
        of
        accounts receivable of $2,497 and a decrease in the change of prepaid expenses
        and other assets of $1,592.
 
 Cash
        used
        in investing activities for the six months ended June 30, 2005 increased
        by $598
        compared to the same period in 2004. This increase was primarily attributable
        to
        no proceeds from sales of assets in the six months ended June 30, 2005 compared
        to $672 of proceeds in the same period in 2004.
 
 Cash
        used
        in financing activities for the six months ended June 30, 2005 increased
        by $993
        compared to the cash provided by financing activities for the six months
        ended
        June 30, 2004. This increase was primarily due to the cash consideration
        paid
        for the filing delay of $556 during the six months ended June 30, 2005 and
        a
        decrease in proceeds from the exercise of stock options of $460 compared
        to the
        same period in 2004.
 
 **Off-Balance
        Sheet Arrangements**
 
 At
        June
        30, 2005, our Danish subsidiary has outstanding bank performance guarantees
        totaling 1,612 Danish Kroner (approximately $261 in U.S. dollars) that were
        issued in 1999 through 2002 in connection with sales contracts to foreign
        governments. These bank performance guarantees expire in 2005 and 2006, but
        are
        not officially released until the customer notifies the bank that renewal
        is not
        required. In addition, we have issued performance bonds for $157 collateralized
        by letters of credit issued by Silicon Valley Bank under our line of credit
        in
        connection with sales contracts. The performance bonds expire through November
        2007. We have no further performance obligations under these contracts other
        than providing normal warranty service on the products sold under the contracts.
 
 In
        addition, we have non-cancelable operating leases entered into in the ordinary
        course of business. For liquidity purposes, we choose to lease our facilities,
        automobiles, and certain equipment instead of purchasing them.
 
 **Contractual
        Obligations and Other Commercial Commitments**
 
 We
        had no
        material commitments for capital expenditures as of June 30, 2005.
 
 The
        following table presents our expected cash requirements for contractual
        obligations outstanding as of June 30, 2005:
  **Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1-3
                  Years**
              
              **4-5
                  Years**
              
              **After**
                **5
                  Years**Senior
                  Notes, including interest expense
              
              $
              75,553
              
              $
              —
              
              $
              75,553
              
              $
              —
              
              
              —Long-term
                  obligations
              
              
              31
              
              
              13
              
              
              18
              
              
              —
              
              
              —Operating
                  lease obligations
              
              
              4,789
              
              
              1,582
              
              
              2,954
              
              
              253
              
              
              —$
              80,373
              
              $
              1,595
              
              $
              78,525
              
              $
              253
              
              $
              —
 
 **Income
        Taxes**
 
 As
        of
        December 31, 2004, we have research and experimentation credit carry forwards
        for federal and state purposes of approximately $3,000 and $1,000, respectively.
        These credits begin to expire in 2006 for federal purposes and carry forward
        indefinitely for California state purposes. We have capital loss carry forwards
        of approximately $1,000 for both federal and state purposes which begin to
        expire in 2006 for federal purposes and carry forward indefinitely for state
        purposes. We also have approximately $139,000 and $69,000, respectively,
        of
        federal and state net operating loss carry forwards which will begin to expire
        in 2006 and 2005, respectively.
 
 Internal
        Revenue Code Sections 382 and 383, and similar state provisions place certain
        limitations on the annual amount of loss and credit carryforwards that can
        be
        utilized if certain changes to a company’s ownership occur. The acquisition of
        Survivalink in 2001 resulted in a change in ownership pursuant to Section
        382 of
        the Internal Revenue Code. The annual limitation is as follows: $8,300 for
        2005,
        $6,500 for 2006 and $1,800 thereafter. The amount of net operating loss subject
        to this limitation, for federal and state purposes, is approximately $53,000
        and
        $24,000, respectively. Research and experimentation credits and capital loss
        carryovers are also subject to the limitation under Internal Revenue Code
        Sections 382 and 383 and similar state provisions. The utilization of net
        operating loss carryovers and other tax attributes may be subject to further
        substantial limitations if certain ownership changes occur in future periods.
  22
 
 We
        recorded deferred tax assets of approximately $16,000 upon the acquisition
        of
        Survivalink in 2001. The deferred tax assets are composed primarily of loss
        and
        tax credit carryforwards and other temporary differences. The deferred tax
        assets recorded were reduced by a valuation allowance of $16,000. Due to
        the
        expiration of some of the net operating loss carryovers the balance is $13,000
        as of December 31, 2004. If we determine that we will realize the tax benefit
        related to these Survivalink deferred assets in the future, the related decrease
        in the valuation allowance will reduce goodwill instead of the provision
        for
        taxes.
 
 We
        also
        recorded deferred tax assets of approximately $8,000 upon the acquisition
        of
        Cadent in 2000. The deferred tax asset was composed primarily of loss
        carryforwards and other temporary differences. The deferred tax assets recorded
        were also reduced by a valuation allowance of $8,000. Due to the expiration
        of
        some of the net operating loss carryovers, the balance is $7,000 as of December
        31, 2004. If we determine that we will realize the tax benefit related to
        these
        Cadent deferred assets in the future, the related decrease in the valuation
        allowance will reduce goodwill instead of the provision for taxes.
 
 Additionally,
        approximately $1,600 of the net operating loss carryforward represents
        deductions claimed as the result of stock options. If we determine that we
        will
        realize the benefit of this net operating loss carryforward in the future,
        the
        related decrease in the valuation allowance will be credited to additional
        paid-in capital instead of the provision for taxes.
 
 At
        December 31, 2004, we had foreign net operating loss carryforwards. The losses
        carry over indefinitely, unless certain defined changes in business operations
        occur during the carryover period. We have established a full valuation
        allowance against these deferred tax assets since it cannot be established
        that
        these foreign subsidiaries’ net operating loss carryforwards will be fully
        utilized.
 
 **Critical
        Accounting Policies**
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amount of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amount of revenue and expenses for each
        period.
 
 The
        following represents a summary of our critical accounting policies, defined
        as
        those policies that we believe are: (a) the most important to the portrayal
        of
        our financial condition and results of operations, and (b) that require our
        most
        difficult, subjective or complex judgments, often as a result of the need
        to
        make estimates about the effects of matters that are inherently
        uncertain.
 
 ***Valuation
        of Accounts Receivable***
 
 We
        maintain an allowance for uncollectible accounts receivable to estimate the
        risk
        of extending credit to customers. The allowance is estimated based on customer
        compliance with credit terms, the financial condition of the customer, and
        collection history, where applicable. Additional allowances could be required
        if
        the financial condition of our customers were to be impaired beyond our
        estimates.
 
 ***Valuation
        of Inventory***
 
 Inventory
        is valued at the lower of cost (estimated using the first-in, first-out method)
        or market. We periodically evaluate the carrying value of inventories and
        maintain an allowance for obsolescence to adjust the carrying value, as
        necessary, to the lower of cost or market. The allowance is based on our
        assessment of future product demand, historical experience and technical
        obsolescence, as well as other factors affecting the recoverability of the
        asset
        through future sales. Unfavorable changes in estimates of obsolete inventory
        would result in an increase in the allowance and a decrease in gross
        profit.
  23
 ***Goodwill
        and Other Intangibles***
 
 In
        accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,” goodwill
        and other intangible assets with indefinite lives are no longer subject to
        amortization but are tested for impairment annually or whenever events or
        changes in circumstances indicate that the asset might be impaired. We operate
        in one operating segment and have one reporting unit; therefore, we test
        goodwill for impairment at the consolidated level against the fair value
        of the
        Company. Per SFAS No. 142, the fair value of a reporting unit refers to the
        amount at which the unit as a whole could be bought or sold in a current
        transaction between willing parties. Quoted market prices in active markets
        are
        the best evidence of fair value and shall be used as the basis on the last
        day
        of the year for the measurement, if available. We assess potential impairment
        on
        an annual basis on the last day of the year and compare our market
        capitalization to the book value of the Company including goodwill. A
        significant decrease in our stock price could indicate a material impairment
        of
        goodwill which, after further analysis, could result in a material charge
        to
        operations. If goodwill is considered impaired, the impairment loss to be
        recognized is measured by the amount by which the carrying amount of the
        goodwill exceeds the implied fair value of that goodwill. Inherent in our
        fair
        value determinations are certain judgments and estimates, including projections
        of future cash flows, the discount rate reflecting the risk inherent in future
        cash flows, the interpretation of current economic indicators and market
        valuations and strategic plans with regard to operations. A change in these
        underlying assumptions would cause a change in the results of the tests,
        which
        could cause the fair value of the reporting unit to be less than its respective
        carrying amount. In addition, to the extent that there are significant changes
        in market conditions or overall economic conditions or strategic plans change,
        it is possible that future goodwill impairments could result, which could
        have a
        material impact on the financial position and results of
        operations.
 
 See
        Note
        3 of the Consolidated Condensed Notes to Financial Statements for results
        of
        recent impairment tests.
 
 Other
        intangible assets with finite lives continue to be subject to amortization,
        and
        any impairment is determined in accordance with SFAS No. 144 “Accounting for the
        Impairment or Disposal of Long-Lived Assets.
 
 ***Valuation
        of Long-Lived Assets***
 
 In
        accordance with SFAS No. 144, long-lived assets and intangible assets with
        determinate lives are reviewed for impairment whenever events or changes
        in
        circumstances indicate that the carrying amount of an asset may not be
        recoverable. We evaluate potential impairment by comparing the carrying amount
        of the asset with the estimated undiscounted future cash flows associated
        with
        the use of the asset and its eventual disposition. Should the review indicate
        that the asset is not recoverable, our carrying value of the asset would
        be
        reduced to its estimated fair value, which is generally measured by future
        discounted cash flows. In our estimate, no provision for impairment is currently
        required on any of our long-lived assets.
 
 ***Valuation
        of Warrants***
 
 We
        periodically issue warrants in connection with debt issuances and in exchange
        for goods and services. We follow the guidance of APB No. 14 “Accounting for
        Convertible Debt and Debt Issued with Stock Purchase Warrants” for warrants we
        issue in connection with debt. We follow the guidance in EITF No. 96-18
“Accounting for Equity Instruments That are Issued to Other Than Employees
        for
        Acquiring, or in Conjunction with Selling, Goods or Services” and EITF No. 01-9
“Accounting for Consideration Given by a Vendor to a Customer (Including a
        Reseller of the Vendor’s Products)” for warrants we issue in exchange for or in
        connection with goods and services. Management considers a number of factors,
        including independent valuations, when determining the fair value of warrants
        issued. We estimate the fair value of warrants issued using the Black-Scholes
        model. Of the various assumptions considered by the Black-Scholes model,
        the
        volatility and the risk free rate used require us to make certain assumptions
        and estimations. We estimate volatility using a statistical method based
        on the
        historical stock price for the historical period equal to the expected life
        of
        the warrant being valued. The risk free interest rate is determined using
        the
        treasury note rate for the number of years corresponding to the expected
        life of
        the warrant being valued. Potentially, the value of warrants could be materially
        different if different assumptions were used and under different markets
        conditions.
 
 ***Revenue
        Recognition***
 
 We
        record
        revenue in accordance with SEC SAB No. 104 “Revenue Recognition in Financial
        Statements .” SAB No. 104 requires that product sales be recognized when there
        is persuasive evidence of an arrangement which states a fixed and determinable
        price and terms, delivery of the product has occurred in accordance with
        the
        terms of the sale, and collectibility of the sale is reasonably assured.
        We
        record product sales when we have received a valid customer purchase order
        for
        product at a stated price, the customer’s credit is approved, and we have
        shipped the product to the customer whereby title and risk have passed to
        the
        customer.
 
 We
        are
        not contractually obligated to repurchase any inventory from distributors
        or end
        user customers. Some of our customers are distributors that sell goods to
        third
        party end users. For certain identified distributors where collection may
        be
        contingent on the distributor’s resale, revenue recognition is deferred and
        recognized on a “sell through” basis. The determination of whether sales to
        distributors are contingent on resale is subjective because we must assess
        the
        financial wherewithal of the distributor to pay us regardless of resale.
        For
        sales to distributors, we consider several factors, including past payment
        history, where available, trade references, bank account balances, Dun &
        Bradstreet reports and any other financial information provided by the
        distributor, in assessing whether the distributor has the financial wherewithal
        to pay regardless of, or prior to, resale of the product and that collection
        of
        the receivable is not contingent on resale.
 
 We
        offer
        limited volume price discounts and rebates to certain customers. Volume price
        discounts are on a per order basis based on the size of the order and are
        netted
        against the revenue recorded at the time of shipment. We have no arrangements
        that provide for volume discounts at a later date, such as based on meeting
        certain quarterly or annual purchase levels. Rebates are paid quarterly or
        annually based on sales performance and are accrued for at the end of a
        reporting period. To date, all rebate arrangements have been immaterial.
  24
 
 We
        follow
        the guidance of EITF No. 00-21 “Accounting for Revenue Arrangements with
        Multiple Deliverables.” ** In
        accordance with this EITF, we consider our program management packages and
        training and other services as separate units of accounting when sold with
        an
        AED based on the fact that the items have value to the customer on a stand
        alone
        basis and could be acquired from another vendor. Training and AED program
        management service revenue is deferred and recognized at the time the training
        occurs. AED program management services pursuant to agreements that existed
        with
        Complient customers pursuant to annual or multi-year terms are deferred and
        amortized straight-line over the related contract period.
 
 Upfront
        license fees are deferred and recognized to revenue using the straight-line
        method over the term of the related license agreement. Royalty revenue is
        due
        and payable quarterly (generally 60 days after period end) pursuant to the
        related license agreements. An estimate of royalty revenue is recorded quarterly
        in the period it is earned based on the prior quarter’s historical results
        adjusted for any new information or trends known to management at the time
        of
        estimation.
 
 ***Product
        Warranty***
 
 Products
        sold are generally covered by a warranty against defects in material and
        workmanship for a period of one to seven years. We accrue a warranty reserve
        to
        estimate the risk of incurring costs to provide warranty services. The accrual
        is based on our historical experience and our expectation of future conditions.
        An increase in warranty claims or in the costs associated with servicing
        those
        claims would result in an increase in the accrual and a decrease in gross
        profit.
 
 ***Litigation
        and Others Contingencies***
 
 We
        regularly evaluate our exposure to threatened or pending litigation and other
        business contingencies. Because of the uncertainties related to the amount
        of
        loss from litigation and other business contingencies, the recording of losses
        relating to such exposures requires significant judgment about the potential
        range of outcomes. We are not presently affected by any litigation or other
        contingencies that have had, or are currently anticipated to have, a material
        impact on our results of operations or financial position. As additional
        information about current or future litigation or other contingencies becomes
        available, we will assess whether such information warrants the recording
        of
        additional expense relating to these contingencies. To be recorded as expense,
        a
        loss contingency must generally be both probable and measurable. If a loss
        contingency is material but is not both probable and estimable, we will disclose
        it in notes to the financial statements.
 
 ***New
        Accounting Standards***
 
 In
        November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an Amendment of
        ARB No. 43, Chapter 4, ‘Inventory Pricing,’” to clarify the accounting for
        abnormal amounts of idle facility expense, freight, handling costs and wasted
        material. This statement requires those items be recognized as current-period
        charges. The provisions of this statement shall be effective for inventory
        costs
        incurred during fiscal years beginning after June 15, 2005. We do not expect
        adoption of this statement to have a material impact on our financial
        statements.
 
 In
        December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment”
        or SFAS No. 123R. SFAS No. 123R revises SFAS No. 123
“Accounting
        for Stock-Based Compensation” and supersedes APB No. 25 “Accounting for
        Stock Issued to Employees” and related interpretations and SFAS No. 148
“Accounting for Stock-Based Compensation-Transition and Disclosure.”
        SFAS No. 123R requires compensation cost relating to all share-based
        payments to employees to be recognized in the financial statements based
        on
        their fair values. In April 2005, the SEC delayed the effective date of SFAS
        No.
        123R to annual, rather than interim, reporting periods beginning after
        June 15, 2005. The pro forma disclosures previously permitted under
        SFAS No. 123 will no longer be an alternative to financial statement
        recognition. We are evaluating the requirements of SFAS No. 123R and
        expect
        that the adoption of SFAS No. 123R will have a material impact on
        our
        consolidated financial position or results of operation. We have not determined
        the method of adoption or determined whether the adoption will result in
        amounts
        recognized in the income statement that are similar to the current pro forma
        disclosures under SFAS No. 123.
 
 In
        December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets --
        an amendment of APB Opinion No. 29 ‘Accounting for Non-monetary Transactions.’”
        The guidance in APB No. 29 is based on the principle that exchanges of
        non-monetary assets should be measured based on the fair value of the assets
        exchanged. The guidance in that Opinion, however, included certain exceptions
        to
        that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception
        for
        non-monetary exchanges of similar productive assets and replaces it with
        a
        general exception for exchanges of non-monetary assets that do not have
        commercial substance. A non-monetary exchange has commercial substance if
        the
        future cash flows of the entity are expected to change significantly as a
        result
        of the exchange. The provisions of SFAS No. 153 are applicable for non-monetary
        asset exchanges occurring in fiscal years beginning after June 15, 2005.
        We do
        not expect adoption of this statement to have a material impact on our financial
        statements.
  25
 
 In
        December 2004, the FASB issued FSP No. 109-2 “Accounting and Disclosure Guidance
        for the Foreign Earnings Repatriation Provision within the American Jobs
        Creation Act of 2004.” FSP No. 109-2 provides enterprises more time (beyond the
        financial-reporting period during which the American Jobs Creation Act took
        effect) to evaluate the impact on the enterprise's plan for reinvestment
        or
        repatriation of certain foreign earnings for purposes of applying SFAS No.
        109.
        The FSP, issued on December 21, 2004, went into effect upon being issued.
        We are
        not yet in a position to decide on whether, and to what extent, it might
        repatriate foreign earnings that have not yet been remitted to the U.S. We
        expect to conclude our analysis of this repatriation incentive during
        2005.
 
 In
        March
        2005, the SEC released SAB No. 107 “Share-Based Payment” which provides
        interpretive guidance related to the interaction between SFAS No. 123R and
        certain SEC rules and regulations, as well as provides the SEC staff’s views
        regarding the valuation of share-based payment arrangements for public
        companies. SAB No. 107 does not change the accounting required by SFAS No.
        123R.
 
 In
        May
        2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections - a
        replacement of APB Opinion No. 20 and FASB No. 3.” SFAS No. 154 requires that
        all voluntary changes in accounting principles are retrospectively applied
        to
        prior financial statements as if that principle had always been used, unless
        it
        is impracticable to do so. When it is impracticable to calculate the effects
        on
        all prior periods, SFAS No. 154 requires that the new principle be applied
        to
        the earliest period practicable. SFAS No. 154 also provides that a change
        in
        method of depreciating or amortizing a long-lived non-financial asset be
        accounted for as a change in estimate effected by a change in accounting
        principle, and also provides that correction of errors in previously issued
        financial statements should be termed a “restatement.” SFAS No. 154 is effective
        for accounting changes and error corrections occurring in fiscal years beginning
        after December 15, 2005. We do not expect adoption of this statement to have
        a
        material impact on our financial statements.
  26
 
 **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 *Interest
        Rate and Market Risk* .
 
 We
        do not
        use derivative financial instruments in our investment portfolio. We are
        averse
        to principal loss and try to ensure the safety and preservation of our invested
        funds by limiting default risk, market risk, and reinvestment risk. We attempt
        to mitigate default risk by investing in only the safest and highest credit
        quality securities. At June 30, 2005, we invested our available cash in money
        market securities of high credit quality financial institutions.
 
 Interest
        expense on our existing long-term debt commitments is based on a fixed interest
        rate and therefore it is unaffected by fluctuations in interest rates. However,
        our line of credit with our bank bears interest at our bank’s prime rate plus
        .75% and if we ever draw down upon the line of credit, the outstanding balance
        could be affected by fluctuations in interest rates.
 
 *Foreign
        Currency Exchange Rate Risk.*
 
 The
        majority of our international sales are made in U.S. dollars; however, some
        sales to the U.K. are made in pounds and to other parts of Europe in Euros,
        and
        thus may be adversely affected by fluctuations in currency exchange rates.
        Additionally, fluctuations in currency exchange rates may adversely affect
        foreign demand for our products by increasing the price of our products in
        the
        currency of the countries in which the products are sold. The majority of
        inventory purchases, both components and finished goods, in our foreign
        operations are made in U.S. dollars. The functional currency of our foreign
        operations in Denmark and the U.K. is the U.S. dollar and therefore, the
        financial statements of these operations are maintained in U.S. dollars.
        Any
        assets and liabilities in foreign currencies, such as bank accounts and certain
        payables and receivables, are re-measured in U.S. dollars at period-end exchange
        rates in effect. Any transactions in foreign currencies, such as wages paid
        in
        local currencies, are re-measured in U.S. dollars using an average monthly
        exchange rate. Any resulting gains and losses are included in operations.
 
 The
        functional currency of our Swedish holding company is the local currency.
        Thus,
        assets and liabilities are translated into U.S. dollars at period-end exchange
        rates then in effect. Translation adjustments are included in accumulated
        other
        comprehensive income in stockholders’ equity. Gains and losses on foreign
        currency transactions are included in operations and were not material in
        any
        period.
 
 Our
        Danish subsidiary has outstanding performance bonds totaling approximately
        1,612,000 Danish Kroner (approximately $261,000 U.S. dollars) at June 30,
        2005.
        Fluctuations in currency could increase the U.S. dollar value exposure under
        these guarantees.
 
 **Item
        4. Controls and Procedures**
 
 Our
        management, including the Chief Executive Officer, Chief Financial Officer
        and
        Vice President of Finance, conducted an evaluation as of the end of the period
        covered by this quarterly report of the effectiveness of our disclosure controls
        and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
        Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that
        evaluation, our management concluded that the disclosure controls and
        procedures, as of the end of the period covered by this report, were effective
        in ensuring that all material information required to be disclosed in the
        reports we file and submit under the Exchange Act have been made known to
        them
        on a timely basis and that such information has been properly recorded,
        processed, summarized and reported, as required.
 
 There
        have been no significant changes in our internal control over financial
        reporting during the most recent fiscal quarter ended June 30, 2005 that
        materially affected, or are reasonably likely to materially affect, our internal
        control over financial reporting.
 
 Our
        management does not expect that our disclosure controls and procedures or
        our
        internal control over financial reporting will prevent all errors and all
        fraud.
        A control system, no matter how well conceived and operated, can provide
        only
        reasonable, not absolute, assurance that the objectives of the control system
        are met. Further, the design of a control system must reflect the fact that
        there are resource constraints, and the benefits of controls must be considered
        relative to their costs. Because of the inherent limitations in all control
        systems, no evaluation of controls can provide absolute assurance that all
        control issues and instances of fraud, if any, within our company have been
        detected.
  27
   **PART
        II. OTHER INFORMATION**
 
 **Item
                  1.**
              **Legal
                  Proceedings**
 
 On
        April
        30, 2003, we filed a
        Complaint against Defibtech, LLC for patent infringement in the United States
        District Court for the District of Minnesota. The Complaint alleged that
        Defibtech’s Sentry and Reviver AEDs infringe our patented
        disposable electrode pre-connect technology as well as other patents. Defibtech
        answered the Complaint and asserted counterclaims alleging that we
        have engaged
        in activities that constitute tortious interference with present and prospective
        contractual relations, common law business disparagement and statutory business
        disparagement. We responded to the counterclaims with a complete and general denial of the
        allegations. On August 8, 2005, we
        executed a settlement agreement with Defibtech, LLC. Our
        allegations of infringement by Defibtech of United States Patent No.’s
        5,579,919, 5,700,281 and 6,038,473 and all of Defibtech’s assorted counterclaims
        have been fully resolved. Other terms and conditions of the settlement remain
        confidential. As a condition of settlement, we will receive a cash payment
        in
        the amount of $925,000.
  In
        March
        2005, six complaints were filed in the Chancery Court of Delaware concerning
        our
        merger agreement with Quinton and the transaction contemplated thereby. These
        six actions were later consolidated into what we refer to as the consolidated
        action. On May 17, 2005, an amended complaint was filed in the consolidated
        action. The six original complaints were:
  ·  *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.
   In
        March
        2005, the following complaints, which we refer to as the California actions,
        were filed in the Superior Court of Orange County, California:
  ·  *Albert
        Rosenfeld v. Cardiac Science, Inc.* ,
        et al.
        Case No. 05CC00057; and
  ·  *Jerrold
        Schaffer v. Cardiac Science, Inc.* ,
        et al.,
        Case No. 05CC00059.
  On
        April
        1, 2005, a complaint was filed in the Chancery Court of Delaware, *Oppenheim
        Pramerica Asset Management v. Cardiac Science, Inc. et al.* ,
        Case
        No. 1222-N, which we refer to as the Oppeheim action. The Oppenheim action
        has
        not been consolidated with the consolidated action. On May 10, 2005, an amended
        complaint was filed by the plaintiffs in the Oppenheim action.
  Generally,
        the complaints allege that our board of directors breached its fiduciary
        obligations with respect to the proposed merger transaction with Quinton
        because
        the board of directors did not negotiate sufficient compensation for our
        shareholders and because the board of directors engaged in self-dealing in
        connection with our senior note holders. The amended complaints filed in
        Delaware also allege that the preliminary joint proxy statement/prospectus
        filed
        with the Securities and Exchange Commission in connection with the merger
        transaction did not adequately disclose material information about the
        transaction. The complaints seek, among other things, injunctive relief
        enjoining the transaction, recessionary damages if the transaction is completed
        and an order that our board of directors hold an auction to obtain the best
        value for our shareholders.
  In
        June
        2005, pursuant to an agreement of the parties to these actions, plaintiffs’
        counsel withdrew their motion for preliminary injunction and, on June 24,
        2005,
        counsel for the parties in the consolidated action and the Oppenheim action
        executed a memorandum of understanding. As a result, plaintiffs’ counsel agreed
        to dismiss all disclosure related claims with prejudice and to release all
        parties associated with the transaction in connection with such claims in
        exchange for our agreement to include certain additional disclosures in the
        joint proxy statement/prospectus. Plaintiffs’ counsel in the consolidated action
        also agreed to dismiss the remainder of their complaint without prejudice.
        Plaintiffs in the Delaware actions intend to apply to the Chancery Court
        of
        Delaware for attorneys’ fees. The agreement with plaintiffs’ counsel in the
        Delaware actions is subject to final approval by the Chancery Court of Delaware.
        We expect that certain of the costs and fees associated with these claims
        will
        be eligible for reimbursement under our insurance policies.
  28
   While
        the
        Oppenheim action (other than the disclosure claims) and the California actions
        have not been dismissed, currently no motion to preliminarily enjoin the
        transaction is pending and we believe that no pending action is likely to
        prevent completion of the transaction.
  Plaintiffs
        in the consolidated, California or Oppenheim actions may seek other remedies
        for
        their purported claims, including damages. We will vigorously contest any
        such
        claim for damages or other remedies.
  **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds**
 
 None
 
 **Item
        3.**  **Defaults
        Upon Senior Securities**
 
 None
 
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders**
 
 None
 
 **Item
        5.**  **Other
        Information**
 
 None
  29
  **Item
        6.****Exhibits**
  The
        following exhibits are filed herewith:
  Exhibit
                10.1
              Amendment,
                  dated June 10, 2005, to the OEM Purchase Agreement dated July 29,
                  2003, as
                  amended, with GE Medical Systems Information Technologies,
                  Inc.
  Exhibit
                10.2
              Amendment,
                  dated June 10, 2005, to the OEM Purchase and Supply Agreement dated
                  July
                  29, 2003, as amended, with GE Medical Systems Information Technologies,
                  Inc. *
  Exhibit
                10.3
              Exclusive
                  Distribution Agreement for United States and Canadian Hospitals
                  dated June
                  13, 2005, with GE Medical Systems Information Technologies, Inc.
                  *
  Exhibit
                31.1
              Chief
                  Executive Officer’s Certification pursuant to Rule 13a-14(a)/15d-14(a) of
                  the Securities Exchange Act of1934.
  Exhibit
                31.2
              Chief
                  Financial Officer’s Certification pursuant to Rule 13a-14(a)/15d-14(a) of
                  the Securities Exchange Act of
                  1934.
  Exhibit
                32.1
              Chief
                  Executive Officer’s Certification pursuant to Rule 13a-14(b)/15d-14(b) of
                  the Securities Exchange Act of1934
                  and 18 U.S.C. Section 1350.
  Exhibit
                32.2
              Chief
                  Financial Officer’s Certification pursuant to Rule 13a-14(b)/15d-14(b) of
                  the Securities Exchange Act of 1934and
                  18 U.S.C. Section 1350.
  *
        Portions of this exhibit are omitted and were filed separately with the
        Secretary of the Commission pursuant to Cardiac Science’s application requesting
        confidential treatment under Rule 24b-2 of the Securities Exchange Act of
        1934.
  30
 
 **Signatures**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  CARDIAC
                SCIENCE, INC.
                (Registrant)Date:
                  August 9, 2005
              By:
              /s/
                RODERICK DE GREEF**Roderick
                  de Greef****(Duly
                  Authorized Officer and Principal Financial
                  Officer)**
  31