##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)



|  |  |                                                                                  
|- |  | ---------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  | 
|  |  | For the quarterly period ended March 31, 2004                                    
|  | 
|  |  | OR                                                                               
|  | 
| ̈ |  | TRANSITION REPORT UNDER 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, California, 92614

(Address of principal executive offices)



Registrants telephone number, including area code: (949) 797-3800



Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈



Indicate by check mark if the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).    Yes  x    No ̈



The number of shares of the Common Stock of the registrant
outstanding as of May 6, 2004 was 80,697,247.



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##### Table of Contents

INDEX TO FORM 10-Q



PART I.
FINANCIAL INFORMATION



|                           |  |                                                                                                            |  |         
|-------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | --------
|                           |  |                                                                                                            |  | Page No.
|                           |  |                                                                                                           
|Item 1.                    |  | Unaudited Financial Statements:                                                                            |  |         
|                           |  |                                                                                                           
|                           |  | Consolidated Condensed Balance Sheets as of March 31, 2004 and December 31, 2003                           |  | 3       
|                           |  |                                                                                                           
|                           |  | Consolidated Condensed Statements of Operations for the three months ended March 31, 2004 and 2003         |  | 4       
|                           |  |                                                                                                           
|                           |  | Consolidated Condensed Statements of Comprehensive Loss for the three months ended March 31, 2004 and 2003 |  | 5       
|                           |  |                                                                                                           
|                           |  | Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2004 and 2003         |  | 6       
|                           |  |                                                                                                           
|                           |  | Notes to Consolidated Condensed Financial Statements                                                       |  | 7       
|                           |  |                                                                                                           
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 13      
|                           |  |                                                                                                           
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 18      
|                           |  |                                                                                                           
|Item 4.                    |  | Controls and Procedures                                                                                    |  | 18      
|                          
|PART II. OTHER INFORMATION
|                           |  |                                                                                                           
|Item 1.                    |  | Legal Proceedings                                                                                          |  | 19      
|                           |  |                                                                                                           
|Item 2.                    |  | Not applicable                                                                                             |  |         
|                           |  |                                                                                                           
|Item 3.                    |  | Not applicable                                                                                             |  |         
|                           |  |                                                                                                           
|Item 4.                    |  | Not applicable                                                                                             |  |         
|                           |  |                                                                                                           
|Item 5.                    |  | Other Information                                                                                          |  | 19      
|                           |  |                                                                                                           
|Item 6.                    |  | Exhibits and Reports on Form 8-K                                                                           |  | 19      
|                           | 
|Signatures                 |  | 20                                                                                                        



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



CARDIAC SCIENCE, INC.



CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)



|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                           |  | March 31,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                  |  | $             | 6,641    |   |                  | $ | 8,871    |  
|Accounts receivable, net of allowance for doubtful accounts of $1,852 at March 31, 2004 and $1,626 at December 31, 2003                                                    |  |               | 16,940   |   |                  |   | 20,410   |  
|Inventories                                                                                                                                                                |  |               | 10,895   |   |                  |   | 9,575    |  
|Prepaid expenses and other current assets                                                                                                                                  |  |               | 2,880    |   |                  |   | 2,154    |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                       |  |               | 37,356   |   |                  |   | 41,010   |  
|Property and equipment, net                                                                                                                                                |  |               | 6,368    |   |                  |   | 7,003    |  
|Goodwill, net                                                                                                                                                              |  |               | 140,352  |   |                  |   | 139,859  |  
|Intangible assets, net                                                                                                                                                     |  |               | 11,139   |   |                  |   | 11,626   |  
|Other assets                                                                                                                                                               |  |               | 3,512    |   |                  |   | 3,503    |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                               |  | $             | 198,727  |   |                  | $ | 203,001  |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                           |  | $             | 8,712    |   |                  | $ | 8,955    |  
|Accrued expenses                                                                                                                                                           |  |               | 5,556    |   |                  |   | 6,542    |  
|Deferred revenue                                                                                                                                                           |  |               | 2,696    |   |                  |   | 2,479    |  
|Current portion of long term obligations                                                                                                                                   |  |               | 37       |   |                  |   | 53       |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                  |  |               | 17,001   |   |                  |   | 18,029   |  
|Senior secured promissory notes                                                                                                                                            |  |               | 46,595   |   |                  |   | 46,481   |  
|Deferred revenue                                                                                                                                                           |  |               | 819      |   |                  |   | 859      |  
|Other long term obligations                                                                                                                                                |  |               | 35       |   |                  |   | 41       |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                          |  |               | 64,450   |   |                  |   | 65,410   |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Commitments and contingencies                                                                                                                                              |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Common stock$.001 par value; 160,000,000 shares authorized, 80,587,744 and 80,465,585 shares issued and outstanding at March 31, 2004
and December 31, 2003, respectively |  |               | 81       |   |                  |   | 80       |  
|Additional paid-in capital                                                                                                                                                 |  |               | 244,744  |   |                  |   | 243,219  |  
|Accumulated other comprehensive income (loss)                                                                                                                              |  |               | (28      | ) |                  |   | (20      | )
|Accumulated deficit                                                                                                                                                        |  |               | (110,520 | ) |                  |   | (105,688 | )
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                 |  |               | 134,277  |   |                  |   | 137,591  |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $             | 198,727  |   |                  | $ | 203,001  |  
|                                                                                                                                                                           |  |               |          |   |                  |   |          |  



The accompanying notes
are an integral part of these unaudited financial statements.





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CARDIAC SCIENCE, INC.



CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)



|                                                                                |  |                    |            |   |                |   |            |  
|------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | -------------- | - | ---------- | -
|                                                                                |  | Three Months Ended |           
|                                                                                |  | March 31, 2004     |            |   | March 31, 2003 |  
|Net revenue                                                                     |  | $                  | 15,604     |   |                | $ | 14,024     |  
|Cost of goods sold                                                              |  |                    | 6,508      |   |                |   | 6,089      |  
|                                                                                |  |                    |            |   |                |   |            |  
|Gross profit                                                                    |  |                    | 9,096      |   |                |   | 7,935      |  
|                                                                                |  |                    |            |   |                |   |            |  
|Operating expenses:                                                             |  |                    |            |   |                |   |            |  
|Sales and marketing                                                             |  |                    | 6,003      |   |                |   | 4,417      |  
|Research and development                                                        |  |                    | 1,669      |   |                |   | 1,102      |  
|General and administrative                                                      |  |                    | 4,166      |   |                |   | 3,207      |  
|Amortization of intangible assets                                               |  |                    | 503        |   |                |   | 449        |  
|                                                                                |  |                    |            |   |                |   |            |  
|Total operating expenses                                                        |  |                    | 12,341     |   |                |   | 9,175      |  
|                                                                                |  |                    |            |   |                |   |            |  
|Loss from operations                                                            |  |                    | (3,245     | ) |                |   | (1,240     | )
|Interest and other income (expense), net                                        |  |                    | (1,587     | ) |                |   | (1,401     | )
|                                                                                |  |                    |            |   |                |   |            |  
|Loss before minority interest                                                   |  |                    | (4,832     | ) |                |   | (2,641     | )
|Minority interest in consolidated subsidiary                                    |  |                    |           |   |                |   | (48        | )
|                                                                                |  |                    |            |   |                |   |            |  
|Loss from continuing operations                                                 |  |                    | (4,832     | ) |                |   | (2,689     | )
|Income from discontinued operations                                             |  |                    |           |   |                |   | 107        |  
|                                                                                |  |                    |            |   |                |   |            |  
|Net loss                                                                        |  | $                  | (4,832     | ) |                | $ | (2,582     | )
|                                                                                |  |                    |            |   |                |   |            |  
|Net loss per share (basic and diluted)                                          |  | $                  | (0.06      | ) |                | $ | (0.04      | )
|                                                                                |  |                    |            |   |                |   |            |  
|Weighted average number of shares used in the computation of net loss per share |  |                    | 80,532,811 |   |                |   | 66,932,228 |  
|                                                                                |  |                    |            |   |                |   |            |  



The accompanying notes
are an integral part of these unaudited financial statements.



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CARDIAC SCIENCE, INC.



CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)



|                                         |  |                    |        |   |                |   |        |  
|---------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                         |  | Three Months Ended |       
|                                         |  | March 31, 2004     |        |   | March 31, 2003 |  
|Net loss                                 |  | $                  | (4,832 | ) |                | $ | (2,582 | )
|Other comprehensive income (loss):       |  |                    |        |   |                |   |        |  
|Foreign currency translation adjustments |  |                    | (8     | ) |                |   | 120    |  
|                                         |  |                    |        |   |                |   |        |  
|Comprehensive loss                       |  | $                  | (4,840 | ) |                | $ | (2,462 | )
|                                         |  |                    |        |   |                |   |        |  



The accompanying notes
are an integral part of these unaudited financial statements.



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CARDIAC SCIENCE, INC.



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands, except share and per share data)



|                                                                              |  |                    |        |   |               |   |        |  
|----------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------- | - | ------ | -
|                                                                              |  | Three Months Ended |       
|                                                                              |  | March 31,2004      |        |   | March 31,2003 |  
|Cash flows from operating activities:                                         |  |                    |        |   |               |   |        |  
|Net loss                                                                      |  | $                  | (4,832 | ) |               | $ | (2,582 | )
|Adjustments to reconcile net loss to net cash used in operating activities:   |  |                    |        |   |               |   |        |  
|Depreciation                                                                  |  |                    | 639    |   |               |   | 756    |  
|Amortization of intangible assets                                             |  |                    | 503    |   |               |   | 449    |  
|Minority interest                                                             |  |                    |       |   |               |   | 48     |  
|Provision for doubtful accounts                                               |  |                    | 239    |   |               |   | 76     |  
|Corporate relocation and restructuring costs, net of accelerated depreciation |  |                    |        |   |               |   | 292    |  
|Accrued interest and amortization of debt discount/issuance costs             |  |                    | 1,612  |   |               |   | 1,431  |  
|Changes in operating assets and liabilities:                                  |  |                    |        |   |               |   |        |  
|Accounts receivable                                                           |  |                    | 2,995  |   |               |   | (906   | )
|Inventories                                                                   |  |                    | (1,320 | ) |               |   | 202    |  
|Placement of Powerheart CRMs at customer locations                            |  |                    |       |   |               |   | (447   | )
|Prepaid expenses and other assets                                             |  |                    | (638   | ) |               |   | 275    |  
|Deferred revenue                                                              |  |                    | 177    |   |               |   | (55    | )
|Accounts payable and accrued expenses                                         |  |                    | (1,229 | ) |               |   | (1,931 | )
|Assets and liabilities held-for-sale                                          |  |                    |       |   |               |   | (1,451 | )
|                                                                              |  |                    |        |   |               |   |        |  
|Net cash used in operating activities                                         |  |                    | (1,854 | ) |               |   | (3,843 | )
|                                                                              |  |                    |        |   |               |   |        |  
|Cash flows from investing activities:                                         |  |                    |        |   |               |   |        |  
|Purchase of property and equipment                                            |  |                    | (447   | ) |               |   | (325   | )
|Funds in escrow to buy minority interest                                      |  |                    |       |   |               |   | (1,299 | )
|Proceeds from sale of assets at subsidiary, net of costs                      |  |                    |       |   |               |   | 767    |  
|Acquisition costs paid                                                        |  |                    | (50    | ) |               |   |       |  
|Purchase of intangible assets                                                 |  |                    | (16    | ) |               |   |       |  
|                                                                              |  |                    |        |   |               |   |        |  
|Net cash used in investing activities                                         |  |                    | (513   | ) |               |   | (857   | )
|                                                                              |  |                    |        |   |               |   |        |  
|Cash flows from financing activities:                                         |  |                    |        |   |               |   |        |  
|Payments on long term obligations                                             |  |                    | (22    | ) |               |   | (60    | )
|Proceeds from exercise of common stock options and warrants                   |  |                    | 195    |   |               |   | 137    |  
|Costs of equity issuances                                                     |  |                    | (28    | ) |               |   |       |  
|                                                                              |  |                    |        |   |               |   |        |  
|Net cash provided by financing activities                                     |  |                    | 145    |   |               |   | 77     |  
|                                                                              |  |                    |        |   |               |   |        |  
|Effect of exchange rates on cash and cash equivalents                         |  |                    | (8     | ) |               |   | 136    |  
|                                                                              |  |                    |        |   |               |   |        |  
|Net decrease in cash and cash equivalents                                     |  |                    | (2,230 | ) |               |   | (4,487 | )
|Cash and cash equivalents at beginning of period                              |  |                    | 8,871  |   |               |   | 15,598 |  
|                                                                              |  |                    |        |   |               |   |        |  
|Cash and cash equivalents at end of period                                    |  | $                  | 6,641  |   |               | $ | 11,111 |  
|                                                                              |  |                    |        |   |               |   |        |  



The accompanying notes
are an integral part of these unaudited financial statements.



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CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS

(In thousands, except share and per share data)



1. Organization and Description of the Business



Cardiac Science, Inc. (the Company) was incorporated in May 1991
and develops, manufactures and markets portable automated public access defibrillators and a fully-automatic in-hospital bedside defibrillator-monitor that continuously monitors cardiac patients, instantly detects the onset of life-threatening
abnormal heart rhythms, and, when appropriate, delivers defibrillation shocks within seconds and without human intervention to convert the heart back to its normal rhythm. 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 electrode technology to create the only fully automatic in-hospital cardioverter defibrillator (the Powerheart® CRM® or CRM) and a unique semi-automatic, or automated defibrillator, (the Powerheart AED or
G3 AED) for use in out-of-hospital settings. The Companys Powerheart® Cardiac Rhythm Module and Powerheart®
brand AEDs are marketed by its direct sales force and distribution network 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, 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, a privately held company, for 10,250,000 shares of the Companys common stock.



2. Continued Existence



Based on achieving its internal revenue growth targets, the Company believes its current cash balances, combined with net cash that it expects to generate
from operations, the sale of two product lines, and continued access to its unused line of credit of $5,000, will sustain its ongoing operations for the next twelve months. In the event that the Company requires additional cash to support its
operations during the next twelve months or thereafter, it will attempt to raise the required capital through either debt or equity arrangements. The Company cannot provide any assurance that the required capital will be available on acceptable
terms, if at all, or that any financing activity will not be dilutive to current stockholders of the Company. 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.



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 presentation of its
financial position at March 31, 2004 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 2003 Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2004 are not necessarily indicative of results for the full year.



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Inventories



Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following as of:



|                |  |                |        |                   |   |      
|--------------- |  | -------------- | ------ | ----------------- | - | -----
|                |  | March 31, 2004 |        | December 31, 2003
|Raw materials   |  | $              | 3,572  |                   | $ | 3,728
|Work in process |  |                | 94     |                   |   | 157  
|Finished goods  |  |                | 7,229  |                   |   | 5,690
|                |  |                |        |                   |   |      
|                |  | $              | 10,895 |                   | $ | 9,575
|                |  |                |        |                   |   |      



Goodwill and
Intangibles



In accordance with Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, which became effective January 1, 2002, goodwill and other intangible assets with indeterminate 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. Other intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Estimated future intangible asset amortization expense for the years ending December 31, 2004, 2005, 2006, 2007 and 2008 is $2,029, $2,029, $1,982, $1,744, and $1,697,
respectively.



Goodwill and other intangible assets consist of
the following as of:



|                                           |  |                |         |                          |   |        |     |  |      |         |                          |   |         |     |   |        |   |  |   |        
|------------------------------------------ |  | -------------- | ------- | ------------------------ | - | ------ | --- |  | ---- | ------- | ------------------------ | - | ------- | --- | - | ------ | - |  | - | -------
|                                           |  | March 31, 2004 |         | December 31, 2003       
|                                           |  | Cost           |         | Accumulated Amortization |   |        | Net |  | Cost |         | Accumulated Amortization |   |         | Net
|Goodwill                                   |  | $              | 140,352 |                          | $ |       |     |  | $    | 140,352 |                          | $ | 139,859 |     | $ |       |   |  | $ | 139,859
|                                           |  |                |         |                          |   |        |     |  |      |         |                          |   |         |     |   |        |   |  |   |        
|Intangible assets subject to amortization: |  |                |         |                          |   |        |     |  |      |         |                          |   |         |     |   |        |   |  |   |        
|Patents and patent applications            |  |                | 10,406  |                          |   | (3,650 | )   |  |      | 6,756   |                          |   | 10,396  |     |   | (3,372 | ) |  |   | 7,024  
|Customer base                              |  |                | 4,082   |                          |   | (1,016 | )   |  |      | 3,066   |                          |   | 4,082   |     |   | (894   | ) |  |   | 3,188  
|Covenants not to compete                   |  |                | 726     |                          |   | (101   | )   |  |      | 625     |                          |   | 726     |     |   | (41    | ) |  |   | 685    
|URL website address                        |  |                | 646     |                          |   | (64    | )   |  |      | 582     |                          |   | 640     |     |   | (32    | ) |  |   | 608    
|Trade name                                 |  |                | 378     |                          |   | (378   | )   |  |      |        |                          |   | 378     |     |   | (378   | ) |  |   |       
|Purchased software                         |  |                | 128     |                          |   | (18    | )   |  |      | 110     |                          |   | 128     |     |   | (7     | ) |  |   | 121    
|                                           |  |                |         |                          |   |        |     |  |      |         |                          |   |         |     |   |        |   |  |   |        
|                                           |  | $              | 16,366  |                          | $ | (5,227 | )   |  | $    | 11,139  |                          | $ | 16,350  |     | $ | (4,724 | ) |  | $ | 11,626 
|                                           |  |                |         |                          |   |        |     |  |      |         |                          |   |         |     |   |        |   |  |   |        



The increase in
goodwill during the quarter ended March 31, 2004 was due to purchase price allocation adjustments related to the Complient acquisition in October 2003, primarily resulting from a difference in the net realizable value of certain fixed assets
disposed of in the quarter.



The following unaudited pro forma
data summarizes the results of operations for the period indicated as if the Complient acquisition had been completed as of the beginning of the period presented. The pro forma data gives effect to actual operating results prior to the acquisition,
adjusted to include the pro forma effect of amortization of identified intangible assets and the elimination of sales to Complient prior to the acquisition.



|                                                 |  |                                |            |  
|------------------------------------------------ |  | ------------------------------ | ---------- | -
|                                                 |  | Three MonthsEndedMarch 31,2003 |           
|Pro forma net revenue                            |  | $                              | 16,701     |  
|Pro forma net loss                               |  | $                              | (3,827     | )
|Pro forma net loss per share (basic and diluted) |  | $                              | (0.05      | )
|Pro forma weighted-averaged shares               |  |                                | 77,438,166 |  



Product Warranty



Our products are generally under warranty against defects
in material and workmanship for a period of one to five years. We estimate warranty costs 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.



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Changes in the product warranty accrual for the quarters ended March 31 were as follows:



|                                                            |  |      |      |   |      |   |       |  
|----------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | -
|                                                            |  | 2004 |      |   | 2003 |  
|Warranty accrual, beginning of period                       |  | $    | 836  |   |      | $ | 1,604 |  
|Change in liability for warranties issued during the period |  |      | 61   |   |      |   | 88    |  
|Warranty expenditures                                       |  |      | (188 | ) |      |   | (133  | )
|                                                            |  |      |      |   |      |   |       |  
|Warranty accrual, end of period                             |  | $    | 709  |   |      | $ | 1,559 |  
|                                                            |  |      |      |   |      |   |       |  



Stock Based
Compensation



On December 31, 2002, the Financial
Accounting Standards Board (FASB) issued SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amends SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 allows for three methods of
transition for those companies that adopt SFAS 123s provisions for fair value recognition. SFAS 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 123 and SFAS 148.



The Company has adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation. SFAS 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) 25.



Additionally, in accordance with SFAS 123 and Emerging Issues Task Force (EITF) 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 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



Had compensation costs been determined based upon the fair value at the grant date, consistent with the methodology prescribed under SFAS 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 |       
|                                                                      |  | March 31, 2004     |        |   | March 31, 2003 |  
|Net loss, as reported                                                 |  | $                  | (4,832 | ) |                | $ | (2,582 | )
|Add: Compensation expense included in reported net loss               |  |                    |       |   |                |   |       |  
|Deduct: Compensation expense determined under fair value based method |  |                    | (1,237 | ) |                |   | (981   | )
|                                                                      |  |                    |        |   |                |   |        |  
|Pro forma net loss                                                    |  | $                  | (6,069 | ) |                | $ | (3,563 | )
|                                                                      |  |                    |        |   |                |   |        |  
|Net loss per share, as reported (basic and diluted)                   |  | $                  | (0.06  | ) |                | $ | (0.04  | )
|                                                                      |  |                    |        |   |                |   |        |  
|Pro forma net loss per share (basic and diluted)                      |  | $                  | (0.08  | ) |                | $ | (0.05  | )
|                                                                      |  |                    |        |   |                |   |        |  



Recent
Pronouncements



In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entitiesan interpretation of ARB No. 51 (revised in December 2003). This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or
both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance



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its activities without additional subordinated financial support from other parties, which is provided through other
interests that will absorb some or all of the expected losses of the entity, and (ii) the equity investors lack an essential characteristic of a controlling financial interest. It applies to all variable interest entities established after January
31, 2003 and is effective July 1, 2003 for any variable interest entity acquired prior to February 1, 2003. The application of FIN 46 did not have any impact on the Companys consolidated financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. It amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS 133, in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The
application of this statement did not have an impact on the Companys consolidated financial statements.



In May 2003, the FASB issued SFAS No. 150, Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes
standards for how a company clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires a company to classify such instruments as liabilities, whereas they previously may have been classified
as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective July 1, 2003. The application of this statement did not have an impact on the Companys consolidated
financial statements.



EITF 00-21, Revenue Arrangements with
Multiple Deliverables addresses the accounting for multiple element revenue arrangements which involve more than one deliverable or unit of accounting in circumstances, where the delivery of those units takes place in different accounting
periods. EITF 00-21 requires disclosure of the accounting policy for revenue recognition of multiple element revenue arrangements and the nature and description of such arrangements. It was effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant impact on the Companys consolidated 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.



The Companys chief operating decision makers are the Executive
Management Team which is comprised of the Chief Executive Officer and 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, CPR 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.



10



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##### Table of Contents

The following is a breakdown of net revenue by product line:



|                                                                         |  |                    |        |               |   |       
|------------------------------------------------------------------------ |  | ------------------ | ------ | ------------- | - | ------
|                                                                         |  | Three Months Ended
|                                                                         |  | March 31, 2004     |        | March31, 2003
|AEDs and related accessories                                             |  | $                  | 12,052 |               | $ | 12,414
|AED/CPR training and program management services                         |  |                    | 1,739  |               |   |      
|                                                                         |  |                    |        |               |   |       
|AED related revenue                                                      |  |                    | 13,791 |               |   | 12,414
|Powerhearts, electrodes and related accessories                          |  |                    | 333    |               |   | 400   
|Emergency defibrillators, monitors, CPR products and related accessories |  |                    | 1,480  |               |   | 1,210 
|                                                                         |  |                    |        |               |   |       
|                                                                         |  | $                  | 15,604 |               | $ | 14,024
|                                                                         |  |                    |        |               |   |       



The following is a
breakdown of net sales by geographic location:



|              |  |                    |        |                |   |       
|------------- |  | ------------------ | ------ | -------------- | - | ------
|              |  | Three Months Ended
|              |  | March 31, 2004     |        | March 31, 2003
|United States |  | $                  | 11,211 |                | $ | 10,481
|Foreign       |  |                    | 4,393  |                |   | 3,543 
|              |  |                    |        |                |   |       
|              |  | $                  | 15,604 |                | $ | 14,024
|              |  |                    |        |                |   |       



The following is a
breakdown of the Companys long-lived assets by geographic location as of:



|              |  |                |       |                  |   |      
|------------- |  | -------------- | ----- | ---------------- | - | -----
|              |  | March 31, 2004 |       | December 31 2003
|United States |  | $              | 6,101 |                  | $ | 6,758
|Foreign       |  |                | 267   |                  |   | 245  
|              |  |                |       |                  |   |      
|              |  | $              | 6,368 |                  | $ | 7,003
|              |  |                |       |                  |   |      



5. Corporate Relocation and
Restructuring



During the first quarter of 2003, the
Company commenced its plan to relocate its corporate headquarters, expanded its manufacturing capacity, and consolidated its accounting and finance functions in Irvine, California.



Costs related to severance, moving, lease termination and accelerated depreciation of leaseholds and other assets of $531
were incurred and included in general and administrative expenses in the accompanying consolidated statement of operations for the three months ended March 31, 2003. All expansion, relocation, and restructuring activities were completed in the
second quarter of 2003 and an additional $187 was expensed to general and administrative in the three months ended June 30, 2003.



The accrual represented costs recognized pursuant to SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities and SEC Staff
Accounting Bulletin (SAB) 100, Restructuring and Impairment Charges. The Company committed to a sufficiently detailed plan that identified significant actions to be taken and the activities that would not be continued. The plan
was completed during the quarter ended June 30, 2003 and there were no significant changes to the original plan. The involuntary one-time employee-termination arrangement established the benefits to be paid to employees and specifically identified
the classifications or functions of those employees, their locations, and their expected completion date. All employees were informed about the terms of the benefit arrangement, including the benefits that employees would receive upon termination
(including but not limited to cash payments), in sufficient detail to enable employees to determine the type and amount of benefits they would receive. The Company reviewed the net book value of leasehold improvements to be abandoned in certain
facilities in accordance with SFAS 144, and appropriately recorded an adjustment to accelerate the related depreciation over the revised useful life through their cease-use dates.



6. Notes Payable



During February 2004, the Company secured a $5,000 line of credit from its bank. The line of credit will be used to provide additional working capital, as
needed, to fund the Companys growth. The 24-month facility is collateralized by accounts receivable, inventory, cash, and marketable securities, bears interest at the banks prime rate plus .75% (floor of 5%) with interest payable
monthly, and requires the Company to maintain certain financial covenants. On April 30, 2004, the Company obtained a waiver from the bank for the quarter ended March 31, 2004 for non-compliance with the net profit covenant required by the agreement.
Through the date of this filing, the Company has not drawn down on the line.



On March 15, 2004, the Company amended its Senior Note and Warrant Agreement (the Agreement) in order to ease certain financial covenants into 2005 to reflect the Companys actual and expected
financial results. In exchange for modifying these covenants, the Company issued warrants to the note holders to purchase 500,000 shares of common stock at $3.95 per share. The warrants were valued at $1,301 using a Black-Scholes model and were
recorded as additional discount to the Notes and will be amortized over the remaining term of the Notes (approximately 38 months) using the effective interest method. This modification was not considered to be a significant modification of the
Agreement.



11



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##### Table of Contents

7. Litigation



On December 3, 2002, the Company filed a Complaint in Orange County Superior Court against Medical Research Laboratories, Inc. (MRL) alleging
declaratory relief and breach of contract arising out of a July 29, 2002 letter of intent entered into between the parties. The Company alleged that MRL failed to comply with certain conditions of closing set forth in the letter of intent whereby
the Company would acquire all of MRLs stock. MRL filed a cross-complaint, also seeking breach of contract and declaratory relief arising out of the same letter of intent. On February 25, 2003, the Company filed suit against MRL for patent
infringement in the United States District Court for the District of Minnesota. The Company alleged that MRLs LifeQuest JumpStart AED infringed the Companys patented disposable electrode pre-connect technology. The Company settled both
law suits with MRL on June 24, 2003. Under the terms of the confidential settlement agreement, the Company received a settlement amount from MRL and MRL received the right to license two of the Companys patents for additional royalties.



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 now
charges that Philips automated external defibrillators sold under the names HeartStart OnSite Defibrillator, HeartStart, HeartStart FR2 and the HeartStart Home Defibrillator, infringed at least
ten of the Companys United States patents. In the same action, the Company also sought a declaration from the Court that the Companys products do not infringe several of Philips patents and Philips counterclaimed for infringement
of the same 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 or its ultimate effect, if
any, on its financial condition.



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 with no counterclaims. At this stage, the Company is unable to predict the outcome of this litigation or its ultimate effect, if any, on its
financial condition.



On March 19 2004, William S. Parker filed
suit against the Company for patent infringement in Michigan Federal Court. 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. At this stage of the litigation, the Company is unable to predict
the outcome of this litigation or its ultimate effect, if any, on its financial condition.



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.



8. Subsequent Event



In
early April, the Company received a Warning Letter from the U.S. Food and Drug Administration (FDA) following a routine inspection of its manufacturing facility in Minneapolis. The letter specified certain procedural and documentation items in the
Companys quality system. The Company took permanent corrective and preventive action to bring its quality system into compliance. The Company formally responded and is in dialog with the FDA regarding the Warning Letter and any other actions
the Company may take to resolve this situation.



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##### Table of Contents

|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 set
forth herein.



Results of Operations



Quarter Ended March 31, 2004 Compared to the Quarter Ended March 31, 2003



Revenue



The following is a summary of net revenue by product line for the quarters
ended March 31:



|                                                                      |  |       |        |  |       |   |  |        |        |  |       |   |  |   |       |   |  |       |   
|--------------------------------------------------------------------- |  | ----- | ------ |  | ----- | - |  | ------ | ------ |  | ----- | - |  | - | ----- | - |  | ----- | --
|                                                                      |  | 2004` |        |  | 2003  |   |  | Change |       
|AEDs and related accessories and services                             |  | $     | 13,791 |  | 88.4  | % |  | $      | 12,414 |  | 88.5  | % |  | $ | 1,377 |   |  | 11.1  | % 
|Powerheart in-hospital defibrillators and accessories                 |  |       | 333    |  | 2.1   | % |  |        | 400    |  | 2.9   | % |  |   | (67   | ) |  | (16.8 | )%
|Emergency defibrillators, monitors, training products and accessories |  |       | 1,480  |  | 9.5   | % |  |        | 1,210  |  | 8.6   | % |  |   | 270   |   |  | 22.3  | % 
|                                                                      |  |       |        |  |       |   |  |        |        |  |       |   |  |   |       |   |  |       |   
|Total net revenue                                                     |  | $     | 15,604 |  | 100.0 | % |  | $      | 14,024 |  | 100.0 | % |  | $ | 1,580 |   |  | 11.3  | % 
|                                                                      |  |       |        |  |       |   |  |        |        |  |       |   |  |   |       |   |  |       |   



Net revenue for the
quarter ended March 31, 2004 increased $1,377 or 11.1% compared to the quarter ended March 31, 2003. This increase was primarily attributable to AED/CPR training and program management services of $1,739 resulting from the acquisition of this
business from Complient Corporation in October 2003. Sales of AED products and related accessories were relatively flat at $12,052 compared to $12,414 for the same quarter in 2003. In addition, we sold $1,480 of patient monitors, training equipment
and accessories in the quarter ended March 31, 2004 compared to $1,210 in the same quarter in 2003.



Gross Margin



Cost of goods sold for the quarter ended March 31, 2004 was $6,508 compared to $6,089 for the same quarter in 2003. Gross margins as a percentage of
revenue improved to 58.3% for the quarter ended March 31, 2004 from 56.6% in the same quarter in 2003. The improvement was primarily the result of the introduction of our new lower cost version Powerheart AED G3 in August 2003.



Operating Expenses



The following is a summary of operating expenses as a percentage of net
revenue for the quarters ended March 31:



|                           |  |      |        |  |      |   |  |        |       |  |      |   |  |   |       |  |      |  
|-------------------------- |  | ---- | ------ |  | ---- | - |  | ------ | ----- |  | ---- | - |  | - | ----- |  | ---- | -
|                           |  | 2004 |        |  | 2003 |   |  | Change |      
|Sales and marketing        |  | $    | 6,003  |  | 38.5 | % |  | $      | 4,417 |  | 31.5 | % |  | $ | 1,586 |  | 35.9 | %
|Research and development   |  |      | 1,669  |  | 10.7 | % |  |        | 1,102 |  | 7.8  | % |  |   | 567   |  | 51.5 | %
|General and administrative |  |      | 4,166  |  | 26.7 | % |  |        | 3,207 |  | 22.9 | % |  |   | 959   |  | 29.9 | %
|Amortization               |  |      | 503    |  | 3.2  | % |  |        | 449   |  | 3.2  | % |  |   | 54    |  | 12.0 | %
|                           |  |      |        |  |      |   |  |        |       |  |      |   |  |   |       |  |      |  
|Total operating expenses   |  | $    | 12,341 |  | 79.1 | % |  | $      | 9,175 |  | 65.4 | % |  | $ | 3,166 |  | 34.5 | %
|                           |  |      |        |  |      |   |  |        |       |  |      |   |  |   |       |  |      |  



Sales and marketing
expenses increased by 35.9% to $6,003 for the quarter ended March 31, 2004. The increase is primarily attributable to expanded international sales operations ($775), including our direct sales operations in the U.K and Germany, new sales and
marketing expenses related to program management and training services pursuant to the business acquired from Complient in October 2003 ($709) and the establishment of a new inside sales team ($164).



Research and development expenses for the quarter ended March 31, 2004
increased by $567 or 51.5% compared to the same quarter in 2003. In the first quarter ended March 31, 2004, research and development expenses were 10.7% of revenue, up from 7.8% of revenue in the same quarter in 2003. The increase is primarily
attributable to increased headcount and project costs associated with the development of a standard hospital defibrillator for GEMS pursuant to a development agreement signed in July 2003 ($473), as well as the addition of research and development
personnel and activities in connection with the business acquired from Complient Corporation in October 2003 ($101).



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General and administrative expenses increased $959 or 29.9% during the quarter ended March 31, 2004
compared with the same quarter in 2003. As a percentage of revenue, general and administrative expenses increased to 26.7% in the quarter ended March 31, 2004 from 22.9% in the same quarter in 2003. The absolute dollar increase was primarily
comprised of new expenses, primarily headcount and facilities, related to the Complient acquisition ($488), increased legal fees ($386), higher commercial and health insurance costs ($292), and higher bad debt expense ($163), offset by a decrease in
costs related to our relocation and expansion of facilities in the first quarter of 2003 ($531).



Amortization of intangibles was $503 for the quarter ended March 31, 2004, an increase of $54 or 12.0% from the $449 for the same quarter in 2003. The
increase is primarily the result of additional amortization expense of certain identifiable intangible assets related to the Complient acquisition in October 2003.



Interest and Other Expense



Net interest and other expenses increased by $186 for the quarter ended March 31, 2004 compared to the same quarter in 2003. This increase was
primarily due to higher interest expense based on the average outstanding note balance and amortization of warrants using the effective interest rate method, both of which are associated with the senior secured promissory notes issued in May 2002.



Liquidity and Capital Resources



|                                                      |  |               |  |                 
|----------------------------------------------------- |  | ------------- |  | ----------------
|                                                      |  | March 31,2004 |  | December 31,2003
|Working capital                                       |  | 20,355        |  | 22,981          
|Current ratio (current assets to current liabilities) |  | 2.2 : 1.0     |  | 2.3 : 1.0       
|Cash and cash equivalents                             |  | 6,641         |  | 8,871           
|Accounts receivable, net                              |  | 16,940        |  | 20,410          
|Inventories                                           |  | 10,895        |  | 9,575           
|Short-term and long-term borrowings                   |  | 47,968        |  | 46,575          



The decrease in our
current ratio, working capital and cash and cash equivalents is primarily due to our operating loss.



At March 31, 2004, our days sales outstanding on accounts receivable (DSO) was approximately 99 days compared to approximately 105 days at
December 31, 2003. We expect our DSO to move towards an average of 90 days throughout 2004.



In February 2004, we secured a $5,000 line of credit with Silicon Valley Bank. The line of credit will 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. On April 30,
2004, the Company obtained a waiver from the bank for the quarter ended March 31, 2004 for non-compliance with the net profit covenant required by the line of credit agreement. Through the date of this filing, the Company has not drawn down on the
line.



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 exercise of outstanding options and warrants. In May
2002, we entered into a Senior Note and Warrant Purchase Agreement with investors pursuant to which the investors loaned us $50,000. We in turn 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. The proceeds from this offering will fund the acceleration of current product development projects associated with the recently announced partnership with GEMS and for working
capital for future strategic initiatives.



In March 2004, we
amended the Senior Note and Warrant 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 note holders 500,000 additional warrants to
purchase shares of common stock at $3.95 per share.



From
inception through March 31, 2004, we have incurred losses of approximately $111,000. Recovery of our assets is dependent



14



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##### Table of Contents

upon future events, the outcome of which is indeterminable. Additionally, transition to profitable operations is
dependent upon achieving a level of revenues adequate to support our cost structure. The accompanying financial statements have been prepared assuming that we will continue as a going concern.



Cash used in operating activities for the quarter ended March 31, 2004
decreased by $1,989 or 51.8%, to $1,854 from $3,843 for the same quarter in 2003. This decrease was primarily attributable to a $3,901 decrease in accounts receivable offset by an increase in our operating loss of $2,005.



Cash used in investing activities for the quarter ended March 31, 2004
decreased by $344 or 40.1% compared to the same quarter of 2003. This decrease was primarily attributable to the cash used to purchase the minority interest in Artema in February 2003.



Cash provided by financing activities for the quarter ended March 31, 2004 increased by $68 or 88.3%. This increase was
primarily due to an increase in proceeds from the exercise of stock options and warrants quarter to quarter of $58.



Based on meeting our internal sales growth targets, we believe that our current cash balances, combined with net cash that we expect to generate from
operations, the sale of two product lines and access to our unused line of credit of $5,000, will sustain our ongoing operations for the next twelve months. In the event that we require additional cash to support our operations during the next
twelve months or thereafter, we will attempt to raise the required capital through either debt or equity arrangements. We cannot provide any assurance that the required capital will be available on acceptable terms, if at all, or that any financing
activity will not be dilutive to our current stockholders. 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.



Off-Balance Sheet Arrangements



We do not have any material off-balance sheet arrangements other than
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 March 31,
2004.



The following table presents our expected cash
requirements for contractual obligations outstanding as of March 31, 2004:



|                                |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |  
|------------------------------- |  | ----- | ------ | --------------- | - | --------- |  | --------- | ------ | ------------ | - | ------ |  | - | -
|                                |  | Total |        | Less than1 Year |   | 1-3 Years |  | 4-5 Years |        | After5 Years
|Senior secured promissory notes |  | $     | 69,945 |                 |   |          |  | $         | 7,775  |              | $ | 62,170 |  |   | 
|Other long-term obligations     |  |       | 72     |                 |   | 37        |  |           | 24     |              |   | 11     |  |   | 
|Non-cancelable operating leases |  |       | 7,291  |                 |   | 1,633     |  |           | 3,310  |              |   | 2,348  |  |   | 
|                                |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |  
|                                |  | $     | 77,308 |                 | $ | 1,670     |  | $         | 11,109 |              | $ | 64,529 |  | $ | 
|                                |  |       |        |                 |   |           |  |           |        |              |   |        |  |   |  



Income Taxes



As of December 31, 2003, 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 2004 for federal purposes and carry forward indefinitely for state purposes. We also have approximately $134,000 and $74,000, respectively, of federal and state net
operating loss carry forwards which will begin to expire in 2006 and 2005, respectively. The utilization of net operating loss and tax credit carry forwards may be limited under the provisions of Internal Revenue Code Sections 382 and 1503 and
similar state provisions. The limitations could result in the expiration of our net operating loss carry forwards and research and experimentation credit carry forwards before full utilization.



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



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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 physical and technical functionality 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.



Goodwill and Other Intangibles



In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which became effective January 1, 2002, goodwill and other intangible
assets with indeterminate 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. 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.



Should an impairment in goodwill be determined, it could result in a material charge to operations.



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.



Revenue Recognition



We record revenue in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements (SAB 104). SAB 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. Some of our customers are distributors which sell goods to third party end users. We are not contractually obligated to repurchase any inventory from distributors or end
user customers. 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. Training and AED service revenue is deferred
and recognized at the time the training occurs. AED program management services pursuant to agreements that existed with Complient customers are deferred and amortized straight-line over the related contract period. License fees are deferred and
recognized systematically over the term of the license agreement.



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Product Warranty



Products sold are generally covered by a warranty against defects in material and workmanship for a period of one to five 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.



Recent Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities-an interpretation of ARB No. 51. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, and
(ii) the equity investors lack an essential characteristic of a controlling financial interest. It applies to all variable interest entities established after January 31, 2003 and is effective July 1, 2003 for any variable interest entity acquired
prior to February 1, 2003. The application of FIN 46 did not have a significant impact on our consolidated financial statements.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. It amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, in connection with other FASB projects
dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The application of this statement did not have an impact on our consolidated financial
statements.



In May 2003, the FASB issued SFAS No. 150, Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how a company clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires a
company to classify such instruments as liabilities, whereas they previously may have been classified as equity. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective July 1,
2003. The application of this statement did not have an impact on our consolidated financial statements.



EITF 00-21, Revenue Arrangements with Multiple Deliverables addresses the accounting for multiple element revenue arrangements which involve more
than one deliverable or unit of accounting in circumstances, where the delivery of those units takes place in different accounting periods. EITF 00-21 requires disclosure of the accounting policy for revenue recognition of multiple element revenue
arrangements and the nature and description of such arrangements. It will be effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant impact on our
consolidated financial statements.





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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 March 31, 2004,
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.



Foreign Currency Exchange Rate Risk. The
majority of our international sales are made through our international sales office in Copenhagen primarily in U.S. dollars, however, some sales to the U.K. are in pounds and to Germany 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, the U.K. and Germany 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, are remeasured in U.S. dollars at period-end exchange rates in effect. Any transactions in
foreign currencies, such as wages paid in local currencies, are remeasured in U.S. dollars using an average monthly exchange rate. Any resulting gains and losses are included in operations and were not material in any period.



ITEM 4. CONTROLS AND PROCEDURES



An evaluation as of the end of the period covered by this report was carried out, under the supervision and participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC filings.





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PART II. OTHER INFORMATION



|Item | 1. Legal Proceedings
|---- | --------------------



In February 2003, we 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 now charges that Philips automated external defibrillators sold under the names HeartStart OnSite
Defibrillator, HeartStart, HeartStart FR2 and the HeartStart Home Defibrillator, infringed at least ten of our United States patents. In the same action, we also sought a declaration from the Court that our
products do not infringe several of Philips patents and Philips counterclaimed for infringement of the same 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 our Powerheart and Survivalink AEDs and are covered under our patents. At this stage, we are unable to
predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.



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 with no counterclaims. At this stage, we are unable to
predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.



On March 19, 2004, William S. Parker filed suit against us for patent infringement in Michigan Federal Court. 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 our AEDs infringe the Patent. The patent is now expired. We have filed an Answer to the Complaint stating the patent is not infringed and is
otherwise invalid and unenforceable. At this stage of the litigation, we are unable to predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.



|Item | 5. Other Information
|---- | --------------------



In early April, we received a Warning Letter from the U.S. Food and Drug Administration (FDA) following a routine inspection of our manufacturing facility
in Minneapolis. The letter specified certain procedural and documentation items in our quality system. We took permanent corrective and preventive action to bring our quality system into compliance. We formally responded and are in dialog with the
FDA regarding the Warning Letter and any other actions we may take to resolve this situation.



|Item | 6. Exhibits and Reports on Form 8-K
|---- | -----------------------------------



a) Exhibits:



Exhibit 31.1 Chief Executive Officers Certification as required by Section 302 of the Sarbanes-Oxley Act of 2002



Exhibit 31.2 Chief Financial Officers Certification as
required by Section 302 of the Sarbanes-Oxley Act of 2002



Exhibit 32.1 Chief Executive Officers Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002



Exhibit 32.2 Chief Financial Officers Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002



b) Reports on Form 8-K:



Form 8-K filed on March 1, 2004 related to the press release discussing the
results of the quarter and year ended December 31, 2003.





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Signatures



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized.



CARDIAC SCIENCE, INC.(Registrant)




|                   |  |  |  |                                                                            
|------------------ |  |  |  | ---------------------------------------------------------------------------
|                   |  | 
|Date: May 10, 2004 |  |  |  | /s/ RODERICK DE GREEF                                                      
|                   |  |  |  |                                                                            
|                   |  |  |  | Roderick de Greef (Duly Authorized Officer and Principal Financial Officer)





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