##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K/ A


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO


SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-49755


Quinton Cardiology Systems, Inc.


(Exact Name of Registrant as Specified in its Charter)


|                                                                                  |  |                                         
|--------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                          |  | 94-3300396                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                |  | (I.R.S. Employer
    Identification No.)
|                                                                                 
|3303 Monte Villa Parkway,
    Bothell, WA(Address of Principal Executive Offices) |  | 98021(Zip Code)                         

(425) 402-2000


(Registrants Telephone Number, Including Area Code)


Securities Registered Pursuant to Section 12(b) of the
Act:


None.


Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, $0.001 par value.


þ o


þ


þ o














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QUINTON CARDIOLOGY SYSTEMS, INC.


2004 FORM 10-K/ A ANNUAL REPORT


TABLE OF CONTENTS


|              |  |                                                                                                                      |    |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                                      |    | Page |   
|              |  |                                                                                                                      |    |      |   
|PART I       
|Item 1.       |  | Business                                                                                                             |    |      | 1  | 
|Item 2.       |  | Properties                                                                                                           |    |      | 24 | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 24 | 
|Item 4.       |  | Submission of Matters to a Vote of
    Shareholders                                                                  |    |      | 24 | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity,
    Related Shareholder Matters and Issuer Purchases of Equity
    Securities |    |      | 24 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 25 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 26 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosure
    About Market Risk                                                        |    |      | 40 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 41 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |      | 42 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 42 | 
|Item 9B.      |  | Other Information                                                                                                    |    |      | 43 | 
|PART III     
|Item 10.      |  | Executive Officers and Directors of the
    Company                                                                  |    |      | 44 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |      | 47 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |    |      | 52 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 56 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                               |    |      | 56 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statements, and
    Schedules                                                                    |    |      | 57 | 
|Signatures    |  |                                                                                                                      | 61 |     
|EXHIBIT 10.45
|EXHIBIT 10.46
|EXHIBIT 10.47
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



EXPLANATORY NOTE


The terms us, we and our
refer to Quinton Cardiology Systems, Inc. and our wholly owned
subsidiary, Quinton Cardiology, Inc.






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PART 1


This annual report contains forward-looking statements
relating to Quinton Cardiology Systems, Inc. These are
forward-looking statements for purposes of the safe harbor
provisions under the Private Securities Litigation Reform Act of
1995. The words believe, expect,
intend, anticipate, variations of such
words, and similar expressions identify forward-looking
statements, but their absence does not mean that the statement
is not forward-looking. Actual results may vary significantly
from the results expressed or implied in these statements.
Forward-looking statements reflect managements current
expectations, plans or projections and are inherently uncertain.
These forward-looking statements reflect managements
current expectations and involve risks and uncertainties. Our
actual results could differ materially from results that may be
anticipated by such forward-looking statements. The principal
factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section
entitled Certain Factors That May Affect Future
Results and those discussed elsewhere in this report.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to revise any
forward-looking statements to reflect events or circumstances
that may subsequently arise. Readers are urged to review and
consider carefully the various disclosures made in this report
and in our other filings made with the SEC that attempt to
advise interested parties of the risks and factors that may
affect our business, prospects and results of operations. The
terms us, we and our refer
to Quinton Cardiology Systems, Inc. and our wholly owned
subsidiary, Quinton Cardiology, Inc.







|        |         
|------- | --------
|Item 1. | Business



| |         
| | --------
| | Overview







1



---



##### Table of Contents







| |                    
| | -------------------
| | Industry Background









| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | systems and services tailored to the workflow needs of
    clinicians to improve efficiencies and reduce training times;                                                                                          
|
| |  | products that are easy to use and intuitive to physicians and
    clinicians outside of the hospital setting;                                                                                                     
|
| |  | technologies that can effectively digitize, store and manage
    data from a variety of sources and be scaled from single offices
    to wide area networks;                                                      
|
| |  | products that are implemented using standards such as DICOM and
    HL-7 for connectivity, to minimize the effort and expense
    required to integrate data across multiple sources;                             
|
| |  | tools to improve the management of resources by tracking and
    trending cost efficiencies in healthcare delivery systems, thus
    providing data to payors which differentiate among competitive
    providers;
|
| |  | methods for preserving and propagating healthcare data from
    legacy systems;                                                                                                                                   
|
| |  | flexible systems that will easily operate with and take
    advantage of emerging technologies from multiple
    vendors; and                                                                                     
|
| |  | progressive migration to network and Internet technologies
    within a security structure that meets HIPAA requirements.                                                                                         





| |                 
| | ----------------
| | Quinton Solution



2



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##### Table of Contents





Ease of use.


Network compatibility.


Effective data capture.


Improved diagnostic speed and accuracy.


Open technology architecture.




| |               
| | --------------
| | Our Advantages



Cardiology focus.


3



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Industry leading brands.


Large installed base.


Commitment to innovation.


Global distribution network.


Experienced management team.




| |                
| | ---------------
| | Growth Strategy



Increase U.S. market share.


Expand international sales.


4



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Improve connectivity.


Pursue strategic mergers and acquisitions.




| |             
| | ------------
| | Our Products





Electrocardiography systems.


Cardiac stress testing systems.


Holter monitoring systems.


5



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##### Table of Contents



Cardiac rehabilitation telemetry systems.


Cardiology data management systems.


Other systems and supplies.




| |                                         
| | ----------------------------------------
| | Product Support and Maintenance Services





| |                    
| | -------------------
| | Sales and Marketing









6



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| |                             
| | ----------------------------
| | Customer Service and Support







| |                         
| | ------------------------
| | Research and Development







| |           
| | ----------
| | Technology





7



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| |                         
| | ------------------------
| | Manufacturing and Supply











| |                                   
| | ----------------------------------
| | Targeted Acquisition Opportunities



8



---



##### Table of Contents





| |                
| | ---------------
| | Our Competition



|                                         |  |                                            
|---------------------------------------- |  | -------------------------------------------
|Product                                  |  | Competitors                                
|                                         |  |                                            
|Electrocardiography systems              |  | General Electric, Philips, Schiller        
|Cardiac stress testing systems           |  | General Electric, Philips, Welch Allyn     
|Holter monitoring systems                |  | Del Mar Reynolds, General Electric, Philips
|Cardiac rehabilitation telemetry systems |  | Life Sensing Instruments, Scott Care       
|Cardiology data management systems       |  | General Electric, Philips                  





| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | quality, accuracy, and reliability;                                                        
|
| |  | reputation of the provider;                                                                
|
| |  | relative ease of use;                                                                      
|
| |  | depth and breadth of features;                                                             
|
| |  | quality of customer support;                                                               
|
| |  | frequency of updates;                                                                      
|
| |  | flexibility to integrate products with other devices and systems
    from multiple vendors;
|
| |  | availability of third-party reimbursement;                                                 
|
| |  | conformity to standards of care; and                                                       
|
| |  | price.                                                                                     





| |                          
| | -------------------------
| | Third-Party Reimbursement





9



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##### Table of Contents





| |                      
| | ---------------------
| | Government Regulation





| |   |                                             
| | - | --------------------------------------------
| |  | product design and development;             
|
| |  | product testing;                            
|
| |  | product manufacturing;                      
|
| |  | product labeling and packaging;             
|
| |  | product handling, storage, and installation;
|
| |  | premarket clearance or approval;            
|
| |  | advertising and promotion; and              
|
| |  | product sales, distribution, and servicing. 

FDAs Premarket Clearance and Approval Requirements.


510(k) Clearance Process.




Premarket Approval Process.


10



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Clinical Trials.


Pervasive and continuing FDA regulation.




| |   |                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Quality System regulation, which requires manufacturers to
    follow design, testing, control, documentation and other quality
    assurance procedures during the manufacturing process;                                                                                                            
|
| |  | Establishment Registration, which requires establishments
    involved in the production and distribution of medical devices,
    intended for commercial distribution in the U.S. to
    register with the FDA;                                                                                      
|
| |  | Medical Device Listing, which requires manufacturers to list the
    devices they have in commercial distribution with the FDA;                                                                                                                                                                       
|
| |  | Labeling regulations, which prohibit misbranded
    devices from entering the market, as well as prohibit the
    promotion of products for unapproved or off-label
    uses and impose other restrictions on labeling; and                                                                       
|
| |  | Medical Device Reporting regulations, which require that
    manufacturers report to the FDA if their device may have caused
    or contributed to a death or serious injury or malfunctioned in
    a way that would likely cause or contribute to a death or
    serious injury if it were to recur.

11



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| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | fines, injunctions, and civil penalties;                                                    
|
| |  | mandatory recall or seizure of our products;                                                
|
| |  | administrative detention or banning of our products;                                        
|
| |  | operating restrictions, partial suspension or total shutdown of
    production;             
|
| |  | refusing our request for 510(k) clearance or premarket approval
    of new product versions;
|
| |  | revocation of 510(k) clearance or premarket approvals previously
    granted; and           
|
| |  | criminal penalties.                                                                         

International Regulation.






12



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| |                      
| | ---------------------
| | Intellectual Property









| |          
| | ---------
| | Employees





| |                   
| | ------------------
| | Foreign Operations





| |                                               
| | ----------------------------------------------
| | Certain Factors That May Affect Future Results

In addition to the other information contained in this
report, the following risk factors could affect our actual
results and could cause our actual results to differ materially
from those achieved in the past or expressed in our
forward-looking statements or could cause the trading price of
our common stock to decline. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial
also may impair our business operations or negatively impact the
trading price of our common stock.


The unpredictability of our quarterly revenues and operating
results may cause the trading price of our stock to decrease.






| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impact of acquisitions, divestitures, strategic alliances,
    and other significant corporate events;                                                                                                                    
|
| |  | changes in our ability to obtain products and product components
    that are manufactured for us by third parties, such as Holter
    monitors, as well as variations in prices of these products and
    product components;

13



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| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | delays in the development or commercial introduction of new
    versions of products and systems;                                  
|
| |  | the ability to attain and maintain production volumes and
    quality levels for our products and product components;              
|
| |  | effects of domestic and foreign economic conditions on our
    industry and/or customers;                                          
|
| |  | the successful implementation of our system-oriented sales
    approach;                                                           
|
| |  | changes in the demand for our products and systems;                                                                                
|
| |  | varying sales cycles that can take up to a year or more;                                                                           
|
| |  | changes in the mix of products and systems we sell, which could
    affect our revenue levels as well as our gross margins;        
|
| |  | unpredictable budgeting cycles of our customers;                                                                                   
|
| |  | delays in obtaining regulatory clearance for new versions of our
    products and systems;                                         
|
| |  | increased product and price competition;                                                                                           
|
| |  | the impact of regulatory changes on the availability of
    third-party reimbursement to customers of our products and
    systems;
|
| |  | the loss of key personnel;                                                                                                         
|
| |  | the loss of key distributors or distribution companies; and                                                                        
|
| |  | seasonality in the sales of our products and systems.                                                                              



Our lack of customer purchase contracts and our limited order
backlog make it difficult to predict sales and plan
manufacturing requirements, which can lead to lower revenues,
higher expenses and reduced margins.






| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if we overestimate our requirements we may be obligated to
    purchase more components or third-party products than is
    required;                                                                                                                           
|
| |  | if we underestimate our requirements, our third-party
    manufacturers and suppliers may have an inadequate product or
    product component inventory, which could interrupt manufacturing
    of our products and result in delays in shipments and revenues;
|
| |  | we may also experience shortages of product components from time
    to time, which also could delay the manufacturing of our
    products; and                                                                                                                 
|
| |  | over or under production can lead to higher expense, lower than
    anticipated revenues, and reduced margins.                                                                                                                                                  

14



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If market conditions cause us to reduce the selling price of
our products and systems, or our market share is negatively
affected by the activities of our competitors, our margins and
operating results will decrease.






| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | lengthening of buying or selling cycles;                                       
|
| |  | the introduction of competing products;                                        
|
| |  | price reductions by our competitors;                                           
|
| |  | development of more effective products by our competitors;                     
|
| |  | hospital budgetary constraints; and                                            
|
| |  | changes in the reimbursement policies of government and
    third-party payers.



Our business and results of operations may be affected by our
announced merger with Cardiac Science, Inc.




We may suffer additional adverse consequences if the proposed
transaction with Cardiac Science is not completed.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we would not realize the benefits we expect from becoming part
    of a combined company with Cardiac Science, such as the
    potentially enhanced financial position, enhanced product
    diversity and sales, marketing and distribution capabilities;                                                                                                                                                                                                                                                                                  
|
| |  | activities relating to the merger and related uncertainties may
    divert our managements attention from our day-to-day
    business and other potential acquisition opportunities, cause
    disruptions among our employees and negatively impact our
    relationships with customers and business partners, thus
    detracting from our ability to increase revenue and minimize
    costs and possibly leading to a loss of revenue and market
    position that we may not be able to regain if the transaction
    does not occur;
|
| |  | the market price of our common stock could decline following an
    announcement that the merger has been abandoned, to the extent
    that the current market price reflects a market assumption that
    the merger will be completed;                                                                                                                                                                                                                                                                                                    
|
| |  | we could be required to pay Cardiac Science a $4.0 million
    termination fee if the merger agreement is terminated under
    certain specified conditions;                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | we would be required to expense approximately $1.0 million
    or more in transaction related costs that would otherwise be
    treated as part of the purchase price;                                                                                                                                                                                                                                                                                                                                                                      

15



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| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we would remain liable for certain costs related to the
    transaction, such as legal, accounting, financial advisor and
    financial printing fees; and
|
| |  | we may not be able to take advantage of alternative business
    opportunities or effectively respond to competitive pressures.                           

Even if we consummate our pending transaction with Cardiac
Science, the combined company may experience difficulties in
integrating the two companies and may not achieve the
anticipated benefits of the combination.






| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the impairment of relationships with employees, customers,
    distributors, strategic partners and suppliers as a result of
    integration of management and other key personnel;
|
| |  | the potential disruption of the combined companys ongoing
    business and distraction of its management;                                                                         
|
| |  | the difficulty of incorporating acquired technology and rights
    into the product offerings of the combined company;                                                             
|
| |  | not achieving expected synergies; and                                                                                                                                              
|
| |  | unanticipated expenses related to integration of the two
    companies.                                                                                                            



We may make future acquisitions, which involve numerous risks
that could impact our business and results of operations.






| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in integrating the operations, technologies, and
    products of the acquired companies;                                                         
|
| |  | the risk of diverting managements attention from normal
    daily operations of the business;                                                                
|
| |  | potential difficulties in completing projects associated with
    in-process research and development;                                                        
|
| |  | risks of entering markets in which we have no or limited direct
    prior experience and where competitors in such markets have
    stronger market positions;
|
| |  | initial dependence on unfamiliar supply chains or relatively
    small supply partners;                                                                       
|
| |  | insufficient revenues to offset increased expenses associated
    with acquisitions;                                                                          
|
| |  | the risk that acquired lines of business may reduce or replace
    the sales of existing products; and                                                        
|
| |  | the potential loss of key employees of the acquired companies.                                                                                                



16



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We may need additional capital to continue our acquisition
growth strategy.




If we fail to successfully enter into strategic alliances to
generate growth, our operating results may be negatively
affected.




Future changes in the accounting treatment for employee stock
options may cause adverse fluctuations and affect our reported
results of operations.




Since we reduced the valuation allowance against our deferred
tax assets during the fourth quarter of 2004, we will be
required to recognize income tax expense at statutory rates in
future periods, which will materially adversely impact our net
income.




17



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##### Table of Contents



Compliance with changing regulation of corporate governance,
public disclosure and accounting matters may result in
additional expenses.




Failure to keep pace with changes in the marketplace may
cause us to lose market share and our revenues may decrease.




If we fail to maintain our relationships with distribution
organizations, our sales and operating results may suffer.




Failure to develop and commercialize new versions of our
products would cause our operating results to suffer, both
domestically and internationally.






| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | accurately assess customer needs;                                                                            
|
| |  | develop products that are easy to use;                                                                       
|
| |  | minimize the time required to obtain, as well as the costs of,
    required regulatory clearance or approval;
|
| |  | price competitively;                                                                                         
|
| |  | manufacture and deliver on time;                                                                             

18



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##### Table of Contents





| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | accurately predict and control costs associated with
    manufacturing, installation, warranty and maintenance;       
|
| |  | manage customer acceptance and payment;                                                                               
|
| |  | limit demands by our customers for retrofits;                                                                         
|
| |  | access new interface standards needed for product connectivity;                                                       
|
| |  | anticipate and meet demands of our international customers for
    products featuring local language capabilities; and
|
| |  | anticipate and compete effectively with our competitors
    efforts.                                                 





We depend on the expertise of key personnel to manage our
businesses effectively in a changing market, and if we lose one
or more members of our senior management team or if our
management team does not work together effectively, our business
could be harmed.






If we do not maintain or grow revenues from our support
services or consumables, our operating and financial results may
be negatively impacted.




19



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##### Table of Contents



Competition may decrease our market share and cause our
revenues to decrease.






| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | greater financial and other resources;                                        
|
| |  | greater variety of products;                                                  
|
| |  | greater pricing flexibility;                                                  
|
| |  | more extensive technical capabilities;                                        
|
| |  | patent portfolios that may present an obstacle to our conduct of
    business;
|
| |  | stronger name recognition; and                                                
|
| |  | larger distribution networks.                                                 



If suppliers discontinue production of purchased components
of our products and we are unable to secure alternative sources
for these components on a timely basis, our ability to ship
products to our customers may be adversely affected, our
revenues may decline and our costs may increase as a result.




Undetected product errors or defects could result in
increased warranty costs, loss of revenues, product recalls,
delayed market acceptance, and claims against us.






| |   |                                               
| | - | ----------------------------------------------
| |  | failure to achieve market acceptance;         
|
| |  | loss of customers, revenues, and market share;
|
| |  | diversion of development resources;           
|
| |  | increased service and warranty costs;         
|
| |  | legal actions by our customers; and           
|
| |  | increased insurance costs.                    

Our future financial results could be adversely impacted by
asset impairments or other charges.




20



---



##### Table of Contents





Inadequate levels of reimbursement from governmental or other
third-party payers for procedures using our products and systems
may cause our revenues to decrease.




If we fail to obtain or maintain applicable regulatory
clearances or approvals for our products, or if clearances or
approvals are delayed, we will be unable to commercially
distribute and market our products in the U.S. and other
jurisdictions.




Failure to adequately protect our intellectual property
rights will cause our business to suffer.






21



---



##### Table of Contents





If third parties claim that our products infringe their
intellectual property rights, we may be forced to expend
significant financial resources and management time and our
operating results would suffer.




We are dependent upon licensed and purchased technology for
some of our products, and we may not be able to renew these
licenses or purchase agreements in the future.




Our reliance on a principal manufacturing facility may impair
our ability to respond to natural disasters or other unforeseen
catastrophic events.




Recent and future Federal and state regulations in the
U.S. relating to patient privacy could impose burdens on
us.




22



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Delaware law and provisions in our charter could make the
acquisition of our company by another company more difficult.




The market price of our stock may be highly volatile.






| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | uncertainties created by our pending transaction with Cardiac
    Science;                                  
|
| |  | quarterly fluctuations in results of our operations;                                                        
|
| |  | our ability to successfully commercialize our products;                                                     
|
| |  | changes in coverage or earnings estimates by analysts;                                                      
|
| |  | impact of other acquisitions, divestitures, strategic alliances,
    and other significant corporate events;
|
| |  | changes in the mix of products and systems we sell, which could
    affect our gross margins;               
|
| |  | the loss of key distributors or distribution companies; and                                                 
|
| |  | seasonality in the sales of our products and systems.                                                       





| |                      
| | ---------------------
| | Available Information



23



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|        |           
|------- | ----------
|Item 2. | Properties










|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                
|------- | -----------------------------------------------
|Item 4. | Submission of Matters to a Vote of Shareholders






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities





|            |                |             |   |       |     |  |   |      | 
|----------- | -------------- | ----------- | - | ----- | --- |  | - | ---- | 
|            |                | Stock Price |  
|            |                |             |  
|            |                | High        |   |       | Low | 
|            |                |             |   |       |     | 
|Fiscal 2003 |                |             |   |       |     |  |   |     
|            | First Quarter  |             | $ | 7.77  |     |  | $ | 5.25 | 
|            | Second Quarter |             |   | 8.13  |     |  |   | 5.14 | 
|            | Third Quarter  |             |   | 8.85  |     |  |   | 7.20 | 
|            | Fourth Quarter |             |   | 8.49  |     |  |   | 7.20 | 
|Fiscal 2004 |                |             |   |       |     |  |   |     
|            | First Quarter  |             | $ | 12.24 |     |  | $ | 7.87 | 
|            | Second Quarter |             |   | 14.80 |     |  |   | 9.29 | 
|            | Third Quarter  |             |   | 10.11 |     |  |   | 6.80 | 
|            | Fourth Quarter |             |   | 10.99 |     |  |   | 8.54 | 



24



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |        |        |        |       | 
|--------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------ | ------------ | ------------------------------------- | ------ | ------ | ------- | ------ | ------ | ------ | --------- | ------ | ------ | ------ | ---------- | ------- | ------ | ------ | ---------- | ------ | ------ | ------ | ----- | 
|                                                                                                                      |                                                                 | Year Ended December 31,  |             
|                                                                                                                      |                                                                 |                          |             
|                                                                                                                      |                                                                 | 2000                     |              |                                       | 2001   |        |         | 2002   |        |        | 2003      |        |        | 2004   |           
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      |                                                                 |                          |              | (in thousands, except per share data) |        |        |        
|Consolidated Statement of Operations Data(1):                                                                         |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |       
|Revenues                                                                                                              |                                                                 | $                        | 50,734       |                                       |        | $      | 42,874  |        |        | $      | 46,496    |        |        | $      | 84,396     |         |        | $      | 89,603     |       
|Cost of revenues                                                                                                      |                                                                 |                          | 33,719       |                                       |        |        | 26,020  |        |        |        | 27,883    |        |        |        | 51,131     |         |        |        | 50,302     |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      |                                                                 |                          | Gross profit |                                       |        | 17,015 |         |        |        | 16,854 |           |        |        | 18,613 |            |         |        | 33,265 |            |        |        | 39,301 |      
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Operating Expenses:                                                                                                   |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |       
|                                                                                                                      | Research and development                                        |                          |              | 7,479                                 |        |        |         | 5,459  |        |        |           | 5,126  |        |        |            | 8,086   |        |        |            | 7,397  |       
|                                                                                                                      | Write off acquired in-process research and development          |                          |              |                                      |        |        |         |       |        |        |           |       |        |        |            | 1,290   |        |        |            |       |       
|                                                                                                                      | Sales and marketing                                             |                          |              | 13,306                                |        |        |         | 9,210  |        |        |           | 9,974  |        |        |            | 17,669  |        |        |            | 18,378 |       
|                                                                                                                      | General and administrative (excluding stock-based compensation) |                          |              | 4,525                                 |        |        |         | 4,913  |        |        |           | 5,273  |        |        |            | 7,669   |        |        |            | 8,275  |       
|                                                                                                                      | Restructuring costs                                             |                          |              | 645                                   |        |        |         |       |        |        |           |       |        |        |            |        |        |        |            |       |       
|                                                                                                                      | Stock-based compensation(2)                                     |                          |              | 215                                   |        |        |         | 2,664  |        |        |           | 111    |        |        |            | 74      |        |        |            | 73     |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      |                                                                 | Total operating expenses |              |                                       | 26,170 |        |         |        | 22,246 |        |           |        | 20,484 |        |            |         | 34,788 |        |            |        | 34,123 |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      |                                                                 |                          |              | Operating income (loss)               |        |        | (9,155  | )      |        |        | (5,392    | )      |        |        | (1,871     | )       |        |        | (1,523     | )      |        |        | 5,178 | 
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Other Income (Expense):                                                                                               |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |       
|                                                                                                                      | Interest income (expense), net                                  |                          |              | (302                                  | )      |        |         | (939   | )      |        |           | 330    |        |        |            | (212    | )      |        |            | (70    | )     
|                                                                                                                      | Write-off note receivable and accrued interest                  |                          |              |                                      |        |        |         | (1,106 | )      |        |           |       |        |        |            |        |        |        |            |       |       
|                                                                                                                      | Other income (expense), net                                     |                          |              | 369                                   |        |        |         | 74     |        |        |           | (6     | )      |        |            | (11     | )      |        |            | 1,031  |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      |                                                                 |                          |              | Total other income (expense)          |        |        | 67      |        |        |        | (1,971    | )      |        |        | 324        |         |        |        | (223       | )      |        |        | 961   | 
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Income (loss) from continuing operations before income taxes and
    minority interest in loss of consolidated entity |                                                                 |                          | (9,088       | )                                     |        |        | (7,363  | )      |        |        | (1,547    | )      |        |        | (1,746     | )       |        |        | 6,139      |       
|                                                                                                                      | Income tax benefit (provision)                                  |                          |              | 2,088                                 |        |        |         | 205    |        |        |           | 192    |        |        |            | (62     | )      |        |            | 8,890  |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Income (loss) from continuing operations before minority
    interest in loss of consolidated entity                  |                                                                 |                          | (7,000       | )                                     |        |        | (7,158  | )      |        |        | (1,355    | )      |        |        | (1,808     | )       |        |        | 15,029     |       
|Minority interest in loss of consolidated entity                                                                      |                                                                 |                          |             |                                       |        |        |        |        |        |        |          |        |        |        | 25         |         |        |        | 39         |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Income (loss) from continuing operations                                                                              |                                                                 |                          | (7,000       | )                                     |        |        | (7,158  | )      |        |        | (1,355    | )      |        |        | (1,783     | )       |        |        | 15,068     |       
|Discontinued operations:                                                                                              |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |       
|                                                                                                                      | Loss on sale, net                                               |                          |              |                                      |        |        |         | (831   | )      |        |           |       |        |        |            |        |        |        |            |       |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      | Net income (loss)                                               |                          | $            | (7,000                                | )      |        | $       | (7,989 | )      |        | $         | (1,355 | )      |        | $          | (1,783  | )      |        | $          | 15,068 |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Basic income (loss) from continuing operations per share(3)                                                           |                                                                 | $                        | (13.94       | )                                     |        | $      | (11.37  | )      |        | $      | (0.17     | )      |        | $      | (0.15      | )       |        | $      | 1.14       |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Diluted income (loss) from continuing operations per share(3)                                                         |                                                                 | $                        | (13.94       | )                                     |        | $      | (11.37  | )      |        | $      | (0.17     | )      |        | $      | (0.15      | )       |        | $      | 1.08       |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|Shares used in computing basic income (loss) from continuing
    operations per share(3)                              |                                                                 |                          | 502,065      |                                       |        |        | 629,647 |        |        |        | 7,887,659 |        |        |        | 12,147,720 |         |        |        | 13,262,748 |       
|Shares used in computing diluted income (loss) from continuing
    operations per share(3)                            |                                                                 |                          | 502,065      |                                       |        |        | 629,647 |        |        |        | 7,887,659 |        |        |        | 12,147,720 |         |        |        | 14,011,394 |       
|Consolidated Statement of Cash Flows Data:                                                                            |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |            |         |        |        |            |       
|                                                                                                                      | Cash flows from (used in) operating activities                  |                          | $            | (2,115                                | )      |        | $       | 719    |        |        | $         | (1,369 | )      |        | $          | 173     |        |        | $          | 6,259  |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      | Cash flows used in investing activities                         |                          | $            | (672                                  | )      |        | $       | (280   | )      |        | $         | (3,369 | )      |        | $          | (19,597 | )      |        | $          | (41    | )     
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           
|                                                                                                                      | Cash flows from (used in) financing activities                  |                          | $            | 2,409                                 |        |        | $       | (644   | )      |        | $         | 23,902 |        |        | $          | 227     |        |        | $          | 15,499 |       
|                                                                                                                      |                                                                 |                          |              |                                       |        |        |         |        |        |        |           |        |        |        |           

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|                                 |                            |                |   |        |      |  |   |        |  |  |      |        |  |      |   |        |  |  |   |        | 
|-------------------------------- | -------------------------- | -------------- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                                 |                            | December 31,   |  
|                                 |                            |                |  
|                                 |                            | 2000           |   |        | 2001 |  |   | 2002   |  |  | 2003 |        |  | 2004 |  
|                                 |                            |                |   |        |      |  |   |        |  |  |      |        |  |      |  
|                                 |                            | (in thousands) |  
|Consolidated Balance Sheet Data: |                            |                |   |        |      |  |   |        |  |  |      |        |  |      |   |        |  |  |   |       
|                                 | Cash and cash equivalents  |                | $ | 423    |      |  | $ | 218    |  |  | $    | 19,382 |  |      | $ | 185    |  |  | $ | 21,902 | 
|                                 | Total assets               |                |   | 23,654 |      |  |   | 17,466 |  |  |      | 42,050 |  |      |   | 48,317 |  |  |   | 77,175 | 
|                                 | Current liabilities        |                |   | 18,183 |      |  |   | 16,578 |  |  |      | 14,378 |  |      |   | 20,807 |  |  |   | 18,682 | 
|                                 | Long-term liabilities      |                |   |       |      |  |   | 831    |  |  |      | 363    |  |      |   | 1,180  |  |  |   |       | 
|                                 | Total shareholders equity |                | $ | 5,471  |      |  | $ | 57     |  |  | $    | 27,309 |  |      | $ | 26,132 |  |  | $ | 58,334 | 






|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The acquisition of Burdick, Inc. in January 2003 materially
    affects the comparability of information contained in this
    table. See Note 3 to the consolidated financial statements.                     
|   
|(2) | Stock-based compensation charges, though reported separately in
    the statement of operations, are attributed to general and
    administrative expenses.                                                    
|   
|(3) | See Note 2 to the consolidated financial statements for a
    reconciliation of the denominators used in computing basic and
    diluted loss per share from continuing operations for 2002, 2003
    and 2004.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

You should read the following discussion and analysis in
conjunction with our consolidated financial statements and
related notes included elsewhere in this report. Except for
historical information, the following discussion contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact, including future results of
operations or financial position, made in this Annual Report on
Form 10-K are forward looking. The words
believe, expect, intend,
anticipate, variations of such words, and similar
expressions identify forward-looking statements, but their
absence does not mean that the statement is not forward-looking.
These forward-looking statements reflect managements
current expectations and involve risks and uncertainties. Our
actual results could differ materially from results that may be
anticipated by such forward-looking statements. The principal
factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section
entitled Certain Factors That May Affect Future
Results and those discussed elsewhere in this report.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to revise any
forward-looking statements to reflect events or circumstances
that may subsequently arise. Readers are urged to review and
consider carefully the various disclosures made in this report
and in our other filings made with the SEC that attempt to
advise interested parties of the risks and factors that may
affect our business, prospects and results of operations.


Overview








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Critical Accounting Estimates and Policies






| |                              
| | -----------------------------
| | Critical Accounting Estimates





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it requires us to make assumptions because information was not
    available at the time or it included matters that were highly
    uncertain at the time we were making the estimate, and
|
| |  | changes in the estimate or different estimates that we
    reasonably could have selected would have had a material impact
    on our financial condition or results of operations.        



Revenues.


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Accounts Receivable.


Inventories.


Purchase Price Allocations.


Goodwill.




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Intangible Assets.






Warranty.


Investment in Unconsolidated Entity.


Deferred Tax Assets and Income Taxes.




| |                             
| | ----------------------------
| | Critical Accounting Policies



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Revenue Recognition:




Accounting for Stock-Based Compensation.




Segment Reporting.


Results of Operations




|                              |              |                               |       |      |      |  |       |      |   |  |       |      |  
|----------------------------- | ------------ | ----------------------------- | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                              |              | Fiscal Year                   |      
|                              |              |                               |      
|                              |              | 2002                          |       |      | 2003 |  |       | 2004 |  
|                              |              |                               |       |      |      |  |       |      |  
|                              |              | (as a percentage of revenues) |      
|Statement of Operations Data: |              |                               |       |      |      |  |       |      |   |  |       |     
|Revenues:                     |              |                               |       |      |      |  |       |      |   |  |       |     
|                              | Systems      |                               |       | 80.4 | %    |  |       | 84.8 | % |  |       | 86.4 | %
|                              | Service      |                               |       | 19.6 |      |  |       | 15.2 |   |  |       | 13.6 |  
|                              |              |                               |       |      |      |  |       |      |  
|Total revenues                |              |                               | 100.0 |      |      |  | 100.0 |      |   |  | 100.0 |     
|                              |              |                               |       |      |      |  |       |      |  
|Cost of Revenues:             |              |                               |       |      |      |  |       |      |   |  |       |     
|                              | Systems      |                               |       | 50.0 |      |  |       | 52.1 |   |  |       | 47.8 |  
|                              | Service      |                               |       | 10.0 |      |  |       | 8.5  |   |  |       | 8.3  |  
|                              |              |                               |       |      |      |  |       |      |  
|Total cost of revenues        |              |                               | 60.0  |      |      |  | 60.6  |      |   |  | 56.1  |     
|                              |              |                               |       |      |      |  |       |      |  
|                              | Gross margin |                               |       | 40.0 |      |  |       | 39.4 |   |  |       | 43.9 |  
|                              |              |                               |       |      |      |  |       |      |  

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|                                                                                           |                                                                            |                               |      |      |      |  |      |      |      |  |      |      |      | 
|------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------- | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- | 
|                                                                                           |                                                                            | Fiscal Year                   |     
|                                                                                           |                                                                            |                               |     
|                                                                                           |                                                                            | 2002                          |      |      | 2003 |  |      | 2004 |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|                                                                                           |                                                                            | (as a percentage of revenues) |     
|Operating Expenses:                                                                        |                                                                            |                               |      |      |      |  |      |      |      |  |      |     
|                                                                                           | Research and development                                                   |                               |      | 11.0 |      |  |      | 9.6  |      |  |      | 8.3  |     
|                                                                                           | Write off acquired in-process research and development                     |                               |      | 0.0  |      |  |      | 1.5  |      |  |      | 0.0  |     
|                                                                                           | Sales and marketing                                                        |                               |      | 21.5 |      |  |      | 20.9 |      |  |      | 20.5 |     
|                                                                                           | General and administrative, excluding stock-based compensation
    expense |                               |      | 11.3 |      |  |      | 9.1  |      |  |      | 9.2  |     
|                                                                                           | Stock-based compensation                                                   |                               |      | 0.2  |      |  |      | 0.1  |      |  |      | 0.1  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|                                                                                           |                                                                            | Total operating expenses      |      |      | 44.0 |  |      |      | 41.2 |  |      |      | 38.1 | 
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|Operating income (loss)                                                                    |                                                                            |                               | (4.0 | )    |      |  | (1.8 | )    |      |  | 5.8  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|Other Income (Expense):                                                                    |                                                                            |                               |      |      |      |  |      |      |      |  |      |     
|                                                                                           | Interest income (expense), net                                             |                               |      | 0.2  |      |  |      | (0.2 | )    |  |      | (0.1 | )   
|                                                                                           | Interest income, putable warrants                                          |                               |      | 0.5  |      |  |      | 0.0  |      |  |      | 0.0  |     
|                                                                                           | Other income, net                                                          |                               |      | 0.0  |      |  |      | 0.0  |      |  |      | 1.2  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|                                                                                           | Total other income (expense)                                               |                               |      | 0.7  |      |  |      | (0.2 | )    |  |      | 1.1  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|Income (loss) before income taxes and minority interest in loss
    of consolidated entity |                                                                            |                               | (3.3 | )    |      |  | (2.0 | )    |      |  | 6.9  |     
|                                                                                           | Income tax benefit (provision)                                             |                               |      | 0.4  |      |  |      | (0.1 | )    |  |      | 9.9  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|Income (loss) before minority interest in loss of consolidated
    entity                  |                                                                            |                               | (2.9 | )    |      |  | (2.1 | )    |      |  | 16.8 |     
|                                                                                           | Minority interest in loss of consolidated entity                           |                               |      | 0.0  |      |  |      | 0.0  |      |  |      | 0.0  |     
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     
|Net income (loss)                                                                          |                                                                            |                               | (2.9 | )%   |      |  | (2.1 | )%   |      |  | 16.8 | %   
|                                                                                           |                                                                            |                               |      |      |      |  |      |      |     

Comparison of Years Ended December 31, 2004 and
December 31, 2003




| |         
| | --------
| | Revenues









| |             
| | ------------
| | Gross Profit



32



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| |                   
| | ------------------
| | Operating Expenses











33



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| |                       
| | ----------------------
| | Other Income (Expense)





| |                               
| | ------------------------------
| | Income Tax Benefit (Provision)







Comparison of Years Ended December 31, 2003 and
December 31, 2002




| |         
| | --------
| | Revenues





34



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| |             
| | ------------
| | Gross Profit









| |                   
| | ------------------
| | Operating Expenses



35



---



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| |                       
| | ----------------------
| | Other Income (Expense)





| |                               
| | ------------------------------
| | Income Tax Benefit (Provision)







36



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Liquidity and Capital Resources














37



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| |                                           
| | ------------------------------------------
| | Deferred Tax Assets and Income Tax Benefit





| |                        
| | -----------------------
| | Contractual Obligations



|                        |                                    |       |       |           |        |   |       |             |  |   |             |       |  |         |       |       |  |   |   |   | 
|----------------------- | ---------------------------------- | ----- | ----- | --------- | ------ | - | ----- | ----------- |  | - | ----------- | ----- |  | ------- | ----- | ----- |  | - | - | - | 
|                        |                                    |       |       | Less than |        |   |       |             |  |   | After      
|Contractual Obligations |                                    | Total |       |           | 1 Year |   |       | 1 - 3 Years |  |   | 3 - 5 Years |       |  | 5 Years
|                        |                                    |       |       |           |        |   |       |             |  |   |             |       |  |        
|Operating leases        |                                    | $     | 4,383 |           |        | $ | 1,113 |             |  | $ | 2,114       |       |  | $       | 1,156 |       |  | $ |  |  
|Purchase obligations    |                                    |       | 9,111 |           |        |   | 9,111 |             |  |   |            |       |  |         |      |       |  |   |  |  
|                        |                                    |       |       |           |        |   |       |             |  |   |             |       |  |         |      
|                        | Total contractual cash obligations |       | $     | 13,494    |        |   | $     | 10,224      |  |   | $           | 2,114 |  |         | $     | 1,156 |  |   | $ |  | 
|                        |                                    |       |       |           |        |   |       |             |  |   |             |       |  |         |      



|                             |                              |       |    |           |        |   |    |             |  |             |       |         |  |   |   |   |  |   |   |   | 
|---------------------------- | ---------------------------- | ----- | -- | --------- | ------ | - | -- | ----------- |  | ----------- | ----- | ------- |  | - | - | - |  | - | - | - | 
|                             |                              |       |    | Less than |        |   |    |             |  |             | After
|Other Commercial Commitments |                              | Total |    |           | 1 Year |   |    | 1 - 3 Years |  | 3 - 5 Years |       | 5 Years
|                             |                              |       |    |           |        |   |    |             |  |             |       |        
|Line of credit               |                              | $     | 90 |           |        | $ | 90 |             |  | $           |      |         |  | $ |  |   |  | $ |  |  
|Guarantees                   |                              |       |   |           |        |   |   |             |  |             |      |         |  |   |  |   |  |   |  |  
|                             |                              |       |    |           |        |   |    |             |  |             |       |         |  |   |  
|                             | Total commercial commitments |       | $  | 90        |        |   | $  | 90          |  |             | $     |        |  |   | $ |  |  |   | $ |  | 
|                             |                              |       |    |           |        |   |    |             |  |             |       |         |  |   |  





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| |                       
| | ----------------------
| | Public Equity Offering





| |                                            
| | -------------------------------------------
| | Sale of Hemodynamic Monitoring Product Line







| |                 
| | ----------------
| | Subsequent Event



39



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##### Table of Contents







Recent Accounting Pronouncements













|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk







40



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data





| |                            
| | ---------------------------
| | Quarterly Financial Results



|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |       |  |   |        |       |  |   |        |        | 
|--------------------------------------------------------------- | ---------------------------- | ------------------------------------- | ------ | ------ | -------- | - | ------ | ------------- | - | - | ------------ | ----- | - | --------- | ------ | ----- | -------- | - | ------ | ------------- | - | - | ------------ | ----- |  | - | ------ | ----- |  | - | ------ | ------ | 
|                                                                |                              | March 31,                             |        |        | June 30, |   |        | September 30, |   |   | December 31, |       |   | March 31, |        |       | June 30, |   |        | September 30, |   |   | December 31, |      
|                                                                |                              | 2003                                  |        |        | 2003     |   |        | 2003          |   |   | 2003         |       |   | 2004      |        |       | 2004     |   |        | 2004          |   |   | 2004         |      
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      
|                                                                |                              | (In thousands, except for share data) |       
|Consolidated Statements of Operations Data:                     |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |       |  |   |        |       |  |   |        |       
|Revenues                                                        |                              | $                                     | 20,283 |        |          | $ | 20,706 |               |   | $ | 21,034       |       |   | $         | 22,373 |       |          | $ | 21,652 |               |   | $ | 21,648       |       |  | $ | 22,498 |       |  | $ | 23,805 |       
|Cost of revenues                                                |                              |                                       | 12,439 |        |          |   | 12,264 |               |   |   | 12,455       |       |   |           | 13,973 |       |          |   | 12,200 |               |   |   | 12,424       |       |  |   | 12,598 |       |  |   | 13,080 |       
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      
|                                                                | Gross profit                 |                                       |        | 7,844  |          |   |        | 8,442         |   |   |              | 8,579 |   |           |        | 8,400 |          |   |        | 9,452         |   |   |              | 9,224 |  |   |        | 9,900 |  |   |        | 10,725 | 
|Operating Expenses:                                             |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |       |  |   |        |       |  |   |        |       
|Research and development                                        |                              |                                       | 2,087  |        |          |   | 1,989  |               |   |   | 1,969        |       |   |           | 2,041  |       |          |   | 1,831  |               |   |   | 1,796        |       |  |   | 1,882  |       |  |   | 1,888  |       
|Write off acquired in-process research and development          |                              |                                       | 1,290  |        |          |   |       |               |   |   |             |       |   |           |       |       |          |   |       |               |   |   |             |       |  |   |       |       |  |   |       |       
|Sales and marketing                                             |                              |                                       | 4,326  |        |          |   | 4,491  |               |   |   | 4,519        |       |   |           | 4,333  |       |          |   | 4,371  |               |   |   | 4,367        |       |  |   | 4,768  |       |  |   | 4,872  |       
|General and administrative (excluding stock-based compensation) |                              |                                       | 2,027  |        |          |   | 1,942  |               |   |   | 1,829        |       |   |           | 1,871  |       |          |   | 2,088  |               |   |   | 1,949        |       |  |   | 1,974  |       |  |   | 2,264  |       
|Stock-based
    compensation                                    |                              |                                       | 18     |        |          |   | 18     |               |   |   | 18           |       |   |           | 20     |       |          |   | 18     |               |   |   | 18           |       |  |   | 18     |       |  |   | 19     |       
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      
|                                                                | Total operating expenses     |                                       |        | 9,748  |          |   |        | 8,440         |   |   |              | 8,335 |   |           |        | 8,265 |          |   |        | 8,308         |   |   |              | 8,130 |  |   |        | 8,642 |  |   |        | 9,043  | 
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      
|                                                                | Operating income (loss)      |                                       |        | (1,904 | )        |   |        | 2             |   |   |              | 244   |   |           |        | 135   |          |   |        | 1,144         |   |   |              | 1,094 |  |   |        | 1,258 |  |   |        | 1,682  | 
|Other Income (Expense):                                         |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |       |  |   |        |       |  |   |        |       
|Interest income (expense), net                                  |                              |                                       | (75    | )      |          |   | (73    | )             |   |   | (63          | )     |   |           | (33    | )     |          |   | (41    | )             |   |   | (19          | )     |  |   | 38     |       |  |   | (48    | )     
|Non-cash interest income (expense), putable warrants            |                              |                                       | 95     |        |          |   | (63    | )             |   |   |             |       |   |           |       |       |          |   |       |               |   |   |             |       |  |   |       |       |  |   |       |       
|Other income (expense), net                                     |                              |                                       | 4      |        |          |   | (13    | )             |   |   | 2            |       |   |           | (4     | )     |          |   |       |               |   |   | 633          |       |  |   | 17     |       |  |   | 381    |       
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      
|                                                                | Total other income (expense) |                                       |        | 24     |          |   |        | (149          | ) |   |              | (61   | ) |           |        | (37   | )        |   |        | (41           | ) |   |              | 614   |  |   |        | 55    |  |   |        | 333    | 
|                                                                |                              |                                       |        |        |          |   |        |               |   |   |              |       |   |           |        |       |          |   |        |               |   |   |              |      

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|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |   |  |   |       |  |  |   |        | 
|---------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | -------- | - | ----- | ------------- |  | - | ------------ | - |  | --------- | ---- | - | -------- | - | ----- | ------------- |  | - | ------------ | - |  | - | ----- |  |  | - | ------ | 
|                                                                                   |  | March 31,                             |        |   | June 30, |   |       | September 30, |  |   | December 31, |   |  | March 31, |      |   | June 30, |   |       | September 30, |  |   | December 31, |  
|                                                                                   |  | 2003                                  |        |   | 2003     |   |       | 2003          |  |   | 2003         |   |  | 2004      |      |   | 2004     |   |       | 2004          |  |   | 2004         |  
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  
|                                                                                   |  | (In thousands, except for share data) |       
|Income (loss) before income taxes and minority interest in
    consolidated entity |  |                                       | (1,880 | ) |          |   | (147  | )             |  |   | 183          |   |  |           | 98   |   |          |   | 1,103 |               |  |   | 1,708        |   |  |   | 1,313 |  |  |   | 2,015  | 
|Income tax benefit (provision)                                                     |  |                                       |       |   |          |   | (9    | )             |  |   | (4           | ) |  |           | (49  | ) |          |   | (35   | )             |  |   | (35          | ) |  |   |      |  |  |   | 8,960  | 
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  
|Income (loss) before minority interest in loss (income) of
    consolidated entity |  |                                       | (1,880 | ) |          |   | (156  | )             |  |   | 179          |   |  |           | 49   |   |          |   | 1,068 |               |  |   | 1,673        |   |  |   | 1,313 |  |  |   | 10,975 | 
|Minority interest in loss (income) of consolidated entity                          |  |                                       | 21     |   |          |   | (1    | )             |  |   | 4            |   |  |           | 1    |   |          |   | 20    |               |  |   | 10           |   |  |   | 5     |  |  |   | 4      | 
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  
|Net income (loss)                                                                  |  | $                                     | (1,859 | ) |          | $ | (157  | )             |  | $ | 183          |   |  | $         | 50   |   |          | $ | 1,088 |               |  | $ | 1,683        |   |  | $ | 1,318 |  |  | $ | 10,979 | 
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  
|Net income (loss) per share - basic                                                |  | $                                     | (0.15  | ) |          | $ | (0.01 | )             |  | $ | 0.02         |   |  | $         | 0.00 |   |          | $ | 0.09  |               |  | $ | 0.13         |   |  | $ | 0.09  |  |  | $ | 0.78   | 
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  
|Net income (loss) per share -diluted                                               |  | $                                     | (0.15  | ) |          | $ | (0.01 | )             |  | $ | 0.01         |   |  | $         | 0.00 |   |          | $ | 0.08  |               |  | $ | 0.12         |   |  | $ | 0.09  |  |  | $ | 0.74   | 
|                                                                                   |  |                                       |        |   |          |   |       |               |  |   |              |   |  |           |      |   |          |   |       |               |  |   |              |  






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures




Managements Report on Internal Control Over Financial
Reporting






Changes in Internal Controls




42



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##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information

Entry into Material Definitive Agreements




|                |  |                              |  |        
|--------------- |  | ---------------------------- |  | -------
|John Hinson     |  | Chief Executive Officer      |  | $80,030
|Mike Matysik    |  | Chief Financial Officer      |  | $54,543
|Allan Criss     |  | Vice President, Acute Care   |  | $14,162
|David Hadley    |  | Vice President, Research     |  | $44,959
|Atul Jhalani    |  | Vice President, Marketing    |  | $39,239
|Darryl Lustig   |  | Vice President, Primary Care |  | $17,867
|Feroze Motafram |  | Vice President, Operations   |  | $44,959





|              |  |                              |  |        
|------------- |  | ---------------------------- |  | -------
|Darryl Lustig |  | Vice President, Primary Care |  | $65,069
|Allan Criss   |  | Vice President, Acute Care   |  | $47,012





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PART III







|         |                                                
|-------- | -----------------------------------------------
|Item 10. | Executive Officers and Directors of the Company



|                                |  |     |    |  |          |                                                             
|------------------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------
|Name                            |  | Age |    |  | Position
|                                |  |     |    |  |         
|Management:                     |  |     |    |  |          |                                                             
|Ruediger Naumann-Etienne, Ph.D. |  |     | 58 |  |          | Chairman of the Board                                       
|John R. Hinson                  |  |     | 42 |  |          | President, Chief Executive Officer and Director             
|Michael K. Matysik              |  |     | 46 |  |          | Senior Vice President, Chief Financial Officer and Secretary
|Allan Criss                     |  |     | 45 |  |          | Vice President, Acute Care                                  
|David M. Hadley, Ph.D.          |  |     | 55 |  |          | Vice President, Research                                    
|Atul Jhalani                    |  |     | 40 |  |          | Vice President, Marketing                                   
|Brian Lee                       |  |     | 49 |  |          | Vice President, Engineering                                 
|Darryl Lustig                   |  |     | 49 |  |          | Vice President, Primary Care                                
|Feroze Motafram                 |  |     | 50 |  |          | Vice President, Operations                                  
|Non-employee Directors:         |  |     |    |  |          |                                                             
|W. Robert Berg                  |  |     | 61 |  |          | Director                                                    
|Jue-Hsien Chern, Ph.D.          |  |     | 50 |  |          | Director                                                    
|Harvey N. Gillis                |  |     | 59 |  |          | Director                                                    

Ruediger Naumann-Etienne, Ph.D.


John R. Hinson


Michael K. Matysik


Allan Criss


44



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##### Table of Contents





David M. Hadley, Ph.D.


Atul Jhalani


Brian Lee


Darryl R. Lustig


Feroze Motafram


W. Robert Berg


Jue-Hsien Chern, Ph.D.


45



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##### Table of Contents





Harvey N. Gillis


Director Independence




Board Committees and Meetings




Audit Committee.




Compensation Committee.


46



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##### Table of Contents





Nominating and Governance Committee.




Code of Ethics




Section 16(a) Beneficial Ownership Reporting
Compliance











|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Non-employee Directors Compensation






47



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##### Table of Contents







Executive Compensation


Summary Compensation Table




|                          |                               |      |      |                     |            |   |            |              |  |           |             |        |     |                  |        |         |  |   |        |       | 
|------------------------- | ----------------------------- | ---- | ---- | ------------------- | ---------- | - | ---------- | ------------ |  | --------- | ----------- | ------ | --- | ---------------- | ------ | ------- |  | - | ------ | ----- | 
|                          |                               |      |      |                     |            |   |            | Long Term    |  |           |            
|                          |                               |      |      |                     |            |   |            | Compensation |  |           |            
|                          |                               |      |      |                     |            |   |            | Awards       |  |           |            
|                          |                               |      |      |                     |            |   |            |              | 
|                          |                               |      |      | Annual Compensation |            |   | Shares     |              |  |          
|                          |                               |      |      |                     |            |   | Underlying |              |  | All Other |            
|Name & Principal Position |                               | Year |      |                     | Salary ($) |   |            | Bonus ($)    |  |           | Options (#) |        |     | Compensation ($) |       
|                          |                               |      |      |                     |            |   |            |              |  |           |             |        |     |                  |       
|John R. Hinson            |                               |      | 2004 |                     |            | $ | 250,000    |              |  | $         | 80,030      |        |     |                  | 80,000 |         |  | $ | 9,390  | (1)  
|                          | President and CEO             |      |      | 2003                |            |   |            | 232,692      |  |           |             | 81,690 |     |                  |        | 50,000  |  |   |        | 9,356 | 
|                          |                               |      |      | 2002                |            |   |            | 225,000      |  |           |             | 22,250 |     |                  |        | 10,000  |  |   |        | 9,354 | 
|Michael K. Matysik(2)     |                               |      | 2004 |                     |            |   | 183,481    |              |  |           | 54,543      |        |     |                  | 50,000 |         |  |   | 3,406  | (3)  
|                          | Senior Vice President and CFO |      |      | 2003                |            |   |            | 175,000      |  |           |             | 49,183 |     |                  |        | 25,000  |  |   |        | 3,256 | 
|                          |                               |      |      | 2002                |            |   |            | 114,423      |  |           |             | 12,500 |     |                  |        | 150,000 |  |   |        | 3,167 | 
|Darryl R. Lustig          |                               |      | 2004 |                     |            |   | 166,477    |              |  |           | 82,936      | (4)    |     |                  | 20,000 |         |  |   | 10,776 | (1)  
|                          | Vice President, Primary Care  |      |      | 2003                |            |   |            | 153,860      |  |           |             | 81,831 | (5) |                  |        | 15,000  |  |   |        | 9,048 | 
|David M. Hadley           |                               |      | 2004 |                     |            |   | 151,246    |              |  |           | 44,959      |        |     |                  | 50,000 |         |  |   | 3,943  | (3)  
|                          | Vice President, Research      |      |      | 2003                |            |   |            | 150,000      |  |           |             | 45,014 |     |                  |        | 30,000  |  |   |        | 3,483 | 
|                          |                               |      |      | 2002                |            |   |            | 135,577      |  |           |             | 12,500 |     |                  |        | 7,500   |  |   |        | 3,496 | 
|Allan R. Criss(6)         |                               |      | 2004 |                     |            |   | 137,308    |              |  |           | 101,174     | (7)    |     |                  | 25,000 |         |  |   | 9,298  | (1)  
|                          | Vice President, Acute Care    |      |      |                     |            |   |            |              |  |           |             |        |     |                  |        |         |  |   |        |       | 






|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents matching contributions made by us to the named
    executive officers 401(k) savings and retirement plan
    account, life insurance premiums paid by us for term life
    insurance for the benefit of the named executive officer and a
    car allowance.
|   
|(2) | Mr. Matysik joined us as our Senior Vice President and
    Chief Financial Officer in April 2002.                                                                                                                                                                       
|   
|(3) | Represents matching contributions made by us to the named
    executive officers 401(k) savings and retirement plan
    account and life insurance premiums paid by us for term life
    insurance for the benefit of the named executive officer.                     
|   
|(4) | Includes $65,069 in sales bonuses.                                                                                                                                                                                                                                      
|   
|(5) | Includes $47,294 in sales bonuses.                                                                                                                                                                                                                                      
|   
|(6) | Mr. Criss joined us as our Vice President, Acute Care in
    March 2004.                                                                                                                                                                                                
|   
|(7) | Includes $40,000 signing bonus and $47,012 in sales bonuses.                                                                                                                                                                                                            

48



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Option Grants In Last Fiscal Year




|                   |  |                   |        |  |                            |  |      |           |  |                |            |  |                    |        |           |  |         |   |         |  |  |   |           | 
|------------------ |  | ----------------- | ------ |  | -------------------------- |  | ---- | --------- |  | -------------- | ---------- |  | ------------------ | ------ | --------- |  | ------- | - | ------- |  |  | - | --------- | 
|                   |  | Individual Grants |        |  | Potential Realizable Value | 
|                   |  |                   |        |  | at Assumed Annual Rates    | 
|                   |  | Number of         |        |  | % of Total                 |  |      |           |  | of Share Price |           
|                   |  | Securities        |        |  | Options                    |  |      | Exercise  |  |                |            |  | Appreciation       |       
|                   |  | Underlying        |        |  | Granted to                 |  |      | Price Per |  |                |            |  | for Option Term(3) |       
|                   |  | Options           |        |  | Employees in               |  |      | Share     |  |                | Expiration |  |                    |        |          
|Name               |  | Granted (#)(1)    |        |  | Fiscal Year(2)             |  |      | ($/Share) |  |                | Date       |  |                    | 5% ($) |           |  | 10% ($) |  
|                   |  |                   |        |  |                            |  |      |           |  |                |            |  |                    |        |           |  |         |  
|John R. Hinson     |  |                   | 80,000 |  |                            |  | 16.0 | %         |  | $              | 9.32       |  |                    |        | 2/11/2014 |  |         | $ | 468,800 |  |  | $ | 1,188,000 | 
|Michael K. Matysik |  |                   | 50,000 |  |                            |  | 10.0 | %         |  |                | 9.32       |  |                    |        | 2/11/2014 |  |         |   | 293,000 |  |  |   | 742,500   | 
|Darryl R. Lustig   |  |                   | 20,000 |  |                            |  | 4.0  | %         |  |                | 9.32       |  |                    |        | 2/11/2014 |  |         |   | 117,200 |  |  |   | 297,000   | 
|                   |  |                   | 15,000 |  |                            |  | 3.0  | %         |  |                | 7.76       |  |                    |        | 7/28/2014 |  |         |   | 73,200  |  |  |   | 185,550   | 
|David M. Hadley    |  |                   | 50,000 |  |                            |  | 10.0 | %         |  |                | 9.32       |  |                    |        | 2/11/2014 |  |         |   | 293,000 |  |  |   | 742,500   | 
|Allan R. Criss     |  |                   | 25,000 |  |                            |  | 5.0  | %         |  |                | 9.42       |  |                    |        | 3/10/2014 |  |         |   | 148,000 |  |  |   | 375,250   | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The per share exercise price is the fair market value of our
    common stock on the date of grant. The options set forth above
    vest 25% one year after the date of grant and thereafter in
    equal monthly installments over the next 36 months and
    expire 10 years after the grant date subject to earlier
    termination in the event of termination of employment. The
    schedule on which options become exercisable is subject to
    acceleration in the event of certain corporate transactions.                                                
|   
|(2) | Based on options to purchase a total of 501,050 shares of
    our common stock granted to employees during fiscal year 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | The potential realizable value calculated based on the term of
    the option at the time of grant (10 years). Stock price
    appreciation of 5% and 10% is assumed pursuant to rules
    promulgated by the Securities and Exchange Commission and does
    not represent a prediction of our stock price performance.
    Actual gains, if any, are dependent on the actual future
    performance of our common stock and no gain to the optionee is
    possible unless the stock price increases over the option term,
    which will benefit all stockholders.

Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values




|                   |  |             |   |  |          |                      |   |                        |                      |  |                           |  |  |             |         |  |               |   |           |  |  |   |         | 
|------------------ |  | ----------- | - |  | -------- | -------------------- | - | ---------------------- | -------------------- |  | ------------------------- |  |  | ----------- | ------- |  | ------------- | - | --------- |  |  | - | ------- | 
|                   |  |             |   |  |          | Number of Securities |   |                        |                     
|                   |  |             |   |  |          | Underlying           |   |                        | Value of Unexercised | 
|                   |  |             |   |  |          | Unexercised Options  |   |                        | In-the-Money Options | 
|                   |  | Shares      |   |  | Value    |                      |   | at Fiscal Year-End (#) |                      |  | at Fiscal Year-End ($)(2) | 
|                   |  | Acquired on |   |  | Realized |                      |   |                        |                      |  |                           | 
|Name               |  | Exercise    |   |  | ($)(1)   |                      |   | Exercisable            |                      |  | Unexercisable             |  |  | Exercisable |         |  | Unexercisable |  
|                   |  |             |   |  |          |                      |   |                        |                      |  |                           |  |  |             |         |  |               |  
|John R. Hinson     |  |             |  |  |          |                      |  |                        |                      |  | 262,800                   |  |  |             | 109,585 |  |               | $ | 2,063,658 |  |  | $ | 228,180 | 
|Michael K. Matysik |  |             |  |  |          |                      |  |                        |                      |  | 123,957                   |  |  |             | 101,043 |  |               |   | 298,621   |  |  |   | 205,879 | 
|Darryl R. Lustig   |  |             |  |  |          |                      |  |                        |                      |  | 6,874                     |  |  |             | 43,126  |  |               |   | 31,345    |  |  |   | 103,855 | 
|David M. Hadley    |  |             |  |  |          |                      |  |                        |                      |  | 59,145                    |  |  |             | 68,127  |  |               |   | 407,506   |  |  |   | 140,213 | 
|Allan R. Criss     |  |             |  |  |          |                      |  |                        |                      |  |                          |  |  |             | 25,000  |  |               |   |          |  |  |   | 28,500  | 






|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the difference between the fair market value on the
    date of exercise and the exercise price.                        
|   
|(2) | Based on the difference between the fair market value on the
    December 31, 2004 ($10.56 per share) and the exercise
    price.

49



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##### Table of Contents



Employment Contracts and Change-in-Control Arrangements




| |                     
| | --------------------
| | Employment Contracts



Mr. Hinson.


Mr. Matysik.


Mr. Lustig.


Mr. Hadley.


Mr. Criss.






50



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##### Table of Contents





|                       |  |           |     |                 |                      |  |    | 
|---------------------- |  | --------- | --- | --------------- | -------------------- |  | -- | 
|                       |  |           |     | Continuation of |                     
|                       |  | Severance |     |                 | Health and Other     | 
|Name                   |  | Benefit   |     |                 | Benefits (in months) | 
|                       |  |           |     |                 |                      | 
|John R. Hinson         |  |           | 150 | %               |                      |  | 18 | 
|Michael K. Matysik     |  |           | 100 | %               |                      |  | 12 | 
|Darryl R. Lustig       |  |           | 50  | %               |                      |  | 6  | 
|David M. Hadley, Ph.D. |  |           | 100 | %               |                      |  | 12 | 
|Allan R. Criss         |  |           | 50  | %               |                      |  | 6  | 





| |                               
| | ------------------------------
| | Change-in-Control Arrangements





51



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##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management





| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | each person known to the board of directors to own beneficially
    5% or more of our common stock;
|
| |  | each of our directors;                                                                             
|
| |  | each of the executive officers named in the summary compensation
    table; and                    
|
| |  | all of our current directors and executive officers as a group.                                    

Percent of Shares Beneficially Owned


|                                                      |                                  |              |           |  |             |  |      |   | 
|----------------------------------------------------- | -------------------------------- | ------------ | --------- |  | ----------- |  | ---- | - | 
|                                                      |                                  | Number of    |           |  |            
|                                                      |                                  | Shares       |           |  | Percent of  | 
|                                                      |                                  | Beneficially |           |  | Outstanding | 
|Name of Beneficial Owner                              |                                  | Owned(1)     |           |  | Shares      | 
|                                                      |                                  |              |           |  |             | 
|Westfield Capital Management Co. LLC(2)               |                                  |              | 1,580,500 |  |             |  | 11.2 | %
|                                                      | One Financial Center, 23rd Floor |              |           |  |             |  |      |   | 
|                                                      | Boston, MA 02111                 |              |           |  |             |  |      |   | 
|Peter B. Cannell & Co. Inc.(3)                        |                                  |              | 1,342,375 |  |             |  | 9.5  | %
|                                                      | 645 Madison Avenue, 8th Floor    |              |           |  |             |  |      |   | 
|                                                      | New York, NY 10022               |              |           |  |             |  |      |   | 
|J.F. Shea Company, Inc.(4)                            |                                  |              | 1,329,522 |  |             |  | 9.4  | %
|                                                      | 644 Brea Canyon Road             |              |           |  |             |  |      |   | 
|                                                      | Walnut, CA 91789                 |              |           |  |             |  |      |   | 
|Wells Fargo & Company(5)                              |                                  |              | 1,132,975 |  |             |  | 8.0  | %
|                                                      | 420 Montgomery Street            |              |           |  |             |  |      |   | 
|                                                      | San Francisco, CA 94163          |              |           |  |             |  |      |   | 
|Investment Counselors of Maryland, LLC(6)             |                                  |              | 732,350   |  |             |  | 5.2  | %
|                                                      | 803 Cathedral Street             |              |           |  |             |  |      |   | 
|                                                      | Baltimore, MD 21201-5297         |              |           |  |             |  |      |   | 
|Ruediger Naumann-Etienne(7)                           |                                  |              | 579,157   |  |             |  | 4.1  | %
|John R. Hinson(8)                                     |                                  |              | 513,547   |  |             |  | 3.6  | %
|Michael K. Matysik(9)                                 |                                  |              | 183,828   |  |             |  | 1.3  | %
|David M. Hadley(10)                                   |                                  |              | 447,369   |  |             |  | 3.2  | %
|Darryl R. Lustig(11)                                  |                                  |              | 18,616    |  |             |  | *    |  
|Harvey N. Gillis(12)                                  |                                  |              | 29,583    |  |             |  | *    |  
|W. Robert Berg(13)                                    |                                  |              | 31,583    |  |             |  | *    |  
|Jue-Hsien Chern(14)                                   |                                  |              | 19,583    |  |             |  | *    |  
|Allan R. Criss(15)                                    |                                  |              | 7,291     |  |             |  | *    |  
|All directors and executive officers (11 persons)(16) |                                  |              | 1,892,430 |  |             |  | 13.4 | %






| |   |                       
| | - | ----------------------
| | * | Less than one percent.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Beneficial ownership is determined in accordance with
    Rule 13d-3 under the Securities Exchange Act. In computing
    the number of shares beneficially owned by a person or a group
    and the percentage ownership of that person or group, shares of
    our common stock subject to options currently exercisable or
    exercisable within 60 days after April 1, 2005 are
    deemed outstanding, but are not deemed outstanding for the
    purpose of computing the percentage ownership of any other
    person. As of April 1, 2005, we had 14,082,519 shares
    of common stock outstanding. Except as otherwise indicated in
    the footnotes to this table and subject to applicable community
    property laws, each shareholder named in the table has sole
    voting and investment power with respect to the number of shares
    listed opposite the shareholders name. Unless otherwise
    indicated, the address of each of the individuals and entities

52



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##### Table of Contents



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | named below is: c/o Quinton Cardiology Systems, Inc., 3303
    Monte Villa Parkway, Bothell, Washington 98021.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (2) | Beneficial ownership of shares as reported on Schedule 13G/
    A filed with the Securities and Exchange Commission on
    February 14, 2005. According to such filing, Westfield
    Capital Management Co. LLC has sole voting power with respect to
    1,570,500 shares and sole dispositive power with respect to
    all shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (3) | Beneficial ownership of shares as reported on Schedule 13G/
    A filed with the Securities and Exchange Commission on
    February 9, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (4) | Beneficial ownership of shares as reported on Schedule 13G
    filed with the Securities and Exchange Commission on
    November 14, 2002. The Schedule 13G reports each of
    Edmond H. Shea, Jr., John F. Shea, Peter O.
    Shea, Jr., and James G. Shontere as having shared voting
    power for 1,329,522 shares of common stock and shared
    dispositive power for 1,329,522 shares of common stock. The
    filing persons (except for J.F. Shea Company, Inc.) disclaim
    beneficial ownership of the securities being reported and
    disclaim group status. Also, all reporting persons disclaim
    beneficial ownership of an additional 22,443 shares of
    common stock, which the reporting persons acquired directly or
    indirectly as nominee for another investor.
|
| | (5) | Beneficial ownership of shares as reported on Schedule 13G/
    A filed with the Securities and Exchange Commission on
    January 21, 2005. The Schedule 13G/ A reports each of Wells
    Fargo & Company and Wells Capital Management
    Incorporated owns in the aggregate 1,132,975 shares. The
    Schedule 13G/ A also reports that Wells Fargo &
    Company is a parent holding company and that Wells Capital
    Management Incorporated is a registered investment advisor. As
    reported in the Schedule 13G/ A, each of Wells
    Fargo & Company and Wells Capital Management
    Incorporated has sole voting power with respect to
    1,094,300 shares and sole dispositive power with respect to
    1,132,975 shares.                                                    
|
| | (6) | Beneficial ownership of shares as reported on Schedule 13G
    filed with the Securities and Exchange Commission on
    February 3, 2005. According to such filing, Investment
    Counselors of Maryland, LLC has sole voting power with respect
    to 685,850 shares, shared voting power with respect to
    46,500 shares and sole dispositive power with respect to
    all shares.                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (7) | Includes 456,465 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (8) | Includes 294,049 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (9) | Includes 157,810 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|     |                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 78,676 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.   
|    
|(11) | Includes 14,686 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.   
|    
|(12) | Includes 24,583 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.   
|    
|(13) | Includes 24,583 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.   
|    
|(14) | Includes 19,583 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.   
|    
|(15) | Includes 7,291 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.    
|    
|(16) | Includes 1,139,599 shares issuable upon exercise of options
    which are currently exercisable or exercisable within
    60 days after April 1, 2005.

53



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##### Table of Contents



Equity Compensation Plan Information




|                                                           |       |                      |           |           |                      |                      |                    |                      |  |  |         |         | 
|---------------------------------------------------------- | ----- | -------------------- | --------- | --------- | -------------------- | -------------------- | ------------------ | -------------------- |  |  | ------- | ------- | 
|                                                           |       |                      |           |           |                      | Number of Securities |                   
|                                                           |       |                      |           |           |                      | Remaining Available  |                   
|                                                           |       |                      |           |           |                      | for Future Issuance  |                   
|                                                           |       |                      |           |           |                      | Under Equity         |                   
|                                                           |       | Number of Securities |           |           |                      |                      | Compensation Plans |                     
|                                                           |       | to be Issued Upon    |           |           | Weighted-Average     |                      |                    | (Excluding           | 
|                                                           |       | Exercise of          |           |           | Exercise Price of    |                      |                    | Securities Reflected | 
|                                                           |       | Outstanding Options, |           |           | Outstanding Options, |                      |                    | in the First         | 
|Plan Category                                              |       | Warrants and Rights  |           |           | Warrants and Rights  |                      |                    | Column)(1)(2)(3)     | 
|                                                           |       |                      |           |           |                      |                      |                    |                      | 
|Equity compensation plans approved by security holders     |       |                      | 1,981,698 |           |                      | $                    | 5.39               |                      |  |  | 573,651 |        
|Equity compensation plans not approved by security holders |       |                      | 160,000   |           |                      |                      | 8.36               |                      |  |  |        |        
|                                                           |       |                      |           |           |                      |                      |                    |                      | 
|                                                           | Total |                      |           | 2,141,698 |                      |                      | $                  | 5.61                 |  |  |         | 573,651 | 
|                                                           |       |                      |           |           |                      |                      |                    |                      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 477,606 shares remaining available for purchase
    under the 2002 ESPP. The 2002 ESPP includes an evergreen formula
    pursuant to which the number of shares authorized for grant will
    be increased annually by the least of
    (1) 227,272 shares, (2) an amount equal to
    2 percent of the outstanding shares of the common stock as
    of the end of the immediately preceding fiscal year on a fully
    diluted basis, and (3) a lesser amount determined by our
    board of directors. Excludes 227,272 additional shares of common
    stock that became available for purchase under the 2002 ESPP on
    January 1, 2005 pursuant to the evergreen formula.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Includes 96,045 shares remaining available for issuance
    under the 2002 Plan. The 2002 Plan includes an evergreen formula
    pursuant to which the number of shares authorized for grant will
    be increased annually by the least of
    (1) 681,818 shares, (2) an amount equal to
    3 percent of the number of shares of common stock
    outstanding on a fully diluted basis as of the end of our
    immediately preceding fiscal year, and (3) a lesser amount
    determined by our board of directors. Excludes 485,967
    additional shares of common stock that became available for
    issuance under the 2002 Plan on January 1, 2005 pursuant to
    the evergreen formula. Also excludes shares that will become
    issuable under the 2002 Plan if and when they cease to be
    subject to outstanding awards (other than by reason of exercise
    or settlement of the awards) under our 1998 Plan (which was
    suspended on the effective date of our initial public offering).
    Shares available for issuance under the 2002 Plan may be issued
    pursuant to stock options, stock awards or stock units.
|   
|(3) | Our stock option grant program for nonemployee directors is
    administered under the 2002 Plan and provides for the following
    automatic grants of stock to each of our nonemployee directors:
    (1) an initial grant to purchase 10,000 shares of
    our common stock as of the date of the directors initial
    election or appointment to the board and (2) an annual
    grant to purchase 5,000 shares of our common stock
    immediately following each years annual shareholders
    meeting, except that any nonemployee director who received an
    initial grant within three months before an annual meeting of
    shareholders will not receive an annual grant until immediately
    following the second annual meeting after the date of the
    initial grant. Stock options granted under this program will
    vest and become exercisable in equal monthly installments over
    the 12-month period following the grant date (assuming continued
    board service).                                                                                                                                          

Description of Equity Compensation Awards Not Approved By
Shareholders




54



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##### Table of Contents





Administration.


Vesting and Exercise.


Transferability.


Adjustment of Shares.


Company Transaction.


Termination and Amendment.


Federal Income Tax Consequences.




55



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##### Table of Contents












|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.



|                       |  |      |         |     |      |   |         |    
|---------------------- |  | ---- | ------- | --- | ---- | - | ------- | ---
|Services Rendered      |  | 2003 |         |     | 2004 |  
|                       |  |      |         |     |      |  
|Audit services         |  | $    | 509,883 | (1) |      | $ | 466,021 | (4)
|Audit-related services |  |      | 33,734  | (2) |      |   | 47,758  | (5)
|Tax services           |  |      | 31,575  | (3) |      |   | 4,200   | (6)
|All other services     |  |      |        |     |      |   | 90,055  | (7)






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes professional services rendered for the audit of our
    annual financial statements, the reviews of the financial
    statements included in our Form 10-Q filings, services that
    are normally provided by our independent registered public
    accounting firm in connection with statutory and regulatory
    filings or engagements and services that generally only the
    independent registered public accounting firm can reasonably
    provide, such as comfort letters, statutory audits, attest
    services, consents and assistance with and review of documents
    filed with the Securities and Exchange Commission. Fees relating
    to the audit of our 2003 financial statements and the review of
    our filings on Form 10-Q were $200,000. Fees associated
    with the audits of the financial statements of Spacelabs
    Burdick, Inc. for 2001, 2002 and 2003 were $295,665. Other audit
    services fees were $14,218.
|   
|(2) | Includes fees associated primarily with the audits of pension
    and other employee benefit plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | Includes fees associated primarily with the review of our tax
    returns and tax services related to our acquisition of Spacelabs
    Burdick, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(4) | Includes professional services rendered for the audit of our
    annual financial statements, the reviews of the financial
    statements included in our Form 10-Q filings, services that
    are normally provided by our independent auditor in connection
    with statutory and regulatory filings or engagements and
    services that generally only the independent auditor can
    reasonably provide, such as comfort letters, statutory audits,
    attest services, consents and assistance with and review of
    documents file with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                         
|   
|(5) | Includes fees associated primarily with the audits of pension
    and other employee benefit plans ($36,000) and evaluation of
    potential acquisitions ($11,758).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) | Includes fees associated primarily with the review of our tax
    returns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(7) | Includes professional services rendered for the review of the
    financial statements included in our Form S-3 filing, in
    connection with our secondary offering.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

56



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##### Table of Contents







PART IV




|         |                                              
|-------- | ---------------------------------------------
|Item 15. | Exhibits, Financial Statements, and Schedules





| |                                   
| | ----------------------------------
| | (1) Index to Financial Statements:

|                                                                                        |  |  |     | 
|--------------------------------------------------------------------------------------- |  |  | --- | 
|Managements Report on Internal Control Over Financial
    Reporting                    |  |  | F-2 | 
|Report of Independent Registered Public Accounting Firm                                 |  |  | F-3 | 
|Report of Independent Registered Public Accounting Firm                                 |  |  | F-4 | 
|Consolidated Balance Sheets                                                             |  |  | F-5 | 
|Consolidated Statements of Operations                                                   |  |  | F-6 | 
|Consolidated Statements of Changes in Shareholders Equity
    and Comprehensive Income |  |  | F-7 | 
|Consolidated Statements of Cash Flows                                                   |  |  | F-8 | 
|Notes to Consolidated Financial Statements                                              |  |  | F-9 | 



| |                                            
| | -------------------------------------------
| | (2) Index to Financial Statement Schedules:



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All schedules are omitted because they are inapplicable or the
    requested information is included in the consolidated financial
    statements or the related notes thereto.



| |                       
| | ----------------------
| | (3) Index to Exhibits:



| |                                                 
| | ------------------------------------------------
| | The Exhibit Index is included on pages 58 to 60.

57



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                   
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Stock Purchase Agreement dated December 23, 2002 by and
    among Spacelabs Medical, Inc., Spacelabs Burdick, Inc., Quinton
    Cardiology Systems, Inc. and Datex-Ohmeda, Inc.(1)
|       
|        | 2  | .2          |  | ABPM Private Label Distribution Agreement by and between
    Spacelabs Medical, Inc. and Spacelabs Burdick, Inc.(1)                                                               
|       
|        | 3  | .1          |  | Restated Certificate of Incorporation of the registrant.(2)                                                                                                                       
|        | 3  | .2          |  | Bylaws of the registrant.(2)                                                                                                                                                      
|       
|        | 4  | .1          |  | Specimen Company Stock Certificate.(3)                                                                                                                                            
|       
|        | 4  | .2          |  | Investors Rights Agreement.(3)                                                                                                                                                   
|       
|        | 10 | .1*         |  | 1998 Amended and Restated Equity Incentive Plan.(3)                                                                                                                               
|       
|        | 10 | .2*         |  | 2002 Stock Incentive Plan.(3)                                                                                                                                                     
|       
|        | 10 | .3*         |  | 2002 Employee Stock Purchase Plan.(3)                                                                                                                                             
|       
|        | 10 | .4*         |  | Stock Option Grant Program for Nonemployee Directors.(3)                                                                                                                          
|       
|        | 10 | .5*         |  | 2003 Management Incentive Plan.(6)                                                                                                                                                
|       
|        | 10 | .7          |  | Lease Agreement between Quinton Inc. and AHP Subsidiary Holding
    Corporation regarding premises at Bothell, Washington, dated
    August 31, 1998.(3)                          
|       
|        | 10 | .8          |  | First Amendment to Lease between Quinton Inc. and AHP Subsidiary
    Holding Corporation, dated August 31, 1998.(3)                                                               
|       
|        | 10 | .9          |  | OEM Agreement between Quinton Inc. and Mortara Instrument, Inc.
    dated August 1, 2000.(3)                                                                                      
|       
|        | 10 | .10         |  | OEM Agreement between Quinton Inc. and Mortara Instrument, Inc.
    dated October 17, 2000.(3)                                                                                    
|       
|        | 10 | .11         |  | OEM Agreement between Quinton Inc. and Mortara Instrument, Inc.
    dated October 1, 2001.(3)                                                                                     
|       
|        | 10 | .12         |  | Addendum No. 1 to the OEM Agreement between Mortara
    Instrument, Inc. and Quinton Inc. dated August 1, 2001.(3)                                                                
|       
|        | 10 | .13         |  | Loan and Security Agreement between Quinton Cardiology Systems,
    Inc. and Quinton Inc. and Silicon Valley Bank dated
    December 30, 2002.(4)                                 
|       
|        | 10 | .14         |  | Amendment to Loan Documents between Quinton Cardiology Systems,
    Inc., Quinton Inc. and Burdick, Inc. and Silicon Valley Bank
    dated January 9, 2003.(4)                    
|       
|        | 10 | .15         |  | Streamline Facility Agreement between Quinton Cardiology
    Systems, Inc. and Quinton Inc. and Silicon Valley Bank dated as
    of December 30, 2002.(4)                         
|       
|        | 10 | .16         |  | Cross-Corporate Continuing Guaranty between Quinton Cardiology
    Systems, Inc. and Quinton Inc. and Silicon Valley Bank dated
    December 30, 2002.(4)                         
|       
|        | 10 | .17         |  | Intellectual Property Security Agreement between Quinton
    Cardiology Systems, Inc. and Quinton Inc. and Silicon Valley
    Bank dated December 30, 2002.(4)                    
|       
|        | 10 | .18         |  | Assumption Agreement between Quinton Cardiology Systems, Inc.,
    Quinton Inc. and Burdick, Inc. and Silicon Valley Bank dated
    January 9, 2003.(4)                           
|       
|        | 10 | .19         |  | Cross-Corporate Continuing Guaranty between Burdick Inc. and
    Silicon Valley Bank dated January 9, 2003.(4)                                                                    
|       
|        | 10 | .20         |  | Intellectual Property Security Agreement between Burdick, Inc.
    and Silicon Valley Bank dated January 9, 2003.(4)                                                              
|       
|        | 10 | .21         |  | Lease Agreement between Carl Ruedebusch LLC and Burdick, Inc.
    regarding premises at Deerfield Industrial Park in Deerfield,
    Wisconsin dated as of April 6, 1998.(4)       
|       
|        | 10 | .22*        |  | Form of Indemnification Agreement between Quinton Cardiology
    Systems, Inc. and each of its directors and executive
    officers.(5)                                           
|       
|        | 10 | .23         |  | Lease Agreement between Quinton Cardiology Systems, Inc. and
    Hibbs/ Woodinville Associates, L.L.C. regarding premises at
    Bothell, Washington, dated August 29, 2003.(5)   
|       
|        | 10 | .24*        |  | Letter Agreement between Quinton Cardiology Systems, Inc. and
    Darryl Lustig dated October 9, 2003.(6)                                                                         

58



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .25*        |  | Letter Agreement between Quinton Cardiology Systems, Inc. and
    Darryl Lustig dated March 21, 2003.(6)                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .26*        |  | Form of Quinton Cardiology Systems, Inc. Stock Option Grant
    Notice and Stock Option Agreement (This exhibit represents other
    substantially identical documents that have been omitted because
    they are substantially identical to this document in all
    material respects and an Appendix attached to this exhibit sets
    forth material details by which the omitted documents differ
    from this exhibit.).(6)
|       
|        | 10 | .27*        |  | Quinton Cardiology Systems, Inc. Stock Option Grant Notice and
    Stock Option Agreement between Quinton Cardiology Systems, Inc.
    and Atul Jhalani, dated as of October 23, 2003.(6)                                                                                                                                                                                                                                          
|       
|        | 10 | .28*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Ruediger Naumann-Etienne dated as of February 6,
    2004.(7)                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .29*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and John R. Hinson dated as of February 6, 2004.(7)                                                                                                                                                                                                                                                                                                              
|       
|        | 10 | .30*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Michael K. Matysik dated as of February 6, 2004.(7)                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .31*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Darryl Lustig dated as of February 6, 2004.(7)                                                                                                                                                                                                                                                                                                               
|       
|        | 10 | .32*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and John R. Serino dated as of February 6, 2004.(7)                                                                                                                                                                                                                                                                                                              
|       
|        | 10 | .33         |  | Quinton Cardiology Systems, Inc. Stock Option Grant Notice and
    Stock Option Agreement between Quinton Cardiology Systems, Inc.
    and Allan Criss, dated as of March 10, 2004.(7)                                                                                                                                                                                                                                             
|       
|        | 10 | .34*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Allan Criss dated as of March 1, 2004.(8)                                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .35         |  | Amendment to Loan Documents between Quinton Cardiology Systems,
    Inc., Quinton Cardiology, Inc. and Silicon Valley Bank dated
    December 30, 2004.(9)                                                                                                                                                                                                                                                                         
|       
|        | 10 | .36*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Atul Jhalani dated as of February 6, 2004.+                                                                                                                                                                                                                                                                                                                  
|       
|        | 10 | .37*        |  | Form of Stock Option Grant Notice and Stock Option Agreement for
    grants made pursuant to the 2002 Stock Incentive Plan.+                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .38*        |  | Senior Executives  Base Compensation
    Adjustments  2005 dated as of February 28, 2005.+                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .39*        |  | Summary of Non-Employee Director Compensation.+                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .40*        |  | 2004 Sales Bonus Plan for Darryl Lustig, as amended on
    March 14, 2005.+                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .41*        |  | 2004 Sales Bonus Plan for Allan Criss, as amended on
    March 14, 2005.+                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .42*        |  | 2005 Sales Incentive Plan for Darryl Lustig.+                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .43*        |  | 2005 Sales Incentive Plan for Allan Criss.+                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .44*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Brian Lee dated as of February 6, 2004.+                                                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .45*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and Feroze Motafram dated as of February 6, 2004.                                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .46*        |  | Quinton Cardiology Systems, Inc. Stock Option Grant Notice and
    Stock Option Agreement between Quinton Cardiology Systems, Inc.
    and Feroze Motafram dated as of July 23, 2003.                                                                                                                                                                                                                                              
|       
|        | 10 | .47*        |  | Employment Agreement between Quinton Cardiology Systems, Inc.
    and David Hadley dated as of February 6, 2004.                                                                                                                                                                                                                                                                                                                   
|       
|        | 21 | .1          |  | Subsidiaries.+                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|        | 23 | .1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         
|       
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         

59



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##### Table of Contents



|        |    |             |  |                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 32 | .1          |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|       
|        | 32 | .2          |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.






| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | * | Indicates management contract or compensatory plan or
    arrangement.



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| | + | Previously filed with the Annual Report on Form 10-K filed
    on March 16, 2005.



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registrants Current
    Report on Form 8-K (File No. 000-49755) filed on
    January 17, 2003.                  
|   
|(2) | Incorporated by reference to the Registrants Current
    Report on Form 8-K (File No. 000-49755) filed on
    May 21, 2003.                      
|   
|(3) | Incorporated by reference to the Registrants Registration
    Statement on Form S-1 (File No. 333-83272).                                        
|   
|(4) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K for the year ended December 31, 2002
    (File No. 000-49755).       
|   
|(5) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2003 (File No. 000-49755).
|   
|(6) | Incorporated by reference to the Registrants Annual Report
    on Form 10-K for the year ended December 31, 2003
    (File No. 000-49755).       
|   
|(7) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2004 (File No. 000-49755).    
|   
|(8) | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2004 (File No. 000-49755).     
|   
|(9) | Incorporated by reference to the Registrants Current
    Report on Form 8-K (File No. 000-49755) filed on
    January 5, 2005.                   

60



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##### Table of Contents






SIGNATURES






| |                                     
| | ------------------------------------
| | Quinton Cardiology
    Systems, Inc.



| |     |                       
| | --- | ----------------------
| | By: | /s/ Michael K. Matysik

| |                        
| | -----------------------
| |                        
| | Michael K. Matysik     
| | Chief Financial Officer



61



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC.


AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                        |  |  |     | 
|--------------------------------------------------------------------------------------- |  |  | --- | 
|Managements Report on Internal
    Control Over Financial Reporting                    |  |  | F-2 | 
|Report of Independent Registered Public
    Accounting Firm                             |  |  | F-3 | 
|Report of Independent Registered Public
    Accounting Firm                             |  |  | F-4 | 
|Consolidated Balance Sheets                                                             |  |  | F-5 | 
|Consolidated Statements of Operations                                                   |  |  | F-6 | 
|Consolidated Statements of Changes in
    Shareholders Equity and Comprehensive Income |  |  | F-7 | 
|Consolidated Statements of Cash Flows                                                   |  |  | F-8 | 
|Notes to Consolidated Financial
    Statements                                          |  |  | F-9 | 

F-1



---



##### Table of Contents






MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING


Internal Control 
Integrated Framework Internal
Control  Integrated Framework,




F-2



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Managements Report on Internal Control
Over Financial Reporting, Internal Control  Integrated
Framework








Internal Control  Integrated Framework Internal Control  Integrated Framework






| |             
| | ------------
| | /s/ KPMG LLP





F-3



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control-Integrated Framework




| |             
| | ------------
| | /s/ KPMG LLP





F-4



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        |  |       |        |        | 
|---------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------ | ------ | 
|                                                                                                                 |                                                                                                                                                                            | December 31,                               |      
|                                                                                                                 |                                                                                                                                                                            |                                            |      
|                                                                                                                 |                                                                                                                                                                            | 2003                                       |       |         | 2004   | 
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | (in thousands, except share                |      
|                                                                                                                 |                                                                                                                                                                            | and per share data)                        |      
|ASSETS                                                                                                          
|Current Assets:                                                                                                  |                                                                                                                                                                            |                                            |       |         |        |  |       |       
|                                                                                                                 | Cash and cash equivalents                                                                                                                                                  |                                            | $     | 185     |        |  | $     | 21,902 |       
|                                                                                                                 | Marketable equity securities                                                                                                                                               |                                            |       |        |        |  |       | 646    |       
|                                                                                                                 | Accounts receivable, net of allowance for doubtful accounts of
    $663 and $655, respectively                                                                             |                                            |       | 12,480  |        |  |       | 13,649 |       
|                                                                                                                 | Inventories                                                                                                                                                                |                                            |       | 12,690  |        |  |       | 11,047 |       
|                                                                                                                 | Deferred income taxes                                                                                                                                                      |                                            |       |        |        |  |       | 5,542  |       
|                                                                                                                 | Prepaid expenses and other current assets                                                                                                                                  |                                            |       | 1,419   |        |  |       | 790    |       
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total current assets                       |       |         | 26,774 |  |       |        | 53,576 | 
|Machinery and equipment, net of accumulated depreciation and
    amortization of $5,076 and $5,976, respectively |                                                                                                                                                                            |                                            | 4,918 |         |        |  | 4,314 |       
|Deferred income taxes                                                                                            |                                                                                                                                                                            |                                            |      |         |        |  | 3,594 |       
|Intangible assets, net of accumulated amortization of $948 and
    $1,271, respectively                          |                                                                                                                                                                            |                                            | 5,672 |         |        |  | 5,619 |       
|Investment in unconsolidated entity                                                                              |                                                                                                                                                                            |                                            | 1,000 |         |        |  | 1,000 |       
|Goodwill                                                                                                         |                                                                                                                                                                            |                                            | 9,953 |         |        |  | 9,072 |       
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total assets                               |       | $       | 48,317 |  |       | $      | 77,175 | 
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                            
|Current Liabilities:                                                                                             |                                                                                                                                                                            |                                            |       |         |        |  |       |       
|                                                                                                                 | Line of credit                                                                                                                                                             |                                            | $     | 354     |        |  | $     |       |       
|                                                                                                                 | Current portion of long term debt                                                                                                                                          |                                            |       | 363     |        |  |       |       |       
|                                                                                                                 | Accounts payable                                                                                                                                                           |                                            |       | 6,183   |        |  |       | 5,615  |       
|                                                                                                                 | Accrued liabilities                                                                                                                                                        |                                            |       | 7,349   |        |  |       | 6,220  |       
|                                                                                                                 | Warranty liability                                                                                                                                                         |                                            |       | 2,059   |        |  |       | 2,093  |       
|                                                                                                                 | Deferred revenue                                                                                                                                                           |                                            |       | 4,499   |        |  |       | 4,754  |       
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total current liabilities                  |       |         | 20,807 |  |       |        | 18,682 | 
|Deferred income taxes                                                                                            |                                                                                                                                                                            |                                            | 1,180 |         |        |  |      |       
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total liabilities                          |       |         | 21,987 |  |       |        | 18,682 | 
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|Minority interest in consolidated entity                                                                         |                                                                                                                                                                            |                                            | 198   |         |        |  | 159   |       
|Shareholders Equity:                                                                                            |                                                                                                                                                                            |                                            |       |         |        |  |       |       
|                                                                                                                 | Preferred stock (10,000,000 shares authorized), $0.001 par
    value, no shares outstanding as of December 31, 2003 and
    2004                                           |                                            |       |        |        |  |       |       |       
|                                                                                                                 | Common stock (65,000,000 shares authorized), $0.001 par value,
    12,214,905 and 14,057,195 shares issued and outstanding at
    December 31, 2003 and 2004, respectively |                                            |       | 45,617  |        |  |       | 62,656 |       
|                                                                                                                 | Deferred stock-based compensation                                                                                                                                          |                                            |       | (106    | )      |  |       | (33    | )     
|                                                                                                                 | Accumulated other comprehensive income                                                                                                                                     |                                            |       |        |        |  |       | 22     |       
|                                                                                                                 | Accumulated deficit                                                                                                                                                        |                                            |       | (19,379 | )      |  |       | (4,311 | )     
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total shareholders equity                 |       |         | 26,132 |  |       |        | 58,334 | 
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 
|                                                                                                                 |                                                                                                                                                                            | Total liabilities and shareholders equity |       | $       | 48,317 |  |       | $      | 77,175 | 
|                                                                                                                 |                                                                                                                                                                            |                                            |       |         |        | 



F-5



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |        |   |        |            |        | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ------ | --------- | ------ | - | ------ | ---------- | ------ | - | ------ | ---------- | ------ | 
|                                                                                           |                                                                                                        | Year Ended December 31,                         |       
|                                                                                           |                                                                                                        |                                                 |       
|                                                                                           |                                                                                                        | 2002                                            |        |           | 2003   |   |        | 2004       |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | (in thousands, except share and per share data) |       
|Revenues:                                                                                  |                                                                                                        |                                                 |        |           |        |   |        |            |        |   |        |           
|                                                                                           | Systems                                                                                                |                                                 | $      | 37,389    |        |   | $      | 71,557     |        |   | $      | 77,373     |       
|                                                                                           | Service                                                                                                |                                                 |        | 9,107     |        |   |        | 12,839     |        |   |        | 12,230     |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Total revenues                                  |        |           | 46,496 |   |        |            | 84,396 |   |        |            | 89,603 | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|Cost of Revenues:                                                                          |                                                                                                        |                                                 |        |           |        |   |        |            |        |   |        |           
|                                                                                           | Systems                                                                                                |                                                 |        | 23,247    |        |   |        | 43,955     |        |   |        | 42,862     |       
|                                                                                           | Service                                                                                                |                                                 |        | 4,636     |        |   |        | 7,176      |        |   |        | 7,440      |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Total cost of revenues                          |        |           | 27,883 |   |        |            | 51,131 |   |        |            | 50,302 | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Gross profit                                    |        |           | 18,613 |   |        |            | 33,265 |   |        |            | 39,301 | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|Operating Expenses:                                                                        |                                                                                                        |                                                 |        |           |        |   |        |            |        |   |        |           
|                                                                                           | Research and development                                                                               |                                                 |        | 5,126     |        |   |        | 8,086      |        |   |        | 7,397      |       
|                                                                                           | Write off acquired in-process research and development                                                 |                                                 |        |          |        |   |        | 1,290      |        |   |        |           |       
|                                                                                           | Sales and marketing                                                                                    |                                                 |        | 9,974     |        |   |        | 17,669     |        |   |        | 18,378     |       
|                                                                                           | General and administrative (excluding $111, $74 and $73 of
    stock-based compensation, respectively) |                                                 |        | 5,273     |        |   |        | 7,669      |        |   |        | 8,275      |       
|                                                                                           | Stock-based compensation                                                                               |                                                 |        | 111       |        |   |        | 74         |        |   |        | 73         |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Total operating expenses                        |        |           | 20,484 |   |        |            | 34,788 |   |        |            | 34,123 | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Operating income (loss)                         |        |           | (1,871 | ) |        |            | (1,523 | ) |        |            | 5,178  | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|Other Income (Expense):                                                                    |                                                                                                        |                                                 |        |           |        |   |        |            |        |   |        |           
|                                                                                           | Interest income                                                                                        |                                                 |        | 225       |        |   |        | 13         |        |   |        | 162        |       
|                                                                                           | Interest expense                                                                                       |                                                 |        | (114      | )      |   |        | (257       | )      |   |        | (232       | )     
|                                                                                           | Interest income, putable warrants                                                                      |                                                 |        | 219       |        |   |        | 32         |        |   |        |           |       
|                                                                                           | Other income (expense), net                                                                            |                                                 |        | (6        | )      |   |        | (11        | )      |   |        | 1,031      |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           |                                                                                                        | Total other income (expense)                    |        |           | 324    |   |        |            | (223   | ) |        |            | 961    | 
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|Income (loss) before income taxes and minority interest in
    loss of consolidated entity |                                                                                                        |                                                 | (1,547 | )         |        |   | (1,746 | )          |        |   | 6,139  |           
|                                                                                           | Income tax benefit (expense)                                                                           |                                                 |        | 192       |        |   |        | (62        | )      |   |        | 8,890      |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|Income (loss) before minority interest in loss of
    consolidated entity                  |                                                                                                        |                                                 | (1,355 | )         |        |   | (1,808 | )          |        |   | 15,029 |           
|                                                                                           | Minority interest in loss of consolidated entity                                                       |                                                 |        |          |        |   |        | 25         |        |   |        | 39         |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           | Net income (loss)                                                                                      |                                                 | $      | (1,355    | )      |   | $      | (1,783     | )      |   | $      | 15,068     |       
|                                                                                           |                                                                                                        |                                                 |        |           |        |   |        |            |       
|                                                                                           | Net income (loss) per share  basic                                                                    |                                                 | $      | (0.17     | )      |   | $      | (0.15      | )      |   | $      | 1.14       |       
|                                                                                           | Net income (loss) per share  diluted                                                                  |                                                 | $      | (0.17     | )      |   | $      | (0.15      | )      |   | $      | 1.08       |       
|                                                                                           | Weighted average shares outstanding  basic                                                            |                                                 |        | 7,887,659 |        |   |        | 12,147,720 |        |   |        | 13,262,748 |       
|                                                                                           | Weighted average shares outstanding  diluted                                                          |                                                 |        | 7,887,659 |        |   |        | 12,147,720 |        |   |        | 14,011,394 |       



F-6



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME


|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |   |    |   |    |   |         |   |        |   |        |        |        |  
|-------------------------- | ---------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------ | -------- | --------------- |  | ---------- | ------------ | - | - | ----------- | ---- | - | ------------- | ------- | -------- | ----------- | - | ------ | ------------ | - |  | ---------- | --------- | - | ------- | ---- | --- | ----- | - | -- | - | -- | - | ------- | - | ------ | - | ------ | ------ | ------ | -
|                           |                                                                        |                                                                               |        | Series B |                 |  |            |              |   |   | Accumulated |      |   |               |         |         
|                           |                                                                        | Series A Preferred Stock                                                      |        |          | Preferred Stock |  |            | Common Stock |   |   | Deferred    |      |   | Other         |         |          |             |   |       
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   | Stock-based |      |   | Comprehensive |         |          | Accumulated |   |        |             
|                           |                                                                        | Amount                                                                        |        |          | Shares          |  |            | Amount       |   |   | Shares      |      |   | Amount        |         |          | Shares      |   |        | Compensation |   |  | Income     |           |   | Deficit |      |     | Total |  
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |  
|                           |                                                                        | (in thousands, except share data)                                             |       
|Balance, December 31, 2001 |                                                                        | $                                                                             | 12,230 |          |                 |  | 12,230,000 |              |   | $ | 865         |      |   |               | 865,000 |          |             | $ | 3,490  |              |   |  | 677,275    |           |   | $       | (287 | )   |       | $ |   |   |    | $ | (16,241 | ) |        | $ | 57     |       
|                           | Issuance of common stock upon exercise of stock options                |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 60           |   |  |            | 91,191    |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 60     |       
|                           | Deferred stock compensation                                            |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 4            |   |  |            |          |   |         |      | (4  | )     |   |    |  |    |   |         |  |        |   |        |       |       
|                           | Amortization of deferred stock compensation                            |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        |             |   |  |            |          |   |         |      | 111 |       |   |    |  |    |   |         |  |        |   |        | 111    |       
|                           | Proceeds from issuance of common stock, net of issuance costs          |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 28,184       |   |  |            | 4,600,000 |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 28,184 |       
|                           | Conversion of preferred stock to common stock                          |                                                                               |        | (12,230  | )               |  |            | (12,230,000  | ) |   |             | (865 | ) |               |         | (865,000 | )           |   |        | 13,095       |   |  |            | 6,639,347 |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        |       |       
|                           | Proceeds from issuance of stock under employee stock purchase
    plan |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 252          |   |  |            | 41,323    |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 252    |       
|                           | Comprehensive loss:                                                    |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |   |    |   |    |   |         |   |        |   |        |        |       
|                           |                                                                        | Net loss                                                                      |        |          |                |  |            |              |  |   |             |      |  |               |         |          |            |   |        |              |  |  |            |           |  |         |      |     |      |   |    |   |   |   |         |   | (1,355 | ) |        |        | (1,355 | )
|                           | Total comprehensive loss                                               |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        |             |   |  |            |          |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | (1,355 | )     
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |  
|Balance, December 31, 2002 |                                                                        |                                                                               |       |          |                 |  |           |              |   |   |            |      |   |               |        |          |             |   | 45,085 |              |   |  | 12,049,136 |           |   |         | (180 | )   |       |   |   |   |    |   | (17,596 | ) |        |   | 27,309 |       
|                           | Issuance of common stock upon exercise of stock options                |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 81           |   |  |            | 81,883    |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 81     |       
|                           | Amortization of deferred stock compensation                            |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        |             |   |  |            |          |   |         |      | 74  |       |   |    |  |    |   |         |  |        |   |        | 74     |       
|                           | Proceeds from issuance of stock under employee stock purchase
    plan |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 451          |   |  |            | 83,886    |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 451    |       
|                           | Comprehensive loss:                                                    |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |   |    |   |    |   |         |   |        |   |        |        |       
|                           |                                                                        | Net loss                                                                      |        |          |                |  |            |              |  |   |             |      |  |               |         |          |            |   |        |              |  |  |            |           |  |         |      |     |      |   |    |   |   |   |         |   | (1,783 | ) |        |        | (1,783 | )
|                           | Total comprehensive loss                                               |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        |             |   |  |            |          |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | (1,783 | )     
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |  
|Balance, December 31, 2003 |                                                                        |                                                                               |       |          |                 |  |           |              |   |   |            |      |   |               |        |          |             |   | 45,617 |              |   |  | 12,214,905 |           |   |         | (106 | )   |       |   |   |   |    |   | (19,379 | ) |        |   | 26,132 |       
|                           | Issuance of common stock upon exercise of stock options                |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 359          |   |  |            | 157,313   |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 359    |       
|                           | Amortization of deferred stock compensation                            |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        |             |   |  |            |          |   |         |      | 73  |       |   |    |  |    |   |         |  |        |   |        | 73     |       
|                           | Proceeds from issuance of common stock, net of issuance costs          |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 15,451       |   |  |            | 1,605,976 |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 15,451 |       
|                           | Proceeds from issuance of stock under employee stock purchase
    plan |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 531          |   |  |            | 79,001    |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 531    |       
|                           | Tax benefit recognized for stock options                               |                                                                               |        |         |                 |  |            |             |   |   |             |     |   |               |         |         |             |   |        | 698          |   |  |            |          |   |         |      |    |       |   |    |  |    |   |         |  |        |   |        | 698    |       
|                           | Comprehensive income:                                                  |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |   |    |   |    |   |         |   |        |   |        |        |       
|                           |                                                                        | Net income                                                                    |        |          |                |  |            |              |  |   |             |      |  |               |         |          |            |   |        |              |  |  |            |           |  |         |      |     |      |   |    |   |   |   |         |   | 15,068 |   |        |        | 15,068 |  
|                           |                                                                        | Unrealized gain on available-for-sale securities net of income
    tax effect |        |          |                |  |            |              |  |   |             |      |  |               |         |          |            |   |        |              |  |  |            |           |  |         |      |     |      |   |    |   | 22 |   |         |   |       |   |        |        | 22     |  
|                           | Total comprehensive income                                             |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |   |    |  |    |   |         |  |        |   |        | 15,090 |       
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |  
|Balance, December 31, 2004 |                                                                        | $                                                                             |       |          |                 |  |           |              |   | $ |            |      |   |               |        |          |             | $ | 62,656 |              |   |  | 14,057,195 |           |   | $       | (33  | )   |       | $ | 22 |   |    | $ | (4,311  | ) |        | $ | 58,334 |       
|                           |                                                                        |                                                                               |        |          |                 |  |            |              |   |   |             |      |   |               |         |          |             |   |        |              |   |  |            |           |   |         |      |     |       |  



F-7



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |        |        |        |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------------------- | ---- | ------ | ------- | ------- | ----- | ------ | ------- | ------ | ------ | ------ | ------ | -
|                                                                            |                                                                                                                                    | Year Ended December 31,                                                                                 |                                    
|                                                                            |                                                                                                                                    |                                                                                                         |                                    
|                                                                            |                                                                                                                                    | 2002                                                                                                    |                                     |                                                                                                 | 2003 |        |         | 2004    |      
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|                                                                            |                                                                                                                                    | (in thousands)                                                                                          |                                    
|Operating Activities:                                                       |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |       
|                                                                            | Net income (loss)                                                                                                                  |                                                                                                         | $                                   | (1,355                                                                                          | )    |        | $       | (1,783  | )     |        | $       | 15,068 |       
|                                                                            | Adjustments to reconcile net income (loss) to net cash from
    (used in) operating activities  Depreciation and
    amortization |                                                                                                         |                                     | 1,197                                                                                           |      |        |         | 1,858   |       |        |         | 1,574  |       
|                                                                            |                                                                                                                                    | Loss on disposal of machinery and equipment                                                             |                                     |                                                                                                 | 21   |        |         |         | 365   |        |         |        | 20     |       
|                                                                            |                                                                                                                                    | Amortization of deferred stock-based compensation                                                       |                                     |                                                                                                 | 111  |        |         |         | 74    |        |         |        | 73     |       
|                                                                            |                                                                                                                                    | Write off of purchased in-process research and development                                              |                                     |                                                                                                 |     |        |         |         | 1,290 |        |         |        |       |       
|                                                                            |                                                                                                                                    | Minority interest in loss of consolidated entity                                                        |                                     |                                                                                                 |     |        |         |         | (25   | )      |         |        | (39    | )     
|                                                                            |                                                                                                                                    | Deferred income taxes                                                                                   |                                     |                                                                                                 |     |        |         |         | 24    |        |         |        | (9,014 | )     
|                                                                            |                                                                                                                                    | Interest income, putable warrants                                                                       |                                     |                                                                                                 | (219 | )      |         |         | (32   | )      |         |        |       |       
|                                                                            |                                                                                                                                    | Gain on sale of hemodynamic monitoring business                                                         |                                     |                                                                                                 |     |        |         |         |      |        |         |        | (633   | )     
|                                                                            |                                                                                                                                    | Other income  marketable securities                                                                    |                                     |                                                                                                 |     |        |         |         |      |        |         |        | (610   | )     
|                                                                            |                                                                                                                                    | Changes in operating assets and liabilities, net of business
    acquired and product line disposed of: |                                     |                                                                                                 |      |        |         |         |       |        |         |        |        |       
|                                                                            |                                                                                                                                    |                                                                                                         | Accounts receivable                 |                                                                                                 |      | (1,261 | )       |         |       | (1,298 | )       |        |        | (1,169 | )     
|                                                                            |                                                                                                                                    |                                                                                                         | Inventories                         |                                                                                                 |      | (876   | )       |         |       | 1,543  |         |        |        | 775    |       
|                                                                            |                                                                                                                                    |                                                                                                         | Prepaid expenses and other assets   |                                                                                                 |      | 55     |         |         |       | 227    |         |        |        | (51    | )     
|                                                                            |                                                                                                                                    |                                                                                                         | Income taxes receivable and payable |                                                                                                 |      | (206   | )       |         |       |       |         |        |        |       |       
|                                                                            |                                                                                                                                    |                                                                                                         | Accounts payable                    |                                                                                                 |      | 712    |         |         |       | (1,318 | )       |        |        | (568   | )     
|                                                                            |                                                                                                                                    |                                                                                                         | Accrued liabilities                 |                                                                                                 |      | (164   | )       |         |       | (504   | )       |        |        | 332    |       
|                                                                            |                                                                                                                                    |                                                                                                         | Warranty liability                  |                                                                                                 |      | (235   | )       |         |       | (46    | )       |        |        | 49     |       
|                                                                            |                                                                                                                                    |                                                                                                         | Deferred revenue                    |                                                                                                 |      | 851    |         |         |       | (202   | )       |        |        | 452    |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Net cash flows from (used in) operating activities                                              |      |        | (1,369  | )       |       |        | 173     |        |        |        | 6,259  |  
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|Investing Activities:                                                       |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |       
|                                                                            | Purchases of machinery and equipment                                                                                               |                                                                                                         |                                     | (1,044                                                                                          | )    |        |         | (1,345  | )     |        |         | (666   | )     
|                                                                            | Purchase of technology                                                                                                             |                                                                                                         |                                     |                                                                                                |      |        |         |        |       |        |         | (125   | )     
|                                                                            | Proceeds from collection of a note receivable in connection with
    sale of hemodynamic monitoring product line                   |                                                                                                         |                                     |                                                                                                |      |        |         |        |       |        |         | 750    |       
|                                                                            | Purchase of Burdick, Inc., net of cash acquired                                                                                    |                                                                                                         |                                     |                                                                                                |      |        |         | (19,385 | )     |        |         |       |       
|                                                                            | Proceeds from sale of hemodynamic monitoring product line                                                                          |                                                                                                         |                                     |                                                                                                |      |        |         | 1,000   |       |        |         |       |       
|                                                                            | Restricted cash deposit for acquisition                                                                                            |                                                                                                         |                                     | (1,325                                                                                          | )    |        |         |        |       |        |         |       |       
|                                                                            | Acquisition of treadmill manufacturing business                                                                                    |                                                                                                         |                                     | (1,000                                                                                          | )    |        |         |        |       |        |         |       |       
|                                                                            | Proceeds from sales of machinery and equipment                                                                                     |                                                                                                         |                                     |                                                                                                |      |        |         | 133     |       |        |         |       |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Net cash flows used in investing activities                                                     |      |        | (3,369  | )       |       |        | (19,597 | )      |        |        | (41    | )
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|Financing Activities:                                                       |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |       
|                                                                            | Borrowings (repayments) on bank line of credit, net                                                                                |                                                                                                         |                                     | (4,471                                                                                          | )    |        |         | 354     |       |        |         | (354   | )     
|                                                                            | Proceeds from issuance of common stock, net of issuance costs of
    $3,981, $0 and $448, respectively                             |                                                                                                         |                                     | 28,219                                                                                          |      |        |         |        |       |        |         | 15,451 |       
|                                                                            | Payment of note payable in connection with purchase of technology                                                                  |                                                                                                         |                                     |                                                                                                |      |        |         |        |       |        |         | (125   | )     
|                                                                            | Payments of long term debt                                                                                                         |                                                                                                         |                                     |                                                                                                |      |        |         | (363    | )     |        |         | (363   | )     
|                                                                            | Redemption of putable warrants                                                                                                     |                                                                                                         |                                     | (158                                                                                            | )    |        |         | (296    | )     |        |         |       |       
|                                                                            | Proceeds from exercise of stock options and issuance of shares
    under employee stock purchase plan                              |                                                                                                         |                                     | 312                                                                                             |      |        |         | 532     |       |        |         | 890    |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Net cash flows from financing activities                                                        |      |        | 23,902  |         |       |        | 227     |        |        |        | 15,499 |  
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|Net change in cash and cash equivalents                                     |                                                                                                                                    |                                                                                                         | 19,164                              |                                                                                                 |      |        | (19,197 | )       |       |        | 21,717  |       
|Cash and cash equivalents, beginning of year                                |                                                                                                                                    |                                                                                                         | 218                                 |                                                                                                 |      |        | 19,382  |         |       |        | 185     |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|Cash and cash equivalents, end of year                                      |                                                                                                                                    | $                                                                                                       | 19,382                              |                                                                                                 |      | $      | 185     |         |       | $      | 21,902  |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |      
|Supplemental disclosures of cash flow information:                          |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Cash (refunds received) paid for income taxes                                                   |      | $      |        |         |       | $      | (206    | )      |        | $      | 150    |  
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Cash paid for interest                                                                          |      |        | 131     |         |       |        | 264     |        |        |        | 117    |  
|Supplemental disclosures of noncash investing and financing
    activities: |                                                                                                                                    |                                                                                                         |                                     |                                                                                                 |      |        |         |         |       |        |         |       
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Note issued in connection with purchase of technology                                           |      | $      |        |         |       | $      |        |        |        | $      | 125    |  
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Note receivable recorded in connection with the sale of
    hemodynamic monitoring product line |      |        |        |         |       |        | 728     |        |        |        |       |  
|                                                                            |                                                                                                                                    |                                                                                                         |                                     | Note issued in connection with acquisition of treadmill
    manufacturing business              |      |        | 925     |         |       |        |        |        |        |        |       |  



F-8



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##### Table of Contents






QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004


1. Organization and Description of Business






| |                                            
| | -------------------------------------------
| | Certain Significant Risks and Uncertainties



2. Summary of Significant Accounting Policies




| |                                            
| | -------------------------------------------
| | Basis of Presentation and Reclassifications





| |                 
| | ----------------
| | Use of Estimates



F-9



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                             
| | ----------------------------
| | Marketable Equity Securities





| |                    
| | -------------------
| | Accounts Receivable



Inventories






| |                        
| | -----------------------
| | Machinery and Equipment





| |                  
| | -----------------
| | Intangible Assets



F-10



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004










| |         
| | --------
| | Goodwill







| |                    
| | -------------------
| | Purchase Accounting





| |             
| | ------------
| | Income Taxes



F-11



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






| |                    
| | -------------------
| | Revenue Recognition









F-12



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






| |                           
| | --------------------------
| | Software Development Costs





| |             
| | ------------
| | Export Sales





| |                             
| | ----------------------------
| | Foreign Currency Translation





| |                  
| | -----------------
| | Advertising Costs





| |         
| | --------
| | Warranty





F-13



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




| |                               
| | ------------------------------
| | Research and Development Costs





| |                     
| | --------------------
| | Comprehensive Income



|                                                                                   |  |      |   |      |  |      |   |  |  |   |    | 
|---------------------------------------------------------------------------------- |  | ---- | - | ---- |  | ---- | - |  |  | - | -- | 
|                                                                                   |  | 2002 |   | 2003 |  | 2004 |  
|                                                                                   |  |      |   |      |  |      |  
|Unrealized gain on available-for-sale securities, net of tax of
    $0, $0 and $14 |  | $    |  |      |  | $    |  |  |  | $ | 22 | 
|                                                                                   |  |      |   |      |  |      |   |  | 
|Accumulated other comprehensive income                                             |  | $    |  |      |  | $    |  |  |  | $ | 22 | 
|                                                                                   |  |      |   |      |  |      |   |  | 



| |                                                            
| | -----------------------------------------------------------
| | Financial Instruments And Concentrations Of Credit
    Risk







| |                                        
| | ---------------------------------------
| | Accounting for Stock-Based Compensation



F-14



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|                                                                                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                                       |  | 2002 |        |   | 2003 |   |        | 2004 | 
|                                                                                                                                                                       |  |      |        |   |      |   |        |      | 
|Net income (loss)  as reported                                                                                                                                        |  | $    | (1,355 | ) |      | $ | (1,783 | )    |  | $ | 15,068 |  
|Add back: Stock-based employee compensation expense included in
    reported income (loss), net of related tax effects                                                 |  |      | 111    |   |      |   | 74     |      |  |   | 73     |  
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects of $0, $0 and $376 |  |      | (476   | ) |      |   | (1,286 | )    |  |   | (1,737 | )
|                                                                                                                                                                       |  |      |        |   |      |   |        |      | 
|Net income (loss)  pro forma                                                                                                                                          |  | $    | (1,720 | ) |      | $ | (2,995 | )    |  | $ | 13,404 |  
|                                                                                                                                                                       |  |      |        |   |      |   |        |      | 
|Net income (loss) per share, basic  as reported                                                                                                                       |  | $    | (0.17  | ) |      | $ | (0.15  | )    |  | $ | 1.14   |  
|Net income (loss) per share, basic  pro forma                                                                                                                         |  | $    | (0.22  | ) |      | $ | (0.25  | )    |  | $ | 1.01   |  
|Net income (loss) per share, diluted  as reported                                                                                                                     |  | $    | (0.17  | ) |      | $ | (0.15  | )    |  | $ | 1.08   |  
|Net income (loss) per share, diluted  pro forma                                                                                                                       |  | $    | (0.22  | ) |      | $ | (0.25  | )    |  | $ | 0.98   |  



|                                                          |                                                     |                                                          |           |           |      |  |            |            |   |  |            |            |         | 
|--------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------------------- | --------- | --------- | ---- |  | ---------- | ---------- | - |  | ---------- | ---------- | ------- | 
|                                                          |                                                     | 2002                                                     |           |           | 2003 |  |            | 2004       |  
|                                                          |                                                     |                                                          |           |           |      |  |            |            |  
|Denominator:                                              |                                                     |                                                          |           |           |      |  |            |            |   |  |            |           
|                                                          | Weighted average shares outstanding                 |                                                          |           | 7,895,814 |      |  |            | 12,147,720 |   |  |            | 13,262,748 |        
|                                                          | Less: weighted average shares subject to repurchase |                                                          |           | (8,155    | )    |  |            |           |   |  |            |           |        
|                                                          |                                                     |                                                          |           |           |      |  |            |            |  
|Pro forma weighted average shares for basic calculation   |                                                     |                                                          | 7,887,659 |           |      |  | 12,147,720 |            |   |  | 13,262,748 |           
|                                                          |                                                     | Pro forma incremental shares from employee stock options |           |           |     |  |            |            |  |  |            |            | 355,796 | 
|                                                          |                                                     |                                                          |           |           |      |  |            |            |  
|Pro forma weighted average shares for diluted calculation |                                                     |                                                          | 7,887,659 |           |      |  | 12,147,720 |            |   |  | 13,618,544 |           
|                                                          |                                                     |                                                          |           |           |      |  |            |            |  







| |                            
| | ---------------------------
| | Net Income (Loss) Per Share



F-15



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






|                                                |                                                     |                                                |           |           |      |  |            |            |   |  |            |            |         | 
|----------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | --------- | --------- | ---- |  | ---------- | ---------- | - |  | ---------- | ---------- | ------- | 
|                                                |                                                     | 2002                                           |           |           | 2003 |  |            | 2004       |  
|                                                |                                                     |                                                |           |           |      |  |            |            |  
|Numerator:                                      |                                                     |                                                |           |           |      |  |            |            |   |  |            |           
|                                                | Net income (loss)                                   |                                                | $         | (1,355    | )    |  | $          | (1,783     | ) |  | $          | 15,068     |        
|                                                |                                                     |                                                |           |           |      |  |            |            |  
|Denominator:                                    |                                                     |                                                |           |           |      |  |            |            |   |  |            |           
|                                                | Weighted average shares outstanding                 |                                                |           | 7,895,814 |      |  |            | 12,147,720 |   |  |            | 13,262,748 |        
|                                                | Less: weighted average shares subject to repurchase |                                                |           | (8,155    | )    |  |            |           |   |  |            |           |        
|                                                |                                                     |                                                |           |           |      |  |            |            |  
|Weighted average shares for basic calculation   |                                                     |                                                | 7,887,659 |           |      |  | 12,147,720 |            |   |  | 13,262,748 |           
|                                                |                                                     | Incremental shares from employee stock options |           |           |     |  |            |            |  |  |            |            | 748,646 | 
|                                                |                                                     |                                                |           |           |      |  |            |            |  
|Weighted average shares for diluted calculation |                                                     |                                                | 7,887,659 |           |      |  | 12,147,720 |            |   |  | 14,011,394 |           
|                                                |                                                     |                                                |           |           |      |  |            |            |  





| |               
| | --------------
| | Concentrations







| |                  
| | -----------------
| | Segment Reporting



F-16



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|         |  |      |        |  |      |   |        |      |  |   |        | 
|-------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|         |  | 2002 |        |  | 2003 |   |        | 2004 | 
|         |  |      |        |  |      |   |        |      | 
|Domestic |  | $    | 43,702 |  |      | $ | 77,909 |      |  | $ | 83,696 | 
|Foreign  |  |      | 2,794  |  |      |   | 6,487  |      |  |   | 5,907  | 
|         |  |      |        |  |      |   |        |      | 
|Total    |  | $    | 46,496 |  |      | $ | 84,396 |      |  | $ | 89,603 | 
|         |  |      |        |  |      |   |        |      | 





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









|   |                             
|-- | ----------------------------
|3. | Acquisition of Burdick, Inc.



F-17



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004








|                                                            |                       |   |        |        | 
|----------------------------------------------------------- | --------------------- | - | ------ | ------ | 
|Cash and cash equivalents                                   |                       | $ | 386    |       
|Accounts receivable, net of allowance for doubtful accounts |                       |   | 3,798  |       
|Inventories                                                 |                       |   | 6,771  |       
|Prepaid expenses and other current assets                   |                       |   | 184    |       
|Machinery and equipment                                     |                       |   | 2,104  |       
|In-process research and development                         |                       |   | 1,290  |       
|Intangible assets                                           |                       |   | 5,660  |       
|Goodwill                                                    |                       |   | 9,027  |       
|                                                            |                       |   |       
|                                                            | Total assets acquired |   |        | 29,220 | 
|Current liabilities                                         |                       |   | (6,961 | )     
|Deferred income taxes                                       |                       |   | (1,156 | )     
|                                                            |                       |   |       
|                                                            | Net assets acquired   |   | $      | 21,103 | 
|                                                            |                       |   |       









F-18



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004














|                                       |  |                   |        |  
|-------------------------------------- |  | ----------------- | ------ | -
|                                       |  | Year Ended        |       
|                                       |  | December 31, 2002 |       
|                                       |  |                   |       
|Revenues                               |  | $                 | 85,492 |  
|Net loss                               |  | $                 | (6,361 | )
|Net loss per share  basic and diluted |  | $                 | (0.81  | )



F-19



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




| |                  
| | -----------------
| | Minority Interest





|   |                                          
|-- | -----------------------------------------
|4. | Consolidation of Manufacturing Operations





|                                                                    |                                                                                                              |   |     |        |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | - | --- | ------ | -
|Manufacturing consolidation liabilities as of December 31,
    2002 |                                                                                                              | $ |    |       
|                                                                    | Severance, employee transition and other consolidation related
    costs charged to systems cost of revenues |   |     | 1,304  |  
|                                                                    | Severance and other employee transition costs charged to service
    cost of revenues                        |   |     | 114    |  
|                                                                    | Costs paid                                                                                                   |   |     | (1,094 | )
|                                                                    |                                                                                                              |   |    
|Manufacturing consolidation liabilities as of December 31,
    2003 |                                                                                                              |   | 324 |       
|                                                                    | Costs paid                                                                                                   |   |     | (324   | )
|                                                                    |                                                                                                              |   |    
|Manufacturing consolidation liabilities as of December 31,
    2004 |                                                                                                              | $ |    |       
|                                                                    |                                                                                                              |   |    



|   |                                            
|-- | -------------------------------------------
|5. | Sale of Hemodynamic Monitoring Product Line







|   |                             
|-- | ----------------------------
|6. | Marketable Equity Securities



F-20



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






|   |            
|-- | -----------
|7. | Inventories



|                  |  |      |        |  |      |   |        | 
|----------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                  |  | 2003 |        |  | 2004 |  
|                  |  |      |        |  |      |  
|Raw materials     |  | $    | 9,708  |  |      | $ | 7,879  | 
|Finished goods    |  |      | 2,982  |  |      |   | 3,168  | 
|                  |  |      |        |  |      |  
|Total inventories |  | $    | 12,690 |  |      | $ | 11,047 | 
|                  |  |      |        |  |      |  



|   |                        
|-- | -----------------------
|8. | Machinery and Equipment



|                                                |          |             |              |   |      |   |        |       |  |   |        |        | 
|----------------------------------------------- | -------- | ----------- | ------------ | - | ---- | - | ------ | ----- |  | - | ------ | ------ | 
|                                                |          | Depreciable |              |   |      |   |       
|                                                |          | Lives       |              |   | 2003 |   |        | 2004  | 
|                                                |          |             |              |   |      |   |        |       | 
|Equipment                                       |          |             | (2-14  years | ) |      | $ | 8,051  |       |  | $ | 8,173  |       
|Furniture and fixtures                          |          |             | (3-13  years | ) |      |   | 988    |       |  |   | 984    |       
|Leasehold improvements                          |          |             | (2-6 years   | ) |      |   | 955    |       |  |   | 1,133  |       
|                                                |          |             |              |   |      |   |        |       | 
|                                                | Subtotal |             |              |   |      |   |        | 9,994 |  |   |        | 10,290 | 
|Less: Accumulated depreciation and amortization |          |             |              |   |      |   | (5,076 | )     |  |   | (5,976 | )     
|                                                |          |             |              |   |      |   |        |       | 
|Net machinery and equipment                     |          |             |              |   |      | $ | 4,918  |       |  | $ | 4,314  |       
|                                                |          |             |              |   |      |   |        |       | 





|   |                  
|-- | -----------------
|9. | Intangible Assets







F-21



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|           |  |   |     | 
|---------- |  | - | --- | 
|2005       |  | $ | 363 | 
|2006       |  | $ | 377 | 
|2007       |  | $ | 364 | 
|2008       |  | $ | 327 | 
|2009       |  | $ | 327 | 
|Thereafter |  | $ | 461 | 



|    |         
|--- | --------
|10. | Goodwill









|    |                                 
|--- | --------------------------------
|11. | Accrued Liabilities and Warranty



|                                                                  |  |      |       |  |      |   |       | 
|----------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | 
|                                                                  |  | 2003 |       |  | 2004 |  
|                                                                  |  |      |       |  |      |  
|Accrued compensation and benefits                                 |  | $    | 3,452 |  |      | $ | 3,578 | 
|Deferred consideration on sale of hemodynamic monitoring business |  |      | 1,540 |  |      |   |      | 
|Other accrued liabilities                                         |  |      | 2,357 |  |      |   | 2,642 | 
|                                                                  |  |      |       |  |      |  
|Total accrued liabilities                                         |  | $    | 7,349 |  |      | $ | 6,220 | 
|                                                                  |  |      |       |  |      |  



|                             |  |           |       |          |             |   |            |          |  |   |            |  |  |        |        |   |  |   |       | 
|---------------------------- |  | --------- | ----- | -------- | ----------- | - | ---------- | -------- |  | - | ---------- |  |  | ------ | ------ | - |  | - | ----- | 
|                             |  |           |       | Increase |             |   | Charged to |          |  |   |            | 
|                             |  | Beginning |       |          | through     |   |            | cost of  |  |   | Applied to |  |  | End of |       
|                             |  | of Period |       |          | acquisition |   |            | revenues |  |   | liability  |  |  | Period |       
|                             |  |           |       |          |             |   |            |          |  |   |            |  |  |        |       
|Year Ended December 31, 2002 |  | $         | 1,269 |          |             | $ |           |          |  | $ | 762        |  |  | $      | (942   | ) |  | $ | 1,089 | 
|Year Ended December 31, 2003 |  |           | 1,089 |          |             |   | 1,016      |          |  |   | 1,384      |  |  |        | (1,430 | ) |  |   | 2,059 | 
|Year Ended December 31, 2004 |  |           | 2,059 |          |             |   |           |          |  |   | 1,291      |  |  |        | (1,257 | ) |  |   | 2,093 | 



|    |           
|--- | ----------
|12. | Borrowings



F-22



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






| |                 
| | ----------------
| | Putable Warrants





|    |             
|--- | ------------
|13. | Income Taxes



|         |                                    |                         |   |      |      |  |   |      |  |  |   |        |  
|-------- | ---------------------------------- | ----------------------- | - | ---- | ---- |  | - | ---- |  |  | - | ------ | -
|         |                                    | Year Ended December 31, |  
|         |                                    |                         |  
|         |                                    | 2002                    |   |      | 2003 |  |   | 2004 | 
|         |                                    |                         |   |      |      |  |   |      | 
|Current  |                                    |                         |   |      |      |  |   |      |  |  |   |       
|         | Federal                            |                         | $ | (206 | )    |  | $ |     |  |  | $ | 77     |  
|         | State                              |                         |   | 14   |      |  |   | 38   |  |  |   | 47     |  
|         |                                    |                         |   |      |      |  |   |      | 
|         | Total current provision (benefit)  |                         |   | (192 | )    |  |   | 38   |  |  |   | 124    |  
|         |                                    |                         |   |      |      |  |   |      | 
|Deferred |                                    |                         |   |      |      |  |   |      |  |  |   |       
|         | Federal                            |                         |   |     |      |  |   | 21   |  |  |   | (8,472 | )
|         | State                              |                         |   |     |      |  |   | 3    |  |  |   | (542   | )
|         |                                    |                         |   |      |      |  |   |      | 
|         | Total deferred provision (benefit) |                         |   |     |      |  |   | 24   |  |  |   | (9,014 | )
|         |                                    |                         |   |      |      |  |   |      | 
|         | Total provision (benefit)          |                         | $ | (192 | )    |  | $ | 62   |  |  | $ | (8,890 | )
|         |                                    |                         |   |      |      |  |   |      | 

F-23



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|                                                                   |  |                         |       |    |      |  |       |      |  |  |        |   
|------------------------------------------------------------------ |  | ----------------------- | ----- | -- | ---- |  | ----- | ---- |  |  | ------ | --
|                                                                   |  | Year Ended December 31, |      
|                                                                   |  |                         |      
|                                                                   |  | 2002                    |       |    | 2003 |  |       | 2004 | 
|                                                                   |  |                         |       |    |      |  |       |      | 
|Federal income tax provision (benefit) at U.S. statutory
    rates |  |                         | (34.0 | )% |      |  | (34.0 | )%   |  |  | 34.0   | % 
|Non-deductible expenses                                            |  |                         | 2.5   |    |      |  | 3.7   |      |  |  | 1.6    |   
|Research and development credits                                   |  |                         | (17.3 | )  |      |  | (25.3 | )    |  |  | (6.5   | ) 
|State income taxes, net of federal benefit                         |  |                         | 1.1   |    |      |  | 1.3   |      |  |  | 0.5    |   
|Exclusion for extraterritorial income                              |  |                         |      |    |      |  |      |      |  |  | (0.8   | ) 
|Change in deferred tax valuation allowance                         |  |                         | 35.3  |    |      |  | 57.9  |      |  |  | (173.6 | ) 
|                                                                   |  |                         |       |    |      |  |       |      | 
|Provision (benefit) for income taxes                               |  |                         | (12.4 | )% |      |  | 3.6   | %    |  |  | (144.8 | )%
|                                                                   |  |                         |       |    |      |  |       |      | 



F-24



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|                                   |                                                                   |                                |        |        |         |   |       |        |        |  
|---------------------------------- | ----------------------------------------------------------------- | ------------------------------ | ------ | ------ | ------- | - | ----- | ------ | ------ | -
|                                   |                                                                   | 2003                           |        |        | 2004    |  
|                                   |                                                                   |                                |        |        |         |  
|Deferred tax assets:               |                                                                   |                                |        |        |         |   |       |       
|                                   | Net operating loss carryforward                                   |                                | $      | 4,414  |         |   | $     | 3,334  |       
|                                   | Stock-based compensation                                          |                                |        | 1,190  |         |   |       | 1,218  |       
|                                   | Research and experimentation and alternative minimum tax credits  |                                |        | 2,413  |         |   |       | 2,889  |       
|                                   | Inventory basis difference                                        |                                |        | 1,857  |         |   |       | 1,492  |       
|                                   | Warranty liability                                                |                                |        | 782    |         |   |       | 795    |       
|                                   | Deferred consideration on sale of hemodynamic monitoring business |                                |        | 820    |         |   |       | 480    |       
|                                   | Accrued compensation and severance                                |                                |        | 766    |         |   |       | 648    |       
|                                   | Other                                                             |                                |        | 446    |         |   |       | 903    |       
|                                   |                                                                   |                                |        |        |         |  
|                                   |                                                                   | Gross deferred tax assets      |        |        | 12,688  |   |       |        | 11,759 |  
|                                   |                                                                   |                                |        |        |         |  
|                                   |                                                                   | Valuation Allowance            |        |        | (11,086 | ) |       |        |       |  
|                                   |                                                                   |                                |        |        |         |  
|Deferred tax liabilities:          |                                                                   |                                |        |        |         |   |       |       
|                                   | Depreciation                                                      |                                |        | (843   | )       |   |       | (520   | )     
|                                   | Burdick intangible assets                                         |                                |        | (759   | )       |   |       | (659   | )     
|                                   | Burdick trade name intangible asset                               |                                |        | (1,156 | )       |   |       | (1,156 | )     
|                                   | Other income  marketable equity securities                       |                                |        |       |         |   |       | (245   | )     
|                                   | Goodwill from treadmill line acquisition                          |                                |        | (24    | )       |   |       | (43    | )     
|                                   |                                                                   |                                |        |        |         |  
|                                   |                                                                   | Gross deferred tax liabilities |        |        | (2,782  | ) |       |        | (2,623 | )
|                                   |                                                                   |                                |        |        |         |  
|Net deferred tax asset (liability) |                                                                   | $                              | (1,180 | )      |         | $ | 9,136 |       
|                                   |                                                                   |                                |        |        |         |  







F-25



---



##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies



| |                  
| | -----------------
| | Lease Commitments



|      |  |   |       | 
|----- |  | - | ----- | 
|2005  |  | $ | 1,113 | 
|2006  |  |   | 1,062 | 
|2007  |  |   | 1,052 | 
|2008  |  |   | 916   | 
|2009  |  |   | 240   | 
|      |  |   |      
|Total |  | $ | 4,383 | 
|      |  |   |      





| |                  
| | -----------------
| | Other Commitments





| |              
| | -------------
| | Legal Matters





|    |                     
|--- | --------------------
|15. | Shareholders Equity



| |                
| | ---------------
| | Preferred Stock





| |             
| | ------------
| | Common Stock





F-26



---



##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004








|                                                 |  |  |           | 
|------------------------------------------------ |  |  | --------- | 
|Outstanding stock options                        |  |  | 2,141,698 | 
|Stock options available for future grant         |  |  | 573,651   | 
|                                                 |  |  |          
|Total common shares reserved for future issuance |  |  | 2,715,349 | 
|                                                 |  |  |          



|    |                               
|--- | ------------------------------
|16. | Stock-Based Compensation Plans



| |              
| | -------------
| | Stock Options







F-27



---



##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|                           |           |         |           |           |       |   |      |      | 
|-------------------------- | --------- | ------- | --------- | --------- | ----- | - | ---- | ---- | 
|                           |           |         |           | Weighted- |      
|                           |           |         |           | Average   |      
|                           |           |         |           | Exercise  |      
|                           |           | Options |           |           | Price |  
|                           |           |         |           |           |       |  
|Balance, December 31, 2001 |           |         | 1,242,730 |           |       | $ | 1.78 |     
|                           | Granted   |         |           | 336,886   |       |   |      | 8.30 | 
|                           | Exercised |         |           | (91,191   | )     |   |      | 0.67 | 
|                           | Canceled  |         |           | (39,101   | )     |   |      | 1.69 | 
|                           |           |         |           |           |       |  
|Balance, December 31, 2002 |           |         | 1,449,324 |           |       |   | 3.37 |     
|                           | Granted   |         |           | 517,450   |       |   |      | 6.58 | 
|                           | Exercised |         |           | (81,883   | )     |   |      | 0.98 | 
|                           | Canceled  |         |           | (49,824   | )     |   |      | 5.48 | 
|                           |           |         |           |           |       |  
|Balance, December 31, 2003 |           |         | 1,835,067 |           |       |   | 4.32 |     
|                           | Granted   |         |           | 531,050   |       |   |      | 9.28 | 
|                           | Exercised |         |           | (157,313  | )     |   |      | 2.27 | 
|                           | Canceled  |         |           | (67,106   | )     |   |      | 7.22 | 
|                           |           |         |           |           |       |  
|Balance, December 31, 2004 |           |         | 2,141,698 |           |       | $ | 5.61 |     
|                           |           |         |           |           |       |  



|                         |  |             |           |           |             |   |           |             |  |  |           |           |  |          |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | --------- | ----------- | - | --------- | ----------- |  |  | --------- | --------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  | Outstanding |           |           | Exercisable |  
|                         |  |             |           |           |             |  
|                         |  |             |           | Weighted- |             |   |          
|                         |  |             |           | Weighted- |             |   | Average   |             |  |  |           | Weighted- | 
|                         |  |             |           | Average   |             |   | Remaining |             |  |  |           | Average   | 
|                         |  | Number of   |           |           | Exercise    |   |           | Contractual |  |  | Number of |           |  | Exercise |          
|Range of Exercise Prices |  | Options     |           |           | Price       |   |           | Life        |  |  | Options   |           |  | Price    |          
|                         |  |             |           |           |             |   |           |             |  |  |           |           |  |          |          
|$0.22                    |  |             | 95,083    |           |             | $ | 0.22      |             |  |  | 3.8 years |           |  |          | 95,083    |  |  | $ | 0.22  | 
|$0.88  $1.87            |  |             | 9,771     |           |             |   | 0.99      |             |  |  | 4.4 years |           |  |          | 9,771     |  |  |   | 0.99  | 
|$2.20                    |  |             | 753,420   |           |             |   | 2.20      |             |  |  | 5.7 years |           |  |          | 753,420   |  |  |   | 2.20  | 
|$3.30                    |  |             | 19,504    |           |             |   | 3.30      |             |  |  | 6.9 years |           |  |          | 16,730    |  |  |   | 3.30  | 
|$5.40                    |  |             | 10,000    |           |             |   | 5.40      |             |  |  | 8.2 years |           |  |          | 10,000    |  |  |   | 5.40  | 
|$6.00  $6.28            |  |             | 299,535   |           |             |   | 6.01      |             |  |  | 8.0 years |           |  |          | 143,889   |  |  |   | 6.02  | 
|$6.80  $8.37            |  |             | 470,485   |           |             |   | 8.24      |             |  |  | 7.9 years |           |  |          | 280,795   |  |  |   | 8.28  | 
|$8.38  $9.42            |  |             | 468,900   |           |             |   | 9.33      |             |  |  | 9.1 years |           |  |          | 12,498    |  |  |   | 9.32  | 
|$10.33                   |  |             | 15,000    |           |             |   | 10.33     |             |  |  | 9.5 years |           |  |          | 7,497     |  |  |   | 10.33 | 
|                         |  |             |           |           |             |   |           |             |  |  |           |           |  |          |          
|$0.22  $10.33           |  |             | 2,141,698 |           |             | $ | 5.61      |             |  |  | 7.2 years |           |  |          | 1,329,683 |  |  | $ | 3.90  | 
|                         |  |             |           |           |             |   |           |             |  |  |           |           |  |          |          



F-28



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






| |                             
| | ----------------------------
| | Employee Stock Purchase Plan







|    |                       
|--- | ----------------------
|17. | Employee Benefit Plans







| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective October 1, 2003, all new employees meeting the
    eligibility criteria under the Quinton Plan, became eligible for
    participation in the 401(k) Plan.
|
| |  | Effective December 31, 2003, loans held by the Burdick Plan
    were merged into the 401(k) Plan.                                                                  
|
| |  | Effective January 1, 2004, participants in the Burdick Plan
    became eligible for participation in the 401(k) Plan.                                              
|
| |  | Effective March 31, 2004, the remaining assets under the
    Burdick Plan were merged into the 401(k) Plan.                                                        



|    |                           
|--- | --------------------------
|18. | Related Party Transactions



| |                
| | ---------------
| | WR Hambrecht+Co



F-29



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004






| |                        
| | -----------------------
| | Philips/ Agilent/ Zymed









| |        
| | -------
| | ScImage





|    |                                  
|--- | ---------------------------------
|19. | Valuation and Qualifying Accounts



|                             |  |           |     |          |             |   |          |             |  |   |            |           |        |        |     |  |  |   |     | 
|---------------------------- |  | --------- | --- | -------- | ----------- | - | -------- | ----------- |  | - | ---------- | --------- | ------ | ------ | --- |  |  | - | --- | 
|                             |  |           |     | Increase |             |   | Expenses |             |  |   |            | Balance  |       
|                             |  | Beginning |     |          | Through     |   |          | and         |  |   |            |           | End of |       
|                             |  | of Period |     |          | Acquisition |   |          | Adjustments |  |   | Write-offs |           |        | Period |    
|                             |  |           |     |          |             |   |          |             |  |   |            |           |        |        |    
|Year Ended December 31, 2002 |  | $         | 385 |          |             | $ |         |             |  | $ | 160        |           |        | $      | 147 |  |  | $ | 398 | 
|Year Ended December 31, 2003 |  | $         | 398 |          |             | $ | 234      |             |  | $ | 213        |           |        | $      | 182 |  |  | $ | 663 | 
|Year Ended December 31, 2004 |  | $         | 663 |          |             | $ |         |             |  | $ | 205        |           |        | $      | 213 |  |  | $ | 655 | 



|                             |  |           |     |          |             |   |            |           |  |        |      |   |  |   |     | 
|---------------------------- |  | --------- | --- | -------- | ----------- | - | ---------- | --------- |  | ------ | ---- | - |  | - | --- | 
|                             |  |           |     | Expenses |             |   |            | Balance  | 
|                             |  | Beginning |     |          | and         |   | Applied to |           |  | End of |     
|                             |  | of Period |     |          | Adjustments |   | Liability  |           |  | Period |     
|                             |  |           |     |          |             |   |            |           |  |        |     
|Year Ended December 31, 2002 |  | $         | 831 |          |             | $ |           |           |  | $      |     |   |  | $ | 831 | 
|Year Ended December 31, 2003 |  | $         | 831 |          |             | $ |           |           |  | $      | (831 | ) |  | $ |    | 
|Year Ended December 31, 2004 |  | $         |    |          |             | $ |           |           |  | $      |     |   |  | $ |    | 

F-30



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##### Table of Contents



QUINTON CARDIOLOGY SYSTEMS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004




|    |                 
|--- | ----------------
|20. | Subsequent Event





F-31