Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2009.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-20225

ZOLL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)


Massachusetts		04-2711626
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

269 Mill Road, Chelmsford, MA		01824-4105
(Address of principal executive offices)		(Zip Code)

(978) 421-9655

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:


Class		Outstanding at July 28, 2009
Common Stock, $0.01 par value		21,098,358

This document consists of 41 pages.

ZOLL MEDICAL CORPORATION

FORM 10-Q

INDEX


		Page No.
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements:

	Condensed Consolidated Balance Sheets (unaudited) June 28, 2009 and September 28, 2008	3

	Condensed Consolidated Statements of Income (unaudited) Three and Nine Months Ended June 28, 2009 and June 29, 2008	4

	Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended June 28, 2009 and June 29, 2008	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	39

ITEM 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	40

ITEM 1A.	Risk Factors	40

ITEM 5.	Other Information	41

ITEM 6.	Exhibits	41

	Signatures	42

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. ZOLL Medical Corporation (the “Company,” “we,” “our,” or “us”) makes such forward-looking statements under the provisions of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Actual future results may vary materially from those projected, anticipated, or indicated in any forward-looking statements as a result of certain risk factors. Readers should pay particular attention to the considerations described in Part I, Item 2 of this report under the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Risk Factors.” Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. The Company assumes no obligation to update forward-looking statements or update the reasons why actual results, performances or achievements could differ materially from those provided in the forward-looking statements.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(000’s omitted, except per share data)

(Unaudited)


	June 28, 2009			September 28, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	48,048		$	36,675
Short-term marketable securities		7,216			32,597
Accounts receivable, less allowance of $5,988 at June 28, 2009 and $6,229 at September 28, 2008		78,082			84,423
Inventories:
Raw materials		35,780			24,682
Work-in-process		5,759			6,568
Finished goods		35,225			29,773

		76,764			61,023
Prepaid expenses and other current assets		12,797			12,313

Total current assets		222,907			227,031


Property and equipment, at cost:
Land, building and building improvements		1,289			1,271
Machinery and equipment		90,749			79,101
Construction in progress		2,606			1,569
Tooling		17,455			16,463
Furniture and fixtures		4,130			3,957
Leasehold improvements		5,483			5,372

		121,712			107,733
Less: accumulated depreciation		81,087			73,779

Net property and equipment		40,625			33,954

Investments		1,310			1,310
Notes receivable		3,843			3,581
Long-term marketable securities		1,724			1,772
Goodwill		45,434			42,146
Patents and developed technology, net		23,216			20,951
Intangibles and other assets, net		18,327			15,275

	$	357,386		$	346,020

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,348		$	17,539
Deferred revenue		26,664			25,771
Accrued expenses and other liabilities		24,439			31,931

Total current liabilities		78,451			75,241

Non-current liabilities:
Other long-term liabilities		2,921			2,921

Total liabilities		81,372			78,162

Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000 shares authorized, none issued or outstanding; Common stock, $0.01 par value, 38,000 shares authorized, 21,057 and 21,018 issued and outstanding at June 28, 2009 and September 28, 2008, respectively		210			210
Capital in excess of par value		158,277			155,547
Accumulated other comprehensive loss		(8,333	)		(7,593	)
Retained earnings		125,860			119,694

Total stockholders’ equity		276,014			267,858

	$	357,386		$	346,020

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(000’s omitted, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Product sales	$	83,247	$	92,722	$	246,302	$	274,007
Rental revenue		11,900		7,522		31,015		18,412

Total net sales		95,147		100,244		277,317		292,419
Cost of products sold		43,907		44,696		126,525		135,283
Cost of rental revenue		2,521		1,924		7,015		4,729

Total cost of goods sold		46,428		46,620		133,540		140,012

Gross profit		48,719		53,624		143,777		152,407
Expenses:
Selling and marketing		29,148		28,725		83,329		82,273
General and administrative		8,016		7,835		23,642		23,564
Research and development		10,763		8,441		28,848		24,822

Total expenses		47,927		45,001		135,819		130,659

Income from operations		792		8,623		7,958		21,748
Investment and other income, net		1,334		352		702		1,030

Income before income taxes		2,126		8,975		8,660		22,778
Provision for income taxes		636		3,231		2,494		8,200

Net income	$	1,490	$	5,744	$	6,166	$	14,578

Basic earnings per common share	$	0.07	$	0.27	$	0.29	$	0.70

Weighted average common shares outstanding		21,086		20,921		21,075		20,805

Diluted earnings per common and common equivalent share	$	0.07	$	0.27	$	0.29	$	0.69

Weighted average common and common equivalent shares outstanding		21,194		21,474		21,204		21,210

See notes to unaudited condensed consolidated financial statements.

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(Unaudited)


	Nine Months Ended
	June 28, 2009			June 29, 2008
OPERATING ACTIVITIES:
Net income	$	6,166		$	14,578
Charges not affecting cash:
Depreciation and amortization		13,780			12,627
Stock-based compensation expense		2,579			1,963
Changes in current assets and liabilities:
Accounts receivable		5,726			(1,604	)
Inventories		(11,718	)		(6,886	)
Prepaid expenses and other current assets		(513	)		(173	)
Accounts payable and accrued expenses		9,600			(1,441	)

Cash provided by operating activities		25,620			19,064
INVESTING ACTIVITIES:
Purchases of marketable securities		(35,977	)		(34,748	)
Sales of marketable securities		61,416			33,395
Additions to property and equipment		(14,477	)		(12,565	)
Cash paid for acquired assets		(16,094	)		—
Milestone payments related to prior years’ acquisitions		(4,500	)		(6,816	)
Other assets, net		(3,399	)		(4,041	)

Cash used for investing activities		(13,031	)		(24,775	)
FINANCING ACTIVITIES:
Exercise of stock options		170			4,895
Tax benefit from the exercise of stock options		—			1,669

Cash provided by financing activities		170			6,564
Effect of exchange rates on cash and cash equivalents		(1,386	)		491

Net increase in cash and cash equivalents		11,373			1,344
Cash and cash equivalents at beginning of period		36,675			37,631

Cash and cash equivalents at end of period	$	48,048		$	38,975

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes	$	948		$	6,785
Non-cash activity during the period:
Common stock issued at fair value for acquisition of Revivant	$	—		$	5,756

See notes to unaudited condensed consolidated financial statements.

ZOLL MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for returns, bad debts and the estimated lives of fixed assets. Actual results may differ from these estimates. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The information contained in the interim financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended September 28, 2008 included in its Annual Report on Form 10-K filed with the SEC on December 8, 2008.

2. Segment and Geographic Information

Segment information: The Company operates in a single business segment: the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. In order to make operating and strategic decisions, the Company’s chief executive officer (the “chief operating decision maker”) evaluates revenue performance based on the worldwide revenues of four customer/product categories, but, due to shared infrastructures, profitability is based on an enterprise-wide measure. These customer/product categories consist of (1) the sale of resuscitation devices, temperature management products and accessories to the North American hospital market, including the military marketplace, (2) the sale/lease/rental of resuscitation devices, accessories and data collection management software to the North American pre-hospital market, (3) the sale of disposable/other products in North America, and (4) the sale/lease/rental of resuscitation devices, accessories, disposable electrodes, temperature management products and data collection management software to the international market.

An immaterial amount of international sales of the Company’s wearable defibrillator product and data collection management software is currently reflected in the North American pre-hospital market.

Net sales by customer/product categories were as follows:


	Three Months Ended				Nine Months Ended
(000’s omitted)	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Hospital Market—North America	$	26,617	$	26,315	$	64,389	$	87,397
Pre-hospital Market—North America		40,487		42,685		126,742		116,098
Other—North America		5,645		5,822		17,357		16,857
International Market		22,398		25,422		68,829		72,067

	$	95,147	$	100,244	$	277,317	$	292,419

The Company reports assets on a consolidated basis to the chief operating decision maker.

Geographic information: Net sales by major geographical area, determined on the basis of destination of the goods, are as follows:


	Three Months Ended				Nine Months Ended
(000’s omitted)	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
United States	$	67,241	$	70,225	$	188,895	$	206,124
Foreign		27,906		30,019		88,422		86,295

	$	95,147	$	100,244	$	277,317	$	292,419

No individual foreign country represented 10% or more of our revenues or assets for the three or nine months ended June 28, 2009 or June 29, 2008, respectively.

3. Comprehensive Income

The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Other comprehensive income, as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities and foreign currency translation. Total comprehensive income for the three and nine months ended June 28, 2009 or June 29, 2008, respectively, was as follows:


	Three Months Ended						Nine Months Ended
(000’s omitted)	June 28, 2009			June 29, 2008			June 28, 2009			June 29, 2008
Net income	$	1,490		$	5,744		$	6,166		$	14,578
Unrealized gain (loss) on available-for-sales securities, net of tax		(32	)		(192	)		75			(218	)
Foreign currency translation adjustment		2,051			200			(815	)		(401	)

Total comprehensive income	$	3,509		$	5,752		$	5,426		$	13,959

4. Stock Option Plans

At June 28, 2009, the Company had two active stock-based compensation plans under which stock-based grants may be issued, and two other stock-based compensation plans under which grants are no longer being made. No further grants are being made under the Company’s 1992 Stock Option Plan (“1992 Plan”) and 1996 Non-Employee Directors’ Stock Option Plan (“1996 Plan”), but option grants remain outstanding under both plans. The Company’s active plans are the Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”) and the Amended and Restated 2006 Non-Employee Director Stock Option Plan (“2006 Plan”).

On November 11, 2008, the Board of Directors adopted certain amendments to the 2001 Plan and 2006 Plan and recommended that the Company’s stockholders approve an additional 730,000 shares of Common Stock available for issuance under the 2001 Plan (for a total of 3,250,000 shares), and an additional 35,000 shares of Common Stock available for issuance under the 2006 Plan (for a total of 157,500 shares). At the 2009 Annual Meeting of Stockholders held on January 20, 2009, the Company’s stockholders approved these increases. Under the 2001 Plan, no more than 150,000 of the authorized shares may be issued in the form of restricted stock awards, and the balance may be issued in the form of stock option awards. Only stock option awards can be issued under the 2006 Plan.

Stock options outstanding under the 1992 Plan, the 1996 Plan, the 2001 Plan, and the 2006 Plan generally vest over a four-year period and have exercise prices equal to the fair market value of the Common Stock at the date of grant. All options have a 10-year term. All options issued under the 2001 Plan and 2006 Plan must have an exercise price no less than fair market value on the date of grant. Restricted Common Stock grants made under the 2001 Plan will generally vest over a four-year period.

The Company adopted the provisions of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), beginning October 3, 2005, using the modified prospective transition method. SFAS 123R requires the Company to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (a) all share-based payments granted after the effective date under SFAS 123R, and (b) all awards granted under SFAS No. 123 to employees prior to the effective date that remain unvested on the effective date. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Stock-based compensation charges totaled approximately $885,000 and $2.6 million during the three and nine months ended June 28, 2009, respectively, and totaled approximately $708,000 and $2.0 million during the three and nine months ended June 29, 2008, respectively. The effect of recording stock-based compensation by line item for the three and nine months ended June 28, 2009 and June 29, 2008 was as follows:


	Three Months Ended				Nine Months Ended
(000’s omitted)	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Cost of goods sold	$	79	$	67	$	234	$	174
Selling and marketing expense		203		180		607		496
General and administrative expense		469		348		1,353		975
Research and development expense		134		113		385		318

Total stock-based compensation	$	885	$	708	$	2,579	$	1,963

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants issued during the nine months ended June 28, 2009 and June 29, 2008:


	2009		2008
Dividend yield	0	%	0	%
Expected volatility	44.6	%	46.6	%
Risk-free interest rate	2.37	%	3.13	%
Expected lives (years)	5.10		6.08

At June 28, 2009, there was approximately $7.0 million of unrecognized compensation cost related to non-vested awards, which the Company expects to recognize over a weighted-average period of 2.5 years.

The weighted-average, grant-date fair value of options granted (estimated using the Black-Scholes option-pricing model) was $8.58 and $11.54 for the nine months ended June 28, 2009 and June 29, 2008, respectively. During the nine months ended June 28, 2009, the Company issued 25,477 shares of common stock pursuant to exercised options for proceeds of approximately $170,000. Total intrinsic value of options exercised for the nine months ended June 28, 2009 and June 29, 2008 was approximately $260,000 and $4.5 million, respectively. It is the Company’s policy to issue new shares upon the exercise of options.

The following table summarizes the status of outstanding stock options as of June 28, 2009, as well as changes during the nine months ended June 28, 2009:


	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value ($000’s)
Outstanding at September 28, 2008	1,901,819		$	18.42
Granted	325,300			20.18
Exercised	(25,477	)		6.67
Forfeited	(3,925	)		15.77

Outstanding at June 28, 2009	2,197,717		$	18.82	5.97	$	4,831

Exercisable at June 28, 2009	1,309,604		$	17.42	4.32	$	3,645

The following table summarizes the status of unvested restricted stock awards as of June 28, 2009, as well as changes during the nine months ended June 28, 2009:


	Shares		Weighted-Average Fair Value
Unvested at September 28, 2008	42,500		$	21.23
Granted	10,800			14.91
Vested	(15,468	)		19.40
Forfeited	(594	)		26.82

Unvested at June 28, 2009	37,238		$	20.07

5. Earnings per Share

The shares used for calculating basic earnings per share of common stock were the weighted average shares of common stock outstanding during the period, and the shares used for calculating diluted earnings per share of common stock were the weighted average shares of common stock outstanding during the period plus the dilutive effect of stock options and unvested restricted stock.


	Three Months Ended		Nine Months Ended
(000’s omitted)	June 28, 2009	June 29, 2008	June 28, 2009	June 29, 2008
Average shares outstanding for basic earnings per share	21,086	20,921	21,075	20,805
Dilutive effect of stock options and unvested restricted stock	108	553	129	405

Average shares outstanding for diluted earnings per share	21,194	21,474	21,204	21,210

Average shares outstanding for diluted earnings per share for the three and nine months ended June 28, 2009 does not include options to purchase 1.6 million and 1.4 million shares of common stock, respectively, as their effect would have been antidilutive. Average shares outstanding for diluted earnings per share for the three and nine months ended June 29, 2008 does not include options to purchase 180,000 and 327,000 shares of common stock, respectively, as their effect would have been antidilutive.

6. Derivative Instruments and Hedging Activities

The Company operates globally and its earnings and cash flows are exposed to market risk from changes in currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The program is operated pursuant to documented corporate risk management policies. The Company does not typically enter into derivative transactions for speculative purposes.

The Company uses foreign currency forward contracts to manage its currency transaction exposures with intercompany receivables denominated in foreign currencies. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and, therefore, are marked to market with changes in fair value recorded to earnings. These derivative instruments do not subject the Company’s earnings or cash flows to material risk since gains and losses on those derivatives offset losses and gains on the assets and liabilities being hedged.

The Company had two foreign currency forward contracts outstanding at June 28, 2009, serving to mitigate the foreign currency risk of a substantial portion of the Company’s Euro-denominated intercompany balances in the notional amount of approximately 11 million Euros. The fair value of these contracts at June 28, 2009 was approximately $15.5 million, resulting in an unrealized loss of approximately $466,000 for the quarter ended June 28, 2009. The following table presents the fair values of the Company’s derivative instruments not designated as hedging instruments as of June 28, 2009 (in thousands):


Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	Fair Value
Liabilities
Foreign currency contracts	Accrued expenses	$	466

Total liabilities		$	466

The following table presents the pretax impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings during the three and nine months ended June 28, 2009:


		Gain (Loss) Recognized in Income
(000’s omitted)	Location of Gain (Loss) Recognized in Income	Three Months Ended June 28, 2009			Nine Months Ended June 28, 2009
Foreign currency contracts	Investment and other income (loss), net	$	(498	)	$	924

7. Product Warranties

The Company typically offers one-year or five-year product warranties for most of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.

Product warranty activity for the nine months ended June 28, 2009 and June 29, 2008 is as follows:


(000’s omitted)	Beginning Balance		Accruals for Warranties Issued During the Period		Decrease to Pre-existing Warranties		Ending Balance
June 28, 2009	$	3,733	$	941	$	815	$	3,859
June 29, 2008	$	3,328	$	1,170	$	650	$	3,848

8. Acquisitions and Strategic Alliances

Alsius Corporation

On May 4, 2009, the Company completed the acquisition of substantially all the assets of the intravascular temperature management business of Alsius Corporation (“Alsius”). The assets acquired include intellectual property relating to the business, other intangibles, inventories and fixed assets. The Company assumed warranty and service contract obligations relating to Alsius’ installed base of products. The Company consolidated the operations of the acquired business into its Sunnyvale, California subsidiary, ZOLL Circulation, Inc. The Company believes that the acquisition of the temperature management technology and products from Alsius, in combination with the technology and know-how previously acquired by the Company through its purchase of assets from Radiant Medical, Inc. in 2007, creates the opportunity for the Company to become a major participant in the temperature management business. No voting interest was acquired in the acquisition. Under the terms of the acquisition, the Company paid approximately $12 million in cash to Alsius. The acquisition is being accounted for under SFAS No. 141, “Business Combinations.”

The following is a summary of the Company’s preliminary estimate of the fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company has engaged a third party to appraise the fair value of the acquired intangible assets. The results of the appraisal are preliminary at this time. The final results of the appraisal may differ from the preliminary estimate of the fair value of the acquired tangible and intangible assets and assumed liabilities. The Company will finalize the purchase price allocation upon receiving the final appraisal report and other relevant information relating to the acquisition. The final purchase price allocation may be significantly different than the Company’s preliminary estimate as presented below:


(000’s omitted)
Assets:
Inventory	$	4,003
Other current assets		23
Property and equipment		1,510
Goodwill		3,623


(000’s omitted)
Intangible assets subject to amortization (estimated 10 year weighted-average useful life):		3,500

Total assets acquired		12,659

Liabilities:
Current liabilities		313

Total liabilities assumed		313

Net assets acquired	$	12,346

The goodwill resulting from this acquisition, as part of the fair value assessment will be assigned to the Company’s only reportable segment, which is the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. All of the goodwill is expected to be deductible for income tax purposes.

Supplemental Pro Forma Information

The unaudited pro forma combined condensed statements of income for the periods ended June 28, 2009 and June 29, 2008 below give effect to the acquisition of the assets of Alsius as if the acquisition had occurred at the beginning of the year, October 1, 2007 after giving effect to certain adjustments, including amortization of the intangibles subject to amortization and related income taxes.

The unaudited pro forma combined condensed statements of income are not necessarily indicative of the financial results that would have occurred if the Alsius asset acquisition had been consummated on October 1, 2007, nor are they necessarily indicative of the financial results which may be attained in the future.

The pro forma statement of income below is based upon available information and upon certain assumptions that the Company’s management believes are reasonable.


	Three Months Ended				Nine Months Ended
(000’s omitted)	June 28, 2009		June 29, 2008		June 28, 2009		June 29, 2008
Net sales	$	96,290	$	103,266	$	285,859	$	300,653
Net income	$	890	$	2,690	$	1,300	$	4,189
Net income per common share
Basic	$	0.04	$	0.13	$	0.06	$	0.20
Diluted	$	0.04	$	0.13	$	0.06	$	0.20

Strategic Alliance with Welch Allyn

In October 2008, the Company announced a strategic alliance with Welch Allyn, Inc. involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn’s defibrillator and monitoring products. The Company paid approximately $5 million for the purchase of assets, which consist primarily of capitalized software, inventory and fixed assets, related to the Welch Allyn defibrillator products.

Contingent Consideration for Prior Period Acquisitions

The terms of the April 2006 acquisition of the assets of Lifecor, Inc. (“Lifecor”) provide for possible annual earn-out payments based upon revenue growth over a multi-year period. Such payments may be due with respect to Lifecor through fiscal 2011. These earn-out payments for fiscal 2009 and beyond are calculated as 100% of qualifying revenues earned in the current fiscal year in excess of the greater of the prior fiscal year qualifying revenues or $30 million. For fiscal 2008, $4.5 million was paid to Lifecor.

The terms of the March 2004 acquisition of the assets of Infusion Dynamics, Inc. (“Infusion Dynamics”) also provided for possible annual earn-out payments based upon revenue growth through fiscal 2011. For fiscal 2008, approximately $19,000 was paid to Infusion Dynamics.

Because the prospective earn-out payments for Lifecor and Infusion Dynamics are based upon revenue growth over several years, a reasonable estimate of the future payment obligations could not be determined. The annual earn-out payments will be recorded as an additional cost of the purchase and recorded as goodwill if the revenue growth specified in the respective acquisition agreements is achieved and becomes payable. The annual earn-out payments are accrued during the respective fiscal year in which they are earned and are paid in the respective subsequent fiscal year.

9. Intangibles and Other Assets

Intangibles and other assets consist of:


		June 28, 2009				September 28, 2008
(000’s omitted)	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents and developed technology	12 years	$	33,174	$	9,958	$	28,855	$	7,904
Prepaid license fees	16 years		12,020		3,492		11,426		3,072
Customer-related intangibles	10 years		4,750		1,483		4,750		1,137
Intangible assets not subject to amortization	—		890		—		890		—
Other assets	—		8,566		2,924		4,767		2,349

		$	59,400	$	17,857	$	50,688	$	14,462

Amortization of acquired intangibles for the three months ended June 28, 2009 and June 29, 2008 was approximately $760,000 and $732,000, respectively, and is included in operating expenses in the consolidated statements of income. For the nine months ended June 28, 2009 and June 29, 2008, amortization of acquired intangibles was approximately $2.2 million for each period, and is included in operating expenses in the condensed consolidated statements of income.

10. Income Taxes

The Company’s effective tax rate for the three months ended June 28, 2009 and June 29, 2008 was 30% and 36%, respectively.

The Company’s effective tax rate for the nine months ended June 28, 2009 was a tax provision of 29% as compared to 36% for the same period in fiscal 2008. The difference in the effective tax rate is due to the fact that the U.S. Congress extended a research and development tax credit, retroactive from January 1, 2008, during the first quarter of fiscal 2009. A full-year tax credit estimate is included in the Company’s fiscal 2009 rate calculation along with a discrete period adjustment of approximately $400,000 recognized during the first quarter of fiscal 2009 to record the tax credit related to the retroactive application of the credit extension. The comparable prior-year period rate only contained one quarter of a full-year credit in the annual rate calculation. The Company initially estimated that its fiscal 2009 effective tax rate would be approximately 35%. Based on the Company’s actual year-to-date results and lower than projected annual earnings, the Company currently estimates that its fiscal 2009 effective tax rate will be approximately 33%.

As of June 28, 2009 and September 28, 2008, the Company had approximately $3.3 million of gross unrecognized tax benefits which, if recognized, could impact goodwill and/or the effective tax rate. Of the $3.3 million current-year balance, $1.2 million is expected to reverse in fiscal 2009. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. The Company had $433,000 of accrued interest and penalties in income taxes payable as of June 28, 2009 and $480,000 at September 28, 2008.

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. federal and most state and foreign income tax matters through fiscal 2004. The Internal Revenue Service began an audit of the Company’s fiscal 2007 tax return during the third quarter of fiscal 2009.

11. Fair Value Measurements

Effective September 29, 2008, SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) was implemented for financial assets and liabilities that are re-measured and reported at fair value at each reporting period-end date, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, the Company has elected to defer implementation of SFAS 157 as it relates to any non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until fiscal 2010. The Company is evaluating the impact, if any, that SFAS 157 will have on its non-financial assets and liabilities. The adoption of SFAS 157 in relation to financial assets and liabilities and non-financial assets and liabilities that are re-measured and reported at fair value at least annually did not have a material impact on the Company’s financial results.

Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives and most U.S. Government and agency securities).

Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

•

Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds which trade infrequently);

•

Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and

•

Inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (examples include certain securities and derivatives).

Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 28, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):


(000’s omitted)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	14,512	$	14,512	$	—	$	—
Available for sale securities (1)		8,940		1,952		6,988		—
Notes receivable		3,843		—		3,843		—

Total	$	27,295	$	16,464	$	10,831	$	—

Liabilities:
Foreign currency contracts (2)	$	466	$	—	$	466	$	—

Total	$	466	$	—	$	466	$	—

(1)	Included in short-term marketable securities and long-term marketable securities in the accompanying condensed, consolidated balance sheet.

(2)	Included in accrued expenses in the accompanying condensed, consolidated balance sheet.

There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis as a result of partially adopting SFAS 157.

The Company also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” (“SFAS 159”) during the first quarter of fiscal 2009. SFAS 159 allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each reporting date. The Company adopted SFAS 159 but has not elected the fair value option for any eligible financial instruments as of June 28, 2009.

12. Legal Proceedings

The Company is, from time to time, involved in the normal course of its business in various legal proceedings, including intellectual property, contract, employment and product liability suits. Although the Company is unable to quantify the exact financial impact of any of these matters, it believes that none of the currently pending matters will have an outcome material to its financial condition or business.

13. Cash Equivalents and Marketable Securities

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Substantially all cash and cash equivalents are invested in a money market investment account. These amounts are stated at cost, which approximates market value. The Company accounts for marketable securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). SFAS 115 establishes the accounting and reporting requirements for all debt securities and for investments in equity securities that have readily determinable fair values. All marketable securities must be classified as one of the following: held-to-maturity, available-for-sale, or trading. The Company classifies its marketable securities as available-for-sale and, as such, carries the investments at fair value, with unrealized holding gains and losses reported in stockholders’ equity as a separate component of accumulated other comprehensive income (loss). The cost of securities sold is determined based on the specific identification method. Realized gains and losses, and declines in value judged to be other than temporary, are included in investment income.

As of June 28, 2009, available-for-sale securities consisted of the following:


(000’s omitted)	Cost		Accrued Interest		Gross Unrealized
(000’s omitted)	Cost		Accrued Interest		Gains		Losses			Estimated Fair Value
Cash and money-market funds	$	35	$	—	$	—	$	—		$	35
U.S. government agency and Treasury securities		16,405		—		23		—			16,428
Corporate obligations		5,262		14		22		(33	)		5,265
Student loan auction rate securities		1,900		—		—		(176	)		1,724

	$	23,602	$	14	$	45	$	(209	)	$	23,452

As of September 28, 2008, available-for-sale securities consisted of the following:


(000’s omitted)	Cost		Accrued Interest		Gross Unrealized
(000’s omitted)	Cost		Accrued Interest		Gains		Losses			Estimated Fair Value
U.S. government agency and Treasury securities	$	11,773	$	15	$	2	$	(7	)	$	11,783
Mortgage-back obligations		504		5		4		—			513
State and municipal obligations		15,110		59		—		(7	)		15,162
Bank obligations		1,650		8		—		—			1,658
Corporate obligations		4,731		18		5		(250	)		4,504
Student loan auction rate securities		1,900		—		—		(128	)		1,772

	$	35,668	$	105	$	11	$	(392	)	$	35,392

The contractual maturities of these investments as of June 28, 2009 were as follows:


(000’s omitted)	Cost		Fair Value
Within 1 year	$	17,430	$	17,256
After 1 year through 5 years		5,929		5,985
After 5 years through 10 years		59		59
After 10 years		184		152

	$	23,602	$	23,452

The Company’s available-for-sale securities were included in the following captions in the condensed consolidated balance sheets:


(000’s omitted)	June 28, 2009		September 28, 2008
Cash and cash equivalents	$	14,512	$	1,023
Marketable securities		7,216		32,597
Long-term investments		1,724		1,772

	$	23,452	$	35,392

During fiscal 2008, the Company reclassified approximately $2 million of its marketable securities from current assets to non-current assets due to the recent illiquidity in the auction-rate securities market. The underlying assets of these investments are student loans that are backed by the federal government. During fiscal 2008, auctions failed for the auction rate securities. As a result, the Company’s ability to liquidate and fully recover the carrying value of the auction rate securities in the near term may be limited. An auction failure means that the parties wishing to sell the securities could not do so. The Company’s auction rate securities are currently rated “AAA” by Standard and Poor’s. The Company recorded a $100,000 impairment charge in fiscal 2008 on these securities based on valuation models. Subsequently, the Company entered into a Rights Agreement with UBS Financial Services, Inc. (“UBS”), through which these securities were acquired. The Rights Agreement entitles the Company to sell these securities to UBS at any time between June 30, 2010 and July 2, 2012 for par value. The Company will continue to receive interest payments based on the default provisions in the instruments until the securities are sold on the market or sold to UBS during the period established by the Rights Agreement. If the Company does not exercise its right to sell the auction rate securities to UBS by July 2, 2012, the right to sell will expire, and UBS will have no further obligation to the Company. The Rights Agreement releases UBS from all claims related to the securities except consequential damages. UBS has the right to purchase the auction rate securities at par value, without prior notice, from the Company at any time after the acceptance date. The Company believes there is no further impairment of these securities, primarily due to the government guarantee of the underlying securities and also because of the agreement by UBS to purchase, at the Company’s option, from June 30, 2010 to July 2, 2012, the auction rate securities that the Company originally acquired from UBS.

At the end of fiscal 2008, the Company also held approximately $600,000 of marketable mortgage-backed securities. In fiscal 2008, the Company recorded a $100,000 impairment charge on these securities based on valuation models. During the first quarter of 2009, the Company sold the majority of its marketable mortgage-backed securities for a net realized loss of $89,000 in addition to the impairment charge recorded in fiscal 2008.

Gross realized gains and (losses) on available-for-sale securities were ($22,000) and ($257,000) for the three and nine months ended June 28, 2009 and were ($7,000) and ($249,000) for the three and nine months ended June 29, 2008.

14. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS 165 in the quarter ended June 28, 2009. SFAS 165 did not impact the consolidated financial statements for this period. The Company evaluated all events or transactions that occurred after June 28, 2009 up through August 7, 2009, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events.

In April 2009, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). Based on FSP FAS 157-4, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157, “Fair Value Measurements”. FSP FAS 157-4 is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 157-4 for its quarter ending June 28, 2009, and this FSP did not have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: (1) the amount related to credit losses (recorded in earnings), and (2) all other amounts (recorded in other comprehensive income). FSP FAS 115-2 and FAS 124-2 is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 115-2 and FAS 124-2 for its quarter ending June 28, 2009, and this FSP did not have a significant impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107

“Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial information. FSP FAS 107-1 and APB 28-1 is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 in its quarter ending June 28, 2009, and this FSP did not have a significant impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance and cash flows. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. SFAS 168 eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS 168 for its quarter ending September 27, 2009. The Company does not expect adoption of SFAS 168 to have a material impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The objective of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS 141(R)”), and other accounting principles generally accepted in the United States. FSP No. 142-3 applies to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and should be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company is in the process of evaluating FSP No. 142-3 and does not expect it to have a significant impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. The Company believes that SFAS 160 will have an immaterial impact on the Company’s financial statements in future periods as they relate to transactions executed prior to adoption. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the current accounting rules.

In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. SFAS 141R will be adopted on a prospective basis for new acquisitions subsequent to the effective date. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the current accounting rules.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R). The requirements of FSP FAS 141(R)-1 carry forward without significant revision of the guidance on contingencies of SFAS No. 141, “Business

Combinations”, which was superseded by SFAS No. 141(R) (see previous paragraph). FSP FAS 141(R)-1 also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. FSP FAS 141(R)-1 will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. With respect to potential transactions that may be executed subsequent to adoption, the accounting consequences could be materially different than under the current accounting rules.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are committed to the design, manufacture and marketing of technologies that help advance the practice of resuscitation and temperature control therapies for the treatment of critical care patients. With products for pacing, defibrillation, circulation, temperature management, and fluid resuscitation, we provide a comprehensive set of technologies, including Real CPR Help^® and See-Thru CPR^® that help clinicians, EMS professionals, and lay rescuers resuscitate sudden cardiac arrest or trauma victims. We also design and market software that automates the documentation and management of both clinical and non-clinical information.

We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our consolidated financial statements as of June 28, 2009 for the three and nine months then ended, and the notes thereto.

Sales for the three months ended June 28, 2009 decreased 5%, as compared to the comparable period in the prior year. Business conditions in the third quarter were similar to what we experienced during the second quarter, which included the challenging capital equipment spending environment in the North America hospital market and the impact of a strengthening US dollar on our sales denominated in a foreign currency. Additionally, we experienced some softness in the pre-hospital and International markets during the third quarter. The slowdown in capital equipment sales in these markets was partially offset by increased revenues from our LifeVest^® product, U.S. military business, and data management products and the addition of temperature management revenues during the third quarter.

With respect to the strengthening US dollar, foreign exchange fluctuations had a negative impact on total third-quarter revenues of approximately $3 million as compared to the comparable prior-year period, and had a negative impact of approximately $2 million on our operating income in the third quarter as compared to the same prior-year period. Of the $3 million impact on revenue, approximately $1 million is related to the Canadian dollar within our North American operations, while the remaining $2 million is reflected within our International operations related to the Euro, Australian Dollar, and British Pound.

We completed the asset acquisition of the temperature management business from Alsius Corporation in May 2009. We generated approximately $2 million in revenue during the third quarter of fiscal 2009 from this business.

Three Months Ended June 28, 2009 Compared To Three Months Ended June 29, 2008

Sales

Net sales by customer/product categories are as follows:


(000’s omitted)	June 28, 2009		June 29, 2008		% Change
Devices and Accessories to the Hospital Market-North America	$	26,617	$	26,315	1	%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		40,487		42,685	(5	)%
Other Products to North America		5,645		5,822	(3	)%

Subtotal North America		72,749		74,822	(3	)%
All Products to the International Market		22,398		25,422	(12	)%

Net Sales	$	95,147	$	100,244	(5	)%

Sales to the North American hospital market increased slightly, or 1%, compared to the same period a year ago. North American hospital revenues included US Military/Big Government sales of $8.8 million, compared to $5.6 million in the comparable prior-year period. North American hospital sales also included approximately $1 million of temperature management revenues during the period. We continue to see curtailed spending by hospitals. We believe hospitals have constrained capital spending due to the general economic downturn and uncertainty regarding the shape of healthcare reform legislation, and that the curtailed spending should subside as customers better gauge their own economic outlook. Since professional defibrillator products are standard-of-care and the installed base continues to age, we believe such spending has merely been delayed rather than lost.

Sales to the North American pre-hospital market decreased approximately $2.2 million, or 5%, compared to the same quarter in the prior year. We experienced softness in sales of both professional defibrillators and AEDs during the quarter. This decrease in North American pre-hospital market sales was partially offset by the increased volume of LifeVest revenue, which increased 58% to $11.9 million, compared to $7.5 million in the prior-year quarter. The remaining decrease included decreased sales volume of the AutoPulse, partially offset by increased volume of data management software sales.

International sales decreased approximately $3.0 million, or 12%, in comparison to the prior-year period, driven by the approximately $2 million negative impact of foreign exchange rate fluctuations on sales by our international subsidiaries. On a constant currency basis, international sales volume would have decreased by approximately 9% compared to the prior-year quarter. International sales included approximately $1 million of temperature management revenue during the third quarter of fiscal 2009. As expected, the global economic conditions are affecting capital spending.

Total AutoPulse sales were approximately $4.1 million in comparison to $4.8 million in the prior-year quarter. Although shipments increased slightly over the second quarter of this fiscal year, once again, we believe that the comparative results are a reflection of the capital spending environment.

Gross Margins

Cost of sales consists primarily of material, direct labor, overhead, depreciation and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposable electrodes. Material is the largest component of our products, comprising more than half the cost. Overhead includes indirect labor for such activities as supervision, procurement and shipping. Other components of overhead include such items as related employee benefits, rent and electricity. Our consolidated gross margin may fluctuate considerably depending on unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuation and overall market conditions.

Gross margin for the three months ended June 28, 2009 decreased from 53% to 51%, compared to the same period in the prior year. Approximately one and a half percentage points of the decrease was due to the impact of foreign exchange in the current quarter compared to the prior-year quarter. Additionally, our margin decreased approximately a half of a percentage point with the introduction of the temperature management business during the third quarter of fiscal 2009. Increased LifeVest revenues partially offset this decrease with an increase in gross margin of approximately a half a percentage point. Other factors affecting the fluctuation in gross margin each individually represented less than one percentage point of our overall gross margin. Our gross margin tends to fluctuate from period to period as a result of product and geographical mix.

Backlog

Backlog increased to approximately $9.8 million at June 28, 2009, compared to approximately $7.8 million at the end of the prior quarter. Backlog was approximately $8.6 million at June 29, 2008. Our reported backlog includes only those orders, which in management’s judgment, have a high likelihood of shipping in the subsequent ninety-day period. Typically, our backlog decreases during the first and second quarters, remains relatively flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Costs and Expenses

Operating expenses for the three months ended June 28, 2009 and June 29, 2008 were as follows:


(000’s omitted)	June 28, 2009		% of Sales		June 29, 2008		% of Sales		Change %
Selling and marketing	$	29,148	31	%	$	28,725	29	%	(2	)%
General and administrative		8,016	8	%		7,835	8	%	(2	)%
Research and development		10,763	11	%		8,441	8	%	(28	)%

Total expenses	$	47,927	50	%	$	45,001	45	%	(7	)%

As a percentage of sales, selling and marketing expenses for the three months ended June 28, 2009 increased approximately 2% as compared to the three months ended June 29, 2008. This increase, as a percentage of sales, was primarily attributed to the lower volume of revenue compared to the prior-year quarter. The increased dollar spending primarily reflected increased personnel-related expenses for the LifeVest sales force and related sales organization, including commission, salaries and fringe benefits of

approximately $1.8 million, who are supporting the increased LifeVest revenue. The increase was largely offset by decreased commissions and other expense reductions in our core defibrillator operating expenses related to the lower revenue volume in the North American hospital market and the impact of foreign exchange rates on foreign-denominated operating expenses.

As a percentage of sales, general and administrative expenses remained consistent at 8% of sales as compared to the three months ended June 28, 2009. General and administrative expenses were consistent with the prior-year period at approximately $8 million.

As a percentage of sales, research and development expenses for the three months ended June 28, 2009 increased approximately 3% compared to the three months ended June 29, 2008. Research and development expenses increased for the three months ended June 28, 2009 compared to the three months ended June 29, 2008, predominantly due to additional costs of approximately $1.5 million as a result of hiring additional research and development personnel in connection with the strategic alliance with Welch Allyn.

Investment and other income (loss), net

Investment and other income (loss) net, includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (loss), net totaled approximately $1.3 million and $352,000 for the three months ended June 29, 2009 and June 28, 2008, respectively. The increase primarily reflects foreign exchange gains on marking our foreign denominated intercompany receivable balances to the spot rate at the end of the period.

Income Taxes

Our effective tax rate for the three months ended June 28, 2009 and June 29, 2008 was 30% and 36%, respectively. The decrease in the effective tax rate is due to a relatively consistent benefit provided by the research and development tax credit being applied to lower expected annual earnings.

Effective October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). At June 28, 2009 and September 28, 2008, we had approximately $3.3 million of gross unrecognized tax benefits, all of which, if recognized, would affect goodwill and/or our effective tax rate. Of the $3.3 million current-year balance, $1.2 million is expected to reverse in fiscal 2009. We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. We had $433,000 of accrued interest and penalties at June 28, 2009 and $480,000 at September 28, 2008.

We are subject to U.S. federal income tax as well as to income taxes of multiple state and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2004. The Internal Revenue Service began an audit of our fiscal 2007 tax return during the third quarter of fiscal 2009.

In the first quarter of fiscal 2009, we estimated that our fiscal 2009 effective tax rate would be approximately 35%. Based on our actual year-to-date results and lower than projected annual earnings, we now estimate that our fiscal 2009 effective tax rate will be approximately 33% before discrete period items.

Nine Months Ended June 28, 2009 Compared To Nine Months Ended June 29, 2008

Sales

Net sales by customer/product categories are as follows:


(000’s omitted)	June 28, 2009		June 29, 2008		% Change
Devices and Accessories to the Hospital Market-North America	$	64,389	$	87,397	(26	)%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		126,742		116,098	9	%
Other Products to North America		17,357		16,857	3	%

Subtotal North America		208,488		220,352	(5	)%
All Products to the International Market		68,829		72,067	(4	)%

Net Sales	$	277,317	$	292,419	(5	)%

Net sales decreased 5% for the nine months ended June 28, 2009 compared to the prior-year period.

Sales to the North American hospital market decreased approximately $23.0 million, or 26%, compared to the same period a year ago. This decrease primarily reflects curtailed spending by hospitals in response to the general economic downturn. The decrease was also attributable to a smaller volume of US Military/Big Government sales compared to the nine-month period in fiscal 2008. The contract with the State of California in the prior year contributed approximately $8 million of the $20.3 million in sales to the US Military/Big Government in the nine months ended June 29, 2008, in comparison to a total of $15.0 million in U.S. Military/Big Government sales during the nine-month period of fiscal 2009.

Sales to the North American pre-hospital market increased approximately $10.6 million, or 9%, compared to the same period in the prior year. The increase in North American pre-hospital market sales was primarily a result of increased volume of LifeVest revenue of approximately $12.6 million. Other contributors included increased volume in data management software sales and AutoPulse sales, partially offset by a lower volume of AEDs and professional defibrillators.

International sales decreased approximately $3.2 million, or 4%, compared to the prior-year period. The negative impact of foreign exchange rate fluctuations on sales by our international subsidiaries, excluding Canada, totaled approximately $6 million. The increased volume of sales was driven by our direct subsidiaries in France and the UK.

Total sales of the AutoPulse product increased 16%, with particularly strong growth in the North American pre-hospital market. Total AutoPulse sales were approximately $12.6 million in comparison to $10.9 million in the prior-year period.

Gross Margins

Gross margin for the nine months ended June 28, 2009 remained consistent compared to the same period in the prior year at approximately 52%. Approximately a percentage point decrease was due to the impact of foreign exchange rates. This decrease was partially offset by approximately a half of a percentage point increase in margin due to the absence in the current-year of the low margin State of California order which adversely affected the gross margin for the prior-year period. Other factors affecting the fluctuation in gross margin, each individually represented less than one percentage point of our overall gross margin, including the LifeVest business which contributed an increase to the overall gross margin of approximately a half of a percentage point. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuation and overall market conditions.

Costs and Expenses

Operating expenses for the nine months ended June 28, 2009 and June 29, 2008 were as follows:


(000’s omitted)	June 28, 2009		% of Sales		June 29, 2008		% of Sales		Change %
Selling and marketing	$	83,329	30	%	$	82,273	28	%	(1	)%
General and administrative		23,642	9	%		23,564	8	%	0	%
Research and development		28,848	10	%		24,822	9	%	(16	)%

Total expenses	$	135,819	49	%	$	130,659	45	%	(4	)%

As a percentage of sales, selling and marketing expenses for the nine months ended June 28, 2009 increased approximately 2% as compared to the nine months ended June 29, 2008. This increase, as a percentage of sales, was primarily attributed to the relatively small incremental operating expense in the prior-year period associated with the revenue obtained from the State of California order. We did not receive a similar order in the current-year period. The increased dollar spending primarily reflected increased personnel-related expenses of approximately $4.9 million for the expanded LifeVest sales force and related sales organization, including commissions, salaries and fringe benefits that are supporting the increased LifeVest revenue, partially offset by the favorable impact of foreign exchange rates on foreign-denominated operating expenses of approximately $3 million.

As a percentage of sales, general and administrative expenses increased slightly to 9% of sales as compared to 8% of sales for the nine months ended June 29, 2008. General and administrative expenses were consistent with the prior-year period.

As a percentage of sales, research and development expenses for the nine months ended June 28, 2009 increased approximately one percentage point compared to the nine months ended June 29, 2008. Research and development expenses increased for the nine months ended June 28, 2009 compared to the nine months ended June 29, 2008, due predominantly to increased costs related to hiring additional research and development personnel in connection with the strategic alliance with Welch Allyn.

Investment and other income (loss), net

Investment and other income (loss), net includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (loss), net totaled approximately $702,000 and $1.0 million for the nine months ended June 28, 2009 and June 29, 2008, respectively. This decrease is primarily the result of the rapid strengthening of the US dollar earlier in fiscal 2009 as we marked our short-term foreign denominated intercompany receivables to market at the end of the reporting period.

Income Taxes

Our effective tax rate for the nine months ended June 28, 2009 and June 29, 2008 was 29% and 36%, respectively. During the first quarter of 2009, the U.S. Congress extended a research and development tax credit which was retroactive from January 1, 2008. The difference in our effective tax rate is due to a discrete U.S. research and development tax credit of approximately $400,000 recorded during the quarter ended December 28, 2008 for the retroactive portion of the tax credit and to a full-year projected tax credit for research and development in the 2009 annual rate calculation, as compared to only one quarter of a full-year credit in fiscal 2008.

Liquidity and Capital Resources

Our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at June 28, 2009 totaled $55.3 million, compared with $69.3 million at September 28, 2008. We continue to have no long-term debt. On May 4, 2009, we purchased substantially all of the assets of the intravascular temperature management business of Alsius Corporation for a cash purchase price of approximately $12.3 million. See Note 8 to the condensed consolidated financial statements.

As we have previously stated, we have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.

Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to the Lifecor and Infusion Dynamics acquisitions (payments to Lifecor may be made in cash or the Company’s common stock at our option.) We may also need to use these funds in the future for potential acquisitions.

Sources and Uses of Cash

To assist with the discussion, the following table presents the abbreviated cash flows for the nine months ended June 28, 2009 and June 29, 2008:


(000’s omitted)	Nine months ended June 29, 2009			Nine months ended June 29, 2008
Net income	$	6,166		$	14,578
Changes not affecting cash		16,359			14,590
Changes in current assets and liabilities		3,095			(10,104	)

Cash provided by operating activities		25,620			19,064
Cash used for investing activities		(13,031	)		(24,775	)
Cash provided by financing activities		170			6,564
Effect of foreign exchange rates on cash		(1,386	)		491

Net change in cash and cash equivalents		11,373			1,344
Cash and cash equivalents - beginning of period		36,675			37,631

Cash and cash equivalents - end of period	$	48,048		$	38,975

Operating Activities

Cash provided by operating activities of $25.6 million for the nine months ended June 28, 2009 increased $6.6 million compared to cash provided by operating activities for the nine months ended June 29, 2008 of $19.1 million. The increase in cash provided by operating activities for the nine months ended June 28, 2009, as compared to the nine months ended June 29, 2008, was primarily attributable to the decrease in cash payments for accounts payable and accrued expenses as well as increased cash provided by accounts receivable. These increases to cash provided by operating activities were partially offset by lower net income in fiscal 2009 than in fiscal 2008 and by increased inventory purchases for the nine months ended June 28, 2009 as compared to the nine months ended June 29, 2008.

Investing Activities

Cash used in investing activities during the nine months ended June 28, 2009 decreased by approximately $11.7 million from cash used in investing activities during the nine months ended June 29, 2008. This decrease is primarily attributable to the approximately $26.8 million in net sales of marketable securities in the nine months ended June 29, 2009 over the comparable period in the prior year. Additionally, payments of contingent consideration on prior period acquisitions decreased with the final earn-out payment to the shareholders of Revivant Corporation (“Revivant”) in fiscal 2008. These decreases were partially offset by the approximately $16.1 million in cash paid for the acquisition of substantially all of the assets of the intravascular temperature management business of Alsius and for the purchase of assets related to the Welch Allyn defibrillator products.

Financing Activities

Cash provided by financing activities during the nine months ended June 28, 2009 decreased approximately $6.4 million compared to the nine months ended June 29, 2008. The change reflects a substantially lower number of stock options exercised during the current nine-month period (options for 25,477 shares in the current period compared to options for 309,964 shares in the previous year period).

Investments

In March 2004, we acquired substantially all the assets of Infusion Dynamics. Under the terms of the acquisition, we are obligated to make additional earn-out payments through 2011 (“contingencies”) based on performance of the acquired business (See Note 8). Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. As these contingencies are resolved and the consideration is distributable, we record the fair value of the additional consideration as additional cost of the acquired assets. Our earn-out payments, in the form of cash, for fiscal 2007 and 2008 were approximately $11,000 and $19,000, respectively. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period.

We exercised our option to acquire Revivant, the manufacturer of the AutoPulse, on October 12, 2004. We paid $15 million in the form of cash and shares of our Common Stock as the initial merger consideration. Additional contingent consideration under the merger agreement was dependent upon certain clinical developments (“milestone payments”) and increases in revenue through fiscal 2007 (“earn-out payments”). In December 2007, we paid approximately $3.6 million in cash and issued 220,864 shares of Common Stock in payment of the fiscal 2007 earn-out, which was accrued during fiscal 2007, to the former shareholders of Revivant. The December 2007 payment represented the contingent consideration due to the former shareholders of Revivant for the final earn-out period related to this acquisition.

We exercised our option to acquire the business and assets of Lifecor on March 22, 2006 and acquired the business and assets on April 10, 2006. We assumed Lifecor’s outstanding debt (plus an additional $3.0 million owed to us, which was cancelled) and certain stated liabilities. We paid the third-party debt in April 2006. We agreed to pay additional consideration in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period (See Note 8). Earn-out payments to Lifecor were made in the form of cash for fiscal 2007 and 2008 in the approximate amounts of $3.2 million and $4.5 million, respectively. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period. Because additional consideration will be based on the growth of sales, a reasonable estimate of the total acquisition cost cannot be determined.

In October 2008, we announced a strategic alliance with Welch Allyn involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn’s defibrillator and monitoring products. We paid approximately $5 million for the purchase of assets, which consist primarily of capitalized software, inventory and fixed assets, related to the Welch Allyn defibrillator products.

On May 4, 2009, we completed the acquisition of substantially all the assets of the intravascular temperature management business of Alsius Corporation (“Alsius”). The assets acquired include intellectual property relating to the business, other intangibles, inventories and fixed assets. We assumed warranty and service contract obligations relating to Alsius’s installed base of products. The operations of the acquired business were consolidated at our Sunnyvale, California subsidiary, ZOLL Circulation, Inc. We believe that the acquisition of the temperature management technology and products from Alsius, in combination with the technology and know-how previously acquired through our purchase of assets from Radiant Medical, Inc. in 2007, creates the opportunity for us to become a major participant in the temperature management business. No voting interest was acquired in the acquisition. Under the terms of the acquisition, we paid approximately $12 million in cash to Alsius.

Debt Instruments and Related Covenants

We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis, up to $12 million. This line of credit bears interest at LIBOR plus 2% for short-term borrowings (2 – 3 months). For longer term loans, the line of credit bears interest at the rate of LIBOR plus 4% to 6%. No borrowings were outstanding on this line during fiscal 2008 or as of June 28, 2009. There are no covenants related to this line of credit.

Off-Balance Sheet Arrangements

The Company leases certain office and manufacturing space under operating leases. Purchase obligations include all legally binding contracts that are non-cancelable. The table shown below in the next section titled “Contractual Obligations and Other Commercial Commitments” shows the amounts of our operating lease commitments and purchase commitments payable by year. For liquidity purposes, we choose to lease our facilities instead of purchasing them.

Contractual Obligations and Other Commercial Commitments

The following table sets forth certain information concerning our obligations and commitments to make future payments under contracts, such as lease agreements.


	Payments Due by Period
(000’s omitted)	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Contractual Obligations
Non-Cancelable Operating Lease Obligations	$	7,745	$	2,332	$	3,897	$	1,366	$	150
Purchase Obligations		4,773		1,526		1,632		1,615		—

Total Contractual Obligations	$	12,518	$	3,858	$	5,529	$	2,981	$	150

Purchase obligations include all legally binding contracts that are non-cancelable. Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of the table above, purchase obligations for purchase of goods and services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based upon our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain provisions allowing for cancellation without significant penalty.

Contractual obligations that are contingent upon future performance and growth of sales are not included in the table above. These include the additional earn-out payments for the assets of Infusion Dynamics through fiscal 2011 and additional earn-out payments for the assets of Lifecor through fiscal 2011. Because all of these earn-out payments are based upon the growth of sales over several years, a reasonable estimate of the future payment obligations cannot be determined.

Hedging Activities

We had two foreign currency forward contracts outstanding at June 28, 2009 in the notional amount of approximately 11 million Euros, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances. The net settlement amount of these two contracts on June 28, 2009, is an unrealized loss of approximately $466,000, which is included in earnings within “investment and other income, net.” We had a net realized loss of $32,000 from foreign currency forward contracts during the quarter ended June 28, 2009, which is included in earnings within “investment and other income, net,” compared to no realized gains or losses for the prior year’s quarter.

As of June 28, 2009, we did not have any contracts outstanding to serve as a hedge of our forecasted sales to our subsidiaries. As of June 29, 2008, we had contracts outstanding totaling $3.9 million to serve as a hedge of our forecasted sales to our subsidiaries, all maturing in less than twelve months. Because these derivatives did not qualify for hedge accounting in accordance with SFAS 133, we entered into offsetting derivatives, totaling $3.9 million. All of the contracts were marked to market with changes in fair value recorded to earnings. At June 29, 2008, the net settlement amount on these contracts was an unrealized loss of approximately $29,000. Net realized losses were approximately $125,000 for the quarter ended June 29, 2008 and were recorded in “investment and other income, net” in the consolidated statements of income.

Legal and Regulatory Affairs

Critical Accounting Estimates

Our management strives to report our financial results in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require us to use technical terminology. We follow accounting principles generally accepted in the United States in preparing our consolidated financial statements. These principles require us to make certain estimates of matters that are inherently uncertain and to make difficult and subjective judgments that affect our financial position and results of operations. Our most critical accounting policies include revenue recognition, and our most critical accounting estimates include accounts receivable reserves, warranty reserves, inventory reserves, and the valuation of long-lived assets. Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies, which include revenue recognition and those that require significant estimates and judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions, and how they are applied in preparation of the financial statements.

Revenue Recognition

Revenues from sales of cardiac resuscitation and temperature management therapy devices, disposable electrodes, catheters and accessories are recognized when a signed non-cancelable purchase order exists, the product is shipped, title and risk have passed to the customer, the fee is fixed or determinable, and collection is considered probable. Circumstances that generally preclude the immediate recognition of revenue include shipping terms of FOB destination or the existence of a customer acceptance clause in a contract based upon customer inspection of the product. In these instances, revenue is deferred until adequate documentation is obtained to ensure that these criteria have been fulfilled. Similarly, revenues from the sales of our products to distributors fall under the same guidelines. For all significant orders placed by our distributors, we require an approved purchase order, we perform a credit review, and we ensure that the terms on the purchase order or contract are proper and do not include any contingencies which preclude revenue recognition. We do not typically offer any special right of return, stock rotation or price protection to our distributors or end customers. For sales in which payment extends beyond a twelve month period, we recognize revenue at its net present value using an imputed rate of interest.

Our sales to customers often include a device, disposables and other accessories. For the vast majority of our shipments, all deliverables are shipped together. In cases where some elements of a multiple element arrangement are not delivered as of a reporting date, we defer the fair value of the undelivered elements and only recognize the revenue related to the delivered elements in accordance with Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Revenues are recorded net of estimated returns. Some sales to customers of our cardiac resuscitation devices may include some data collection software. The cardiac resuscitation device and software product can operate independently of each other and one does not affect the functionality of the other. In cases where both elements are included in a customer’s order but only one has been delivered by the reporting date, we defer the fair value of the undelivered element and recognize the revenue related to the delivered item in accordance with EITF 03-05, “Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” and EITF 00-21.

We also license software under non-cancelable license agreements and provide services including training, installation, consulting and maintenance, which consists of product support services, and unspecified upgrade rights (collectively, post-contract customer support, “PCS”). Revenue from the sale of software is recognized in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended. License fee revenues are recognized when a non-cancelable license agreement has been signed, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. Revenues from maintenance agreements and upgrade rights are recognized ratably over the period of service. Revenue for services, such as software deployment and consulting, is recognized when the service is performed. Our software arrangements contain multiple elements, which include software products, services and PCS. Generally, we do not sell computer hardware products with our software products. We will occasionally facilitate the hardware purchase by providing information to the customer such as where to purchase the equipment. We generally do not have vendor-specific objective evidence of fair value for our software products. We do, however, have vendor-specific objective evidence of fair value for items such as consulting and technical services, deployment and PCS based upon the price charged when such items are sold separately. Accordingly, for transactions where vendor-specific objective evidence exists for undelivered elements but not for delivered elements, we use the residual method as discussed in SOP 98-9, “Modification of SOP 97-2.” Under the residual method, the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

We do not typically ship any of our software products to distributors or resellers. Our software products are sold by our sales force directly to the end user. We may sell software to system integrators who provide complete solutions to end users on a contract basis.

In fiscal 2007, we were awarded a contract of approximately $11.6 million with a contractor hired by the State of California to supply defibrillators and accessories. The contract also includes preventative maintenance and storage services for certain defibrillators and accessories over a five-year period. Based on the award, we shipped the defibrillators and accessories (“equipment”) in three installments over the course of four months beginning in the fourth quarter of fiscal 2007 and ending in the first quarter of fiscal 2008. At the request of the State, the equipment was shipped to three warehouse locations within California in order to provide for rapid deployment in the case of an emergency. Two of the warehouses are facilities leased by us. Due to the life support function of the equipment and the requirement that they be deployed at a moment’s notice to sustain life in the event of an emergency, it is important that they are stored in an appropriate condition and location. As a result, the State requested that we make arrangements to store and maintain certain of the equipment to ensure it performs its life support function when deployed. Individuals with the requisite background, skills and credentials store and maintain the products. The preventative maintenance services include preventative maintenance on the defibrillator units as well as battery and electrode replacement upon expiration of their shelf life within the five year period of the contract.

Although we delivered the first two installments of the equipment during the fourth quarter of the fiscal year ended September 30, 2007, no revenue was recognized since objective and reliable evidence of fair value did not exist for all undelivered elements. We recognized revenue related to the delivered equipment in the first quarter of fiscal 2008 as we determined that objective and reliable evidence of fair value exists for all remaining undelivered elements, including maintenance, storage, insurance and accessories. We recognized approximately $8 million of revenue during the first quarter of fiscal 2008. The remaining amount of consideration is being recognized over a five-year period as the undelivered elements are delivered. As of June 28, 2009, we had approximately $2.1 million in deferred revenue related to this contract.

In fiscal 2005, we began performance under a “state of readiness” contract awarded by the U.S. government to supply defibrillators on short notice. Based on the award, we received two types of payments from the U.S. government. The first payment of approximately $5 million was to reimburse us for the cost to acquire inventories required to meet potentially short-notice delivery schedules. This payment is carried within ‘Deferred revenue’ on our balance sheet as a liability under government contract.

We also received a payment from the U.S. government to compensate us for managing the purchase, build, storage and inventory rotation process. This payment also compensated us for making future production capacity available. The portion of this payment associated with the purchase and build aspects of the contract was recognized on a percentage of completion basis while the portion of the payment for the storage, inventory rotation and facilities charge was recognized ratably over the contract period.

This government contract is for a one-year term, and the U.S. government has four one-year extension options that require the payment of additional fees to us if exercised (the contract is currently in its fourth and final extension). These fees are for the storage, inventory rotation and facilities charge and are recognized ratably over the contract period. The U.S. government has two options to acquire defibrillators under this contract. They may buy on a replenishment basis, which means we will record a sale under our normal U.S. government price list and maintain our “state of readiness”, or they may buy on a non-replenishment basis, which will still allow us to obtain normal margins but will reduce our future obligations under this arrangement.

For those markets for which we sell separately priced extended warranties, revenue is deferred and recognized over the applicable warranty period, based upon the fair value of the contract.

We also generate rental revenue from our LifeVest product. Doctors prescribe the LifeVest equipment for use by their patients. The patients then rent the LifeVest product for use over a prescribed period of time, between 2-3 months. The patients are generally covered by health plan contracts, which typically contract with a third party payor that agrees to pay based on fixed or allowable reimbursement rates. Third party payors are entities such as insurance companies, governmental agencies, health maintenance organizations or other managed care providers. The rental income is recognized ratably over the rental period.

Allowance for Doubtful Accounts / Sales Returns and Allowances / Trade-In Allowances

We maintain an allowance for doubtful accounts for estimated losses, for which related provisions are included in bad-debt expense, resulting from the inability of our customers to make required payments. Specifically identified reserves are charged to selling and marketing expenses. Provisions for general reserves are charged to general and administrative expenses. We determine the adequacy of this allowance by regularly reviewing the aging of our accounts receivable and evaluating individual customer receivables, considering customers’ financial condition, historical experience, communications with the customers, credit history and current economic conditions. We also maintain an estimated reserve for potential future product returns and discounts given related to trade-ins and to current period product sales, which is recorded as a reduction of revenue. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included in the sales returns and allowance accounts on our balance sheet.

As of June 28, 2009, our accounts receivable balance of $78.1 million is reported net of allowances of $6.0 million. We believe our reported allowances at June 28, 2009 are adequate. If the financial condition of our customers was to deteriorate, however, resulting in their inability to make payments, we might need to record additional allowances, resulting in additional expenses being recorded for the period in which such determination was made.

Although we are not typically contractually obligated to provide trade-in allowances under existing sales contracts, we may offer such allowances when negotiating new sales arrangements. When pricing sales transactions, we contemplate both cash consideration and the net realizable value of any used equipment to be traded in. The trade-in allowance value stated in a sales order may differ from the estimated net realizable value of the underlying equipment. Any excess in the trade-in allowance over the estimated net realizable value of the used equipment represents additional sales discount.

We account for product sales transactions by recording as revenue the total of the cash consideration and the estimated net realizable value of the trade-in equipment less a normal profit margin. Any difference between the estimated net realizable value of the used equipment and the trade-in allowance granted is recorded as a reduction to revenue at the time of the sale.

Used ZOLL equipment is recorded at the lower of cost or market consistent with Accounting Research Bulletin No. 43. We regularly review our reserves to assure that the balance sheet value associated with our trade-in equipment is properly stated.

If the trade-in equipment is a competitor’s product, we will usually resell the product to a third-party distributor who specializes in sale of used medical equipment, without any refurbishment. We typically do not recognize a profit upon the resale of a competitor’s used equipment, although as a result of the inherent nature of the estimation process, we could recognize either a nominal gain or loss.

Fair Value Measurements

During the first quarter of fiscal 2009, we adopted FASB SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), for all financial assets and liabilities and nonfinancial assets and liabilities which are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In accordance with SFAS Position 157-2, “Effective Date of FASB Statement No. 157,” we have elected to defer implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until the first quarter of fiscal 2010. We are evaluating the impact, if any, SFAS 157 will have on our non-financial assets and liabilities. The adoption of SFAS 157 for financial assets and liabilities and non-financial assets and liabilities which are recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material effect on our financial condition or operating results.

We also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS 159”), during the first quarter of fiscal 2009. SFAS 159 allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each reporting date. We adopted SFAS 159 but did not elect the fair value option for any eligible financial instruments as of June 28, 2009.

Refer to Note 11, “Fair Value Measurements,” to the condensed consolidated financial statements in this Form 10-Q for additional information on the adoption of SFAS 157 and SFAS 159.

Warranty Reserves

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time, usually one year for pre-hospital and international customers and five years for hospital customers. In instances where pre-hospital customers receive warranty coverage beyond one year, revenue is deferred based upon vendor specific objective evidence of fair value and recognized over the period of extended warranty. We provide for the estimated cost of product warranties at the time product is shipped and revenue is recognized. The costs that we estimate include material, labor, and shipping. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We believe that our recorded liability of $3.9 million at June 28, 2009 is adequate to cover future costs for the servicing of our products sold through that date and under warranty. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventory

We value our inventories at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method, including material, labor and factory overhead.

Inventory on hand may exceed future demand either because the product is outdated, obsolete, or because the amount on hand is in excess of future needs. We provide for the total value of inventories that we determine to be obsolete based on criteria such as customer demand and changing technologies. We estimate excess inventory amounts by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At June 28, 2009, our inventory was recorded at net realizable value requiring adjustments of $8.7 million, or 10.2% of our $85.4 million gross inventories.

Goodwill

At June 28, 2009, we had approximately $45 million in goodwill, primarily resulting from our acquisitions of Revivant (approximately $27 million), the assets of Lifecor (approximately $5 million), certain assets of BIO-key International, Inc. (approximately $5 million), the assets of Infusion Dynamics (approximately $4 million) and the assets of the intravascular temperature management business of Alsius (approximately $4 million.) In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we test our goodwill for impairment at least annually by comparing the fair value of our reporting units to the carrying value of those reporting units. Fair value is determined based on an estimate of the discounted future cash flows expected from the reporting units. The determination of fair value requires significant judgment on the part of management about future revenues, expenses and other assumptions that contribute to the net cash flows of the reporting units. Additionally, we periodically review our goodwill for impairment whenever events or changes in circumstances indicate that impairment has occurred.

Long-Lived Assets

We periodically review the carrying amount of our long-lived assets, including property and equipment, and intangible assets, to assess potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The determination includes evaluation of factors such as current market value, business climate and future cash flows expected to result from the use of the related assets. Our policy is to use undiscounted cash flows in assessing potential impairment and to record an impairment loss based on fair value in the period when it is determined that the carrying amount of the asset may not be recoverable. This process requires judgment on the part of management.

Stock-Based Compensation

We adopted the provisions of SFAS No. 123R, “Share Based Payment” (“SFAS 123R”), beginning October 3, 2005, using the modified prospective transition method. SFAS 123R requires us to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (a) all share-based payments granted after the effective date under SFAS 123R, and (b) all awards granted under SFAS 123 to employees prior to the effective date that remain unvested on the effective date. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Prior to October 3, 2005, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and, therefore, we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.

Refer to Note 4, “Stock Option Plans,” to the consolidated financial statements for further discussion.

Risk Factors

The following changes have been made to the Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2008, which was filed with the SEC on December 8, 2008: (1) we have added five new risk factors entitled:

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“Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition;”

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“Current and Future State and Municipal Budget Deficits Could Adversely Affect our Financial Performance;”

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“The Company Has Entered Into A Strategic Alliance With Welch Allyn Which May Not Be Successful;”

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“The Company Has Acquired Substantially All the Assets of Alsius Corporation. If We are Not Successful in Fully Integrating this Business, Our Operating Results May be Affected;” and

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“We May Incur Significant Liability if it is Determined Under FDA Regulations That We Are Promoting Off-Label Use of Our Temperature Management Products;” and

(2) we have modified the following seven risk factors entitled:

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“If We Fail to Compete Successfully in the Future against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected;”

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“We Acquired New Products and Technology, Such as Temperature Management Technology from Radiant Medical, Inc. and Alsius Corporation. If We Are Not Successful in Growing Our Business with These Products and Technology, Our Operating Results May Be Affected;”

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“We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales;”

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“We May be Required to Implement a Costly Product Recall;”

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“We May Fail to Adequately Protect or Enforce Our Intellectual Property Rights or Secure Rights to Third Party Intellectual Property, and Our Competitors Can Use Some of Our Previously Proprietary Technology;”

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“Intangibles and Goodwill We Currently Carry on Our Balance Sheet May Become Impaired;” and

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“We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.”

If We Fail to Compete Successfully in the Future against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected.

Our principal global competitors with respect to our entire cardiac resuscitation equipment product line are Physio-Control and Philips. Physio-Control is a subsidiary of Medtronic, Inc., a leading medical technology company, and has been the market leader in the defibrillator industry for over 20 years. As a result of Physio-Control’s large position in this industry, many potential customers have relationships with Physio-Control that could make it difficult for us to continue to penetrate the markets for our products. In addition, Medtronic and Philips and other competitors each have significantly greater resources than we do. Accordingly, Medtronic, Philips and other competitors could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. These and other competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and/or less expensive manner. Medtronic previously announced its intention to spin off its external defibrillator business into a separate publicly traded company once it resolves quality issues with the Food and Drug Administration (“FDA”), which have disrupted shipments of its products. How these continuing developments will affect the competitive landscape in the future is unclear, but the Company has taken steps to pursue additional customers. (See additional discussion of this situation regarding Physio-Control, Medtronic’s external defibrillator business, in the risk factor below entitled, “The Resumption of Unrestricted Shipments of Physio-Control, a Division of Medtronic, May Adversely Affect our Revenues and Profits.”)

There are a number of smaller competitors in the United States, which include Cardiac Science Corporation, HeartSine Technology, and Defibtech. Internationally, we face the same competitors as in the United States as well as Nihon Kohden, Corpuls, Schiller, and other local competitors. It is possible the market may embrace these competitors’ products, which could negatively impact our market share.

Additional companies may enter the market. For example, GE Healthcare entered the hospital market through cooperation with Cardiac Science Corporation. They have currently been focused on the International market but could begin to focus on the U.S. market, as well, which may impair our ability to gain market share.

Currently there are no competitors for our LifeVest product. However, competitors may develop their own products to compete against the LifeVest. It is possible that similar products developed by competitors could be superior to or more cost-effective than our LifeVest product. Consequently, our ability to sell/lease/rent the LifeVest could be materially affected and our financial results could be materially and adversely affected.

In addition to external defibrillation and external pacing with cardiac resuscitation equipment, it is possible that other alternative therapeutic approaches to the treatment of sudden cardiac arrest may be developed. These alternative therapies or approaches, including pharmaceutical or other alternatives, could prove to be superior to our products.

There is significant competition in the business of developing and marketing software for data collection, billing, scheduling, dispatching, records and resource management in the emergency medical system and fire markets. Our principal competitors in this business include Sansio, Healthware Technologies, Inc., Safety Pad Software, ImageTrend, Inc., eCore Software Solutions, Inc., PDSI Software, Inc., EnRoute Emergency Systems (formerly Geac Computer Corporation, Ltd.), DocuMed, Inc., Tritech Software Systems, Inc., Ortivus AB, RAM Software Systems, Inc., Intergraph Corporation, Affiliated Computer Services, Inc., Emergency Reporting, Inc., AmbPac, Inc., ESO Solutions, Golden Hour and Innovative Engineering, some of which have greater financial, technical,

research and development and marketing resources than we do. Because the barriers to entry in this business are relatively low, additional competitors may easily enter this market in the future. It is possible that systems developed by competitors could be superior to our data management system. Consequently, our ability to sell our data management systems could be materially affected and our financial results could be materially and adversely affected.

The Resumption of Unrestricted Shipments of Physio-Control, a Division of Medtronic, May Adversely Affect our Revenues and Profits.

Beginning in January 2007, Physio-Control, a division of Medtronic, had suspended most U.S. product shipments due to internal quality control issues. In August 2007, Physio-Control began shipping some products to U.S. customers under certain restrictions. As announced by Physio-Control on April 28, 2008, it has reached an agreement on a consent decree with the FDA regarding its quality system improvements for its external defibrillator products. Under the consent decree, Physio-Control will be allowed to continue shipments in the United States. In addition, under the consent decree, restrictions on shipments now apply to International shipments as well. Once certain conditions under the consent decree are met, Physio-Control will be allowed to resume unrestricted distribution. The full resumption of shipments may adversely affect our revenues in the future.

It is Possible that if Competitors Increase Their Use of Price Discounting, Our Gross Margins Could Decline.

Some competitors have, from time to time, used price discounting in order to attempt to gain market share. If this activity were to increase in the future it is possible that our gross margin and overall profitability could be adversely affected if we decided to respond in kind.

Our Operating Results are Likely to Fluctuate, Which Could Cause Our Stock Price to be Volatile, and the Anticipation of a Volatile Stock Price Can Cause Greater Volatility.

Our quarterly and annual operating results have fluctuated and may continue to fluctuate. Various factors have and may continue to affect our operating results, including:

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high demand for our products, which could disrupt our normal factory utilization and cause shipments to occur in uneven patterns;

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variations in product orders;

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timing of new product introductions;

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temporary disruptions of buying behavior due to changes in technology (e.g., shift to biphasic technology);

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changes in distribution channels;

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actions taken by our competitors such as the introduction of new products or the offering of sales incentives;

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the ability of our sales forces to effectively market our products;

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supply interruptions from our single-source vendors;

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temporary manufacturing disruptions;

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regulatory actions, including actions taken by the Food and Drug Administration (‘FDA”) or similar agencies; and

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delays in obtaining domestic or foreign regulatory approvals.

A large percentage of our sales are made toward the end of each quarter. As a consequence, our quarterly financial results are often dependent on the receipt of customer orders in the last weeks of a quarter. The absence of these orders could cause us to fall short of our quarterly sales targets, which, in turn, could cause our stock price to decline sharply. As we grow in size, and these orders are received closer to the end of a period, we may not be able to manufacture, test, and ship all orders in time to recognize the shipment as revenue for that quarter.

Based on these factors, period-to-period comparisons should not be relied upon as indications of future performance. In anticipation of less successful quarterly results, parties may take short positions in our stock. The actions of parties shorting our stock might cause even more volatility in our stock price. The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly.

The AED PAD (Public Access Defibrillation) Business is Highly Dynamic. If We are Not Successful in Competing in this Market, Our Operating Results May be Affected.

The PAD market has many new dynamics. This market involves many new types of non-traditional healthcare distributors, and the efficiency of these distributors may not be as robust as we expect. These new types of distributors may present credit risks since they may not be well established and may not have the necessary business volumes. In addition, we may not be successful in gaining greater market acceptance of our AED Plus into alternative PAD markets if our PAD distributors are not successful. All of these items could cause our operating results to be unfavorably affected.

We Acquired New Products and Technology, Such as Temperature Management Technology from Radiant Medical, Inc. and Alsius Corporation. If We Are Not Successful in Growing Our Business with These Products and Technology, Our Operating Results May Be Affected.

We have acquired temperature management technology. As part of the successful development of the market for this technology, where applicable, we must:

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establish new marketing and sales strategies;

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identify respected health professionals and organizations to champion the products;

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work with potential customers to develop new sources of unbudgeted funding;

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conduct successful clinical trials;

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achieve early success for the product in the field; and

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obtain FDA approval of new indications.

If we are delayed or fail to achieve these market development initiatives, we may encounter difficulties building our customer base for these products. Sub-par results from any of these items, such as inconclusive results from clinical trials, could cause our operating results to be unfavorably affected.

We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales.

We are conducting clinical trials related to the AutoPulse and the LifeVest. While we are confident in the future outcomes of these trials, an unsuccessful trial could affect the marketability of these products in the future.

We recently announced that the AutoPulse trial would run approximately six months longer than originally anticipated due to a battery issue. While this additional time is necessary, it will result in additional costs to conduct the trial and at the same time postpone the impact of any financial benefits if this trial is successful.

Our Approach to Our Backlog Might Not Be Successful.

We maintain a backlog in order to generate operating efficiencies. If order rates are insufficient to maintain such a backlog, we may be subject to operating inefficiencies. For example, although our backlog typically increases in the fourth quarter, it did not increase in the fourth quarter of fiscal 2008. We believe this was related to general economic concerns on the part of some professional customers.

We May be Required to Implement a Costly Product Recall.

In the event that any of our products proves to be defective, we can voluntarily recall, or the FDA could require us to redesign or implement a recall of, any of our products. Both our larger competitors and we have, on numerous occasions, voluntarily recalled products in the past, and based on this experience, we believe that future recalls could result in significant costs to us and significant adverse publicity, which could harm our ability to market our products in the future. Though it may not be possible to quantify the economic impact of a recall, it could have a material adverse effect on our business, financial condition and results of operations.

We initiated a voluntary worldwide field corrective action on our AED Plus automated external defibrillator during the second quarter of fiscal 2009. The batteries in the AED Plus are not performing as expected. This corrective action applies to approximately 180,000 AED Plus units. We have accrued approximately $500,000 to cover the cost of this corrective action.

Changes in the Healthcare Industry May Require Us to Decrease the Selling Price for Our Products or Could Result in a Reduction in the Size of the Market for Our Products, Each of Which Could Have a Negative Impact on Our Financial Performance.

Trends toward managed care, healthcare cost containment, and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies, which could adversely affect the sale and/or the prices of our products. For example:

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major third-party payers of hospital and pre-hospital services, including Medicare, Medicaid and private healthcare insurers, have substantially revised their payment methodologies during the last few years, which has resulted in stricter standards for reimbursement of hospital and pre-hospital charges for certain medical procedures;

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Medicare, Medicaid and private healthcare insurer cutbacks could create downward price pressure in the cardiac resuscitation pre-hospital market;

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numerous legislative proposals have been considered that would result in major reforms in the U.S. healthcare system, which could have an adverse effect on our business;

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there has been a consolidation among healthcare facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products, and these entities may decide to stop purchasing our products or demand discounts on our prices;

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there is economic pressure to contain healthcare costs in international markets;

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there are proposed and existing laws and regulations in domestic and international markets regulating pricing and profitability of companies in the healthcare industry; and

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there have been initiatives by third-party payers to challenge the prices charged for medical products, which could affect our ability to sell products on a competitive basis.

We expect the healthcare industry to continue to change significantly in the future. Both the pressure to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of sales, which could have a material adverse effect on our business.

Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition.

In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs. Recently, President Obama and members of Congress have proposed significant reforms to the U.S. healthcare system. Both the U.S. Senate and House of Representatives have conducted hearings about U.S. healthcare reform. The Obama administration’s fiscal year 2010 budget included proposals to limit Medicare payments and increase taxes. In addition, members of Congress have proposed a single-payer healthcare system, a government health insurance option to compete with private plans and other expanded public healthcare measures. The ultimate content or timing of any future healthcare reform legislation, and its impact on us, is impossible to predict. If significant reforms are made to the healthcare system in the United States, or in other jurisdictions, those reforms may have an adverse effect on our financial condition and results of operations.

General Economic Conditions, Which Are Largely Out of the Company’s Control, May Adversely Affect the Company’s Financial Condition and Results of Operations.

The Company’s businesses may be affected by changes in general economic conditions, both nationally and internationally. Recessionary economic cycles, higher interest rates, higher fuel and other energy costs, inflation, higher levels of unemployment, changes in the laws or industry regulations or other economic factors may adversely affect the demand for the Company’s products. Additionally, these economic factors, as well as higher tax rates, increased costs of labor, insurance and healthcare, and changes in other laws and regulations may increase the Company’s cost of sales and operating expenses, which may adversely affect the Company’s financial condition and results of operations.

Our primary business is the sale of capital equipment. While customers may delay their capital equipment purchases of defibrillator products in the near-term due to the current economic environment, the equipment is a standard of care and will ultimately need to be replaced. However, we cannot be sure as to how long such delays may continue. However, our AutoPulse product is not a standard of care as yet. Consequently, customers may indefinitely postpone the purchase of this product and its accessories.

Current and Future State and Municipal Budget Deficits Could Adversely Affect our Financial Performance.

Many of the Company’s customers include State and municipal agencies. In a recent article by the Center on Budget and Policy Priorities, the Center estimated that approximately 45 states are facing or will face budget deficits in fiscal 2009 and/or fiscal 2010. Because of these budget deficits, our customers may delay their purchases of capital equipment from the Company due to the current economic environment. Significant purchasing delays may adversely affect the Company’s financial performance.

Recent Economic Trends Could Adversely Affect our Financial Performance.

The global economic recession has adversely affected the levels of both our sales and profitability. As widely reported, the domestic and global financial markets have recently experienced severe disruption in recent months, including severely diminished liquidity and credit availability. Consequently, economic weakness has grown more severe. We believe these conditions have not materially affected our financial position as of June 28, 2009 or our liquidity for the quarter ended June 28, 2009. However, we could be negatively impacted if these conditions continue for a sustained period of time, or if there is further deterioration in financial markets and major economies. The current tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products and services.

In addition, weakening economic conditions and outlook may result in a further decline in the level of our customers’ spending that could adversely affect our results of operations and liquidity. We are unable to predict the likely duration and severity of the current disruption in the domestic and global financial markets and the related adverse economic conditions.

We Can be Sued for Producing Defective Products and We May be Required to Pay Significant Amounts to Those Harmed If We are Found Liable, and Our Business Could Suffer from Adverse Publicity.

The manufacture and sale of medical products such as ours entail significant risk of product liability claims, and product liability claims are made against us from time to time. Our quality control standards comply with FDA requirements, and we believe that the amount of product liability insurance we maintain is adequate based on past product liability claims in our industry. We cannot be assured that the amount of such insurance will be sufficient to satisfy claims made against us in the future or that we will be able to maintain insurance in the future at satisfactory rates or in adequate amounts. Product liability claims could result in significant costs or litigation. A product liability lawsuit is currently pending. A successful claim brought against us in excess of our available insurance coverage or any claim that results in significant adverse publicity against us could have a material adverse effect on our business, financial condition and results of operations.

Recurring Sales of Electrodes to Our Customers May Decline.

We typically have recurring sales of electrodes to our customers. Other vendors have developed electrode adaptors that allow generic electrodes to be compatible with our defibrillators. If we are unable to continue to differentiate the superiority of our electrodes over these generic electrodes, our future revenue from the sale of electrodes could be reduced, or our pricing and profitability could decline.

Failure to Produce New Products or Obtain Market Acceptance for Our New Products in a Timely Manner Could Harm Our Business.

Because substantially all of our revenue comes from the sale of cardiac resuscitation devices and related products, our financial performance will depend upon market acceptance of, and our ability to deliver and support, new products. We cannot be assured that we will be able to produce viable products in the time frames we currently estimate. Factors which could cause delay in these schedules or even cancellation of our projects to produce and market these new products include: research and development delays, the actions of our competitors producing competing products, and the actions of other parties who may provide alternative therapies or solutions, which could reduce or eliminate the markets for pending products.

The degree of market acceptance of any of our products will depend on a number of factors, including:

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our ability to develop and introduce new products in a timely manner;

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our ability to successfully implement new product technologies;

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the market’s readiness to accept new products;

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the standardization of an automated platform for data management systems;

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the clinical efficacy of our products and the outcome of clinical trials;

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the ability to obtain timely regulatory approval for new products; and

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the prices of our products compared to the prices of our competitors’ products.

If our new products do not achieve market acceptance, our financial performance could be adversely affected.

Our Dependence on Sole and Single Source Suppliers Exposes Us to Supply Interruptions and Manufacturing Delays Caused by Faulty Components, Which Could Result in Product Delivery Delays and Substantial Costs to Redesign Our Products.

Although we use many standard parts and components for our products, some key components are purchased from sole or single source vendors for which alternative sources at present are not readily available. For example, we currently purchase proprietary components, including capacitors, display screens, gate arrays and integrated circuits, for which there are no direct substitutes. Our inability to obtain sufficient quantities of these components as well as our limited ability to deal with faulty components may result in future delays or reductions in product shipments, which could cause a fluctuation in our results of operations.

These or any other components could be replaced with alternatives from other suppliers, which could involve a redesign of our products. Such a redesign could involve considerable time and expense. We could be at risk that the supplier might experience difficulties meeting our needs.

If our manufacturers are unable or unwilling to continue manufacturing our components in required volumes, we will have to transfer manufacturing to acceptable alternative manufacturers whom we have identified, which could result in significant interruptions of supply. The manufacture of these components is complex, and our reliance on the suppliers of these components exposes us to potential production difficulties and quality variations, which could negatively impact the cost and timely delivery of our products. Accordingly, any significant interruption in the supply, or degradation in the quality, of any component would have a material adverse effect on our business, financial condition and results of operations.

We May Not be Able to Obtain Appropriate Regulatory Approvals for Our New Products.

The manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. The FDA administers the Federal Food, Drug and Cosmetic Act, as amended, and the rules and regulations promulgated thereunder. Some of our products have been classified by the FDA as Class II devices and others, such as our AEDs, have been classified as Class III devices. All of these devices must secure a 510(k) pre-market notification clearance before they can be introduced into the U.S. market. The process of obtaining 510(k) clearance typically takes several months and may involve the submission of limited clinical data supporting assertions that the product is substantially equivalent to an already approved device or to a device that was on the market before the Medical Device Amendments of 1976. Delays in obtaining 510(k) clearance could have an adverse effect on the introduction of future products. Moreover, approvals, if granted, may limit the uses for which a product may be marketed, which could reduce or eliminate the commercial benefit of manufacturing any such product.

We are also subject to regulation in each of the foreign countries in which we sell products. Many of the regulations applicable to our products in such countries are similar to those of the FDA. However, the national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. We cannot be assured that such clearances will be obtained. For example, although we received U.S. 510(k) clearance on our biphasic waveform in 1999, to date we have not been able to obtain similar clearance in Japan. As a result, our Japanese defibrillator revenues are very modest. Although we anticipate clearance in the future, we can provide no such assurance that we will succeed.

If We Fail to Comply With Applicable Regulatory Laws and Regulations, the FDA and Other U.S. and Foreign Regulatory Agencies Could Exercise Any of Their Regulatory Powers, Which Could Have a Material Adverse Effect on Our Business.

Every company that manufactures or assembles medical devices is required to register with the FDA and to adhere to certain quality systems, which regulate the manufacture of medical devices and prescribe record keeping procedures and provide for the routine inspection of facilities for compliance with such regulations. The FDA also has broad regulatory powers in the areas of clinical testing, marketing and advertising of medical devices. To ensure that manufacturers adhere to good manufacturing practices, medical device manufacturers are routinely subject to periodic inspections by the FDA. If the FDA believes that a company may not be operating in compliance with applicable laws and regulations, it could take any of the following actions:

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place the company under observation and re-inspect the facilities;

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issue a warning letter apprising of violating conduct;

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detain or seize products;

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mandate a recall;

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enjoin future violations; and

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assess civil and criminal penalties against the company, its officers or its employees.

We, like most of our U.S. competitors, have received warning letters from the FDA in the past, and we may receive warning letters in the future. We have always complied with the warning letters we have received. However, our failure to comply with FDA regulations could result in sanctions being imposed on us, including restrictions on the marketing or recall of our products. These sanctions could have a material adverse effect on our business.

If a foreign regulatory agency believes that we are not operating in compliance with their laws and regulations, they could prevent us from selling our products in their country, which could have a material adverse effect on our business.

We are Dependent upon Licensed and Purchased Technology for Upgradeable Features in Our Products, and We May Not Be Able to Renew These Licenses or Purchase Agreements in the Future.

We license and purchase technology from third parties for upgradeable features in our products, including a 12 lead analysis program, SPO2, EtCO2, CO and NIBP technologies. We anticipate that we will need to license and purchase additional technology to remain competitive. We may not be able to renew our existing licenses and purchase agreements or to license and purchase other technologies on commercially reasonable terms or at all. If we are unable to renew our existing licenses and purchase agreements or we are unable to license or purchase new technologies, we may not be able to offer competitive products.

Fluctuations in Currency Exchange Rates May Adversely Affect Our International Sales.

Our revenue from foreign operations can be denominated in or significantly influenced by the currency and general economic climate of the country in which we make sales. A decrease in the value of such foreign currencies relative to the U.S. dollar could result in downward price pressure for our products or losses from currency exchange rate fluctuations. As we continue to expand our international operations, downward price pressure and exposure to gains and losses on foreign currency transactions may increase.

Approximately 25% to 33% of our revenue is generated in foreign markets. More than half of this revenue, representing our direct subsidiaries sales, is denominated in a foreign currency and, as such, is subject to direct foreign currency exposure. The currency exposure on the revenue is partially offset by the operating expenses which are also denominated in local currencies. The currency exposure is also partially offset by any forward contracts entered into to hedge our exposure to exchange rates. The other portion of revenue generated in the foreign markets is sold to distributors and is denominated in U.S. Dollars. This revenue could be subject to price pressure as the U.S. Dollar strengthens.

We may use forward contracts and other instruments to reduce our exposure to exchange rate fluctuations from intercompany accounts receivable and forecasted intercompany sales to our subsidiaries denominated in foreign currencies, and we may not be able to do this successfully. Accordingly, we may experience economic loss and a negative impact on our results of operations and equity as a result of foreign currency exchange rate fluctuations.

Our Current and Future Investments May Lose Value in the Future.

We hold investments in two private companies and may in the future invest in the securities of other companies and participate in joint venture agreements. These investments and future investments are subject to the risks that the entities in which we invest will become bankrupt or lose money.

Investing in other businesses involves risks and no assurance can be made as to the profitability of any investment. Our inability to identify profitable investments could adversely affect our financial condition and results of operations. Unless we hold a majority position in an investment or joint venture, we will not be able to control all of the activities of the companies in which we invest or the joint ventures in which we are participating. Because of this, such entities may take actions against our wishes and not in furtherance of, and even opposed to, our business plans and objectives. These investments are also subject to the risk of impasse if no one party exercises ultimate control over the business decisions.

Future Changes in Applicable Laws and Regulations Could Have an Adverse Effect on Our Business.

Federal, state or foreign governments may change existing laws or regulations or adopt new laws or regulations that regulate our industry. Changes in or adoption of new laws or regulations could result in the following consequences that would have an adverse effect on our business:

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regulatory clearance previously received for our products could be revoked;

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costs of compliance could increase; or

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we may be unable to comply with such laws and regulations so that we would be unable to sell our products.

Some of Our Activities May Subject Us to Risks under Federal and State Laws Prohibiting “Kickbacks” and False or Fraudulent Claims.

We are subject to the provisions of a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. While the federal law applies only to referrals, products or services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs, with hospitals, physicians, laboratories and other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or are for items or services that were not provided as claimed. Anti-kickback and false claims laws prescribe civil and criminal penalties (including fines) for noncompliance that can be substantial. While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing practices is ever evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could harm our business and prospects.

Patients May Not Be Able to Obtain Appropriate Insurance Coverage for Our LifeVest Product.

The ability of patients to obtain appropriate insurance coverage for our LifeVest product from government and third-party payors is critical to the success of the product. The availability of insurance coverage affects which products physicians may prescribe. Implementation of healthcare reforms in the United States and abroad may limit the price of, or the level at which, insurance is provided for our LifeVest product and adversely affect both our pricing flexibility and the demand for the product. Hospitals or physicians may respond to such pressures by substituting other therapies for our LifeVest product.

Further legislative or administrative reforms to the U.S. or international reimbursement systems that significantly reduce insurance coverage for our LifeVest product or deny coverage for our LifeVest product, or adverse decisions regarding coverage or reimbursement issues relating to our LifeVest product by administrators of such systems would have an adverse impact on the sales of our LifeVest product. This in turn could have an adverse effect on our financial condition and results of operations.

Our LifeVest Product is a Reimbursable Product and Is Subject to Laws that Are Different from Our Capital Equipment Business.

The LifeVest product is our first reimbursed product which is different than our typical capital equipment business. The LifeVest product is governed by the Durable Medical Equipment Regulations and is subject to audit. The LifeVest is reimbursed by Medicare, Medicaid, or other third-party payors, for which reimbursement rates may fall with little notice.

Failure to Comply with HIPAA Obligations Would Put Us at Risk.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which is primarily applicable to our LifeVest product, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

HIPAA also protects the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. HIPAA restricts the use and disclosure of patient health information, including patient records. Although we believe that HIPAA does not apply to us directly, most of our customers have significant obligations under HIPAA, and we intend to cooperate with our customers and others to ensure compliance with HIPAA with respect to patient information that comes into our possession. Failure to comply with HIPAA obligations can entail criminal penalties. Some states have also enacted rigorous laws or regulations protecting the security and privacy of patient information. If we fail to comply with these laws and regulations, we could face additional sanctions.

Uncertain Customer Decision Processes May Result in Long Sales Cycles, Which Could Result in Unpredictable Fluctuations in Revenues and Delay the Replacement of Cardiac Resuscitation Devices.

Many of the customers in the pre-hospital market consist of municipal fire and emergency medical systems departments. As a result, there are numerous decision-makers and governmental procedures in the decision-making process. In addition, decisions at hospitals concerning the purchase of new medical devices are sometimes made on a department-by-department basis. Accordingly, we believe the purchasing decisions of many of our customers may be characterized by long decision-making processes, which have resulted in and may continue to result in long sales cycles for our products. For example, the sales cycles for cardiac resuscitation products typically have been between six to nine months, although some sales efforts have taken as long as two years.

Reliance on Domestic and International Distributors to Sell Our Products Exposes Us to Business Risks That Could Result in Significant Fluctuations in Our Results of Operations.

Although we perform credit assessments with sales to distributors, payment by the distributor may be affected by the financial stability of the customers to which the distributor sells. Future sales to distributors may also be affected by the distributor’s ability to successfully sell our products to their customers. Either of these scenarios could result in significant fluctuations in our results of operations.

Our International Sales Expose Our Business to a Variety of Risks That Could Result in Significant Fluctuations in Our Results of Operations.

Approximately 32% of our sales for the first nine months of fiscal 2009 were made to foreign purchasers, and we plan to increase the sale of our products to foreign purchasers in the future. As a result, a significant portion of our sales is and will continue to be subject to the risks of international business, including:

•

fluctuations in foreign currencies;

•

trade disputes;

•

changes in regulatory requirements, tariffs and other barriers;

•

consequences of failure to comply with U.S. law and regulations concerning the conduct of business outside the U.S.;

•

the possibility of quotas, duties, taxes or other changes or restrictions upon the importation or exportation of the products being implemented by the United States or these foreign countries;

•

timing and availability of import/export licenses;

•

political and economic instability;

•

higher credit risk and difficulties in accounts receivable collections;

•

increased tax exposure if our revenues in foreign countries are subject to taxation by more than one jurisdiction;

•

accepting customer purchase orders governed by foreign laws, which may differ significantly from U.S. laws and limit our ability to enforce our rights under such agreements and to collect damages, if awarded;

•

war on terrorism;

•

disruption in the international transportation industry; and

•

use of international distributors.

As international sales become a larger portion of our total sales, these risks could create significant fluctuations in our results of operations. These risks could affect our ability to resell trade-in products to domestic distributors, who in turn often resell the trade-in products in international markets. Our inability to sell trade-in products might require us to offer lower trade-in values, which might impact our ability to sell new products to customers desiring to trade in older models and then purchase newer products.

We intend to continue to expand our direct sales forces and our marketing support for these sales forces. We intend to continue to expand these areas, but if our sales forces are not effective, or if there is a sudden decrease in the markets where we have direct operations, we could be adversely affected.

We May Fail to Adequately Protect or Enforce Our Intellectual Property Rights or Secure Rights to Third Party Intellectual Property, and Our Competitors Can Use Some of Our Previously Proprietary Technology.

Our success will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We hold over 250 U.S. and over 150 foreign patents for our various inventions and technologies. Additional patent applications have been filed with the U.S. Patent and Trademark Office and outside the U.S. and are currently pending. The patents that have been granted to us are for a definitive period of time and will expire. We have filed certain corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications as appropriate. We cannot be assured as to:

•

the degree and range of protection any patents will afford against competitors with similar products;

•

if and when patents will be issued;

•

whether or not others will obtain patents claiming aspects similar to those covered by our patent applications;

•

whether or not competitors will use information contained in our expired patents;

•

whether or not others will design around our patents or obtain access to our know-how; or

•

the extent to which we will be successful in avoiding any patents granted to others.

If certain patents issued to others are upheld or if certain patent applications filed by others issue and are upheld, we may be:

•

required to obtain licenses or redesign our products or processes to avoid infringement;

•

prevented from practicing the subject matter claimed in those patents; or

•

required to pay damages.

There is substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation or administrative proceedings, including interference proceedings before the U.S. Patent and Trademark Office, related to intellectual property rights have been and in the future could be brought against us or be initiated by us. Adverse determinations in any patent litigation could subject us to significant liabilities to third parties, could require us to seek licenses from third parties and could, if licenses are not available, prevent us from manufacturing, selling or using certain of our products, some of which could have a material adverse effect on the Company. In addition, the costs of any such proceedings may be substantial whether or not we are successful.

Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all U.S. employees, consultants and advisors to enter into confidentiality agreements, which prohibit the disclosure of confidential information to anyone outside of our Company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. We cannot be assured that these agreements will provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of the lawful development by others of such information.

Reliance on Overseas Vendors for Some of the Components for Our Products Exposes Us to International Business Risks, Which Could Have an Adverse Effect on Our Business.

Some of the components we use in our products are acquired from foreign manufacturers, particularly countries located in Europe and Asia. As a result, a significant portion of our purchases of components is subject to the risks of international business. The failure to obtain these components as a result of any of these risks can result in significant delivery delays of our products, which could have an adverse effect on our business.

We May Acquire Other Businesses, and We May Have Difficulty Integrating These Businesses or Generating an Acceptable Return from Acquisitions.

We recently acquired certain assets from Welch Allyn, Inc. and Alsius Corporation. We may acquire other companies or make strategic purchases of interests in other companies related to our business in order to grow, add product lines, acquire customers or otherwise attempt to gain a competitive advantage in new or existing markets. Such acquisitions and investments may involve the following risks:

•

our management may be distracted by these acquisitions and may be forced to divert a significant amount of time and energy into integrating and running the acquired businesses;

•

we may face difficulties associated with financing the acquisitions;

•

we may face the inability to achieve the desired outcomes justifying the acquisition;

•

we may face difficulties integrating the acquired business’ operations and personnel; and

•

we may face difficulties incorporating the acquired technology into our existing product lines.

Intangibles and Goodwill We Currently Carry on Our Balance Sheet May Become Impaired.

At June 28, 2009, we had approximately $81 million of goodwill and intangible assets on our balance sheet. These assets are subject to impairment if the cash flow that we generate from these assets specifically, or our business more broadly, are insufficient to justify the carrying value of the assets. Factors affecting our ability to generate cash flow from these assets include, but are not limited to, general market conditions, product acceptance, pricing and competition, distribution, costs of production and operations.

In addition, volatility in our stock price and declines in our market capitalization could put pressure on the carrying value of our goodwill and other long-lived assets if the current period of economic uncertainty and related volatility in the financial markets persist for an extended period of time.

Provisions in Our Charter Documents, Our Shareholder Rights Agreement and State Law May Make It Harder for Others To Obtain Control of the Company Even Though Some Stockholders Might Consider Such a Development to be Favorable.

Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of such shares without further vote or action by our stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for third parties to acquire a majority of our outstanding voting stock. In addition, our restated articles of organization provide for staggered terms for the members of the board of directors, which could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult. Our restated articles of organization, restated by-laws and applicable Massachusetts law also impose various procedural and other requirements that could delay or make a merger, tender offer or proxy contest involving us more difficult.

We have also implemented a so-called poison pill by adopting our shareholders rights agreement, which was renewed in April 2008. This poison pill significantly increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding Common Stock or otherwise “triggers” the poison pill by exceeding the applicable stock ownership threshold. The existence of this poison pill could delay, deter or prevent a takeover of the Company.

All of these provisions could limit the price that investors might be willing to pay in the future for shares of our Common Stock, which could preclude our shareholders from recognizing a premium over the prevailing market price of our stock.

We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.

We have only one manufacturing facility for each of our major products. Damage to any such facility could render us unable to manufacture the relevant product or require us to reduce the output of products at the damaged facility. In addition, a severe weather event, other natural disaster or any other significant disruption affecting a facility occurring late in a quarter could make it difficult to meet product shipping targets. Any of these events could materially and adversely impact our business, financial condition and results of operations.

For example, we have recently moved our manufacturing facilities relating to our AutoPulse and therapeutic hypothermia products to a new building. As a result of this move, the manufacturing facilities will need to be revalidated and inspected. Delay or failure in the validation and inspection process could have a materially adverse impact on these businesses, our financial condition and results of operations.

The Company Holds Various Marketable Securities Investments Which Are Subject to Market Risk, Including Volatile Interest Rates and a Volatile Stock Market.

Management believes it has a conservative investment policy. It calls for investing in high quality investment grade securities with an average duration of 24 months or less. However, with the volatility of interest rates and fluctuations in credit quality of the underlying investments and issues of general market liquidity, there can be no assurance that the Company’s investments will not lose value. Management does not believe it has material exposure currently. For example, a reduction in military expenditures in the monitoring and resuscitation markets would adversely affect business opportunities expected to result from the strategic alliance.

The Company Has Entered Into A Strategic Alliance With Welch Allyn Which May Not Be Successful.

The Company recently announced a strategic alliance with Welch Allyn involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn’s defibrillator and monitoring products. If we are delayed or fail to achieve our goals for this strategic alliance, our operating results could be unfavorably affected. For example, we have experienced a delay in receiving a 510(k) clearance for an AED product to be sold by Welch Allyn.

The Company Has Acquired Substantially All the Assets of Alsius Corporation. If We are Not Successful in Fully Integrating this Business, Our Operating Results May be Affected.

On May 4, 2009, we acquired substantially all the assets of the intravascular temperature management business of Alsius Corporation (“Alsius”). Alsius developed and manufactured intravascular temperature management devices. We face many challenges in order for this acquisition to be successful, such as relocating the product manufacturing to a different location, scaling up the new production facility, reducing the costs of the products, leveraging our sales force to sell the new products and continuing clinical efforts for acceptance of the products for additional applications. Additionally, selling temperature management products may expose us to new risk factors. If we are not successful in achieving these and other integration challenges, our operating results may be adversely affected.

We May Incur Significant Liability if it is Determined Under FDA Regulations That We Are Promoting Off-Label Use of Our Temperature Management Products.

We have regulatory clearances to sell our temperature management products in Europe, Canada and in other countries outside the United States to treat cardiac arrest, but we do not have FDA clearance to sell these products in the United States to treat cardiac arrest. In the United States, the use of our temperature management products to treat cardiac arrest is and will be considered off-label use unless and until we receive regulatory clearance for use of our temperature management products to treat cardiac arrest patients. In the event that we are not able to obtain FDA clearance or approval, we may be at risk for liabilities and lost revenue as a result of off-label use.

Under the Federal Food, Drug and Cosmetic Act and other laws, we are prohibited from promoting our temperature management products for off-label uses. This means that we may not make claims about the safety or effectiveness of our temperature management products for the treatment of cardiac arrest patients, and means that we may not proactively discuss or provide information on the use of our temperature management products for the treatment of cardiac arrest patients, with very specific exceptions. Physicians, however, may lawfully choose to purchase our temperature management products and use them off-label. We do not track how physicians use our temperature management products after they are purchased, and cannot identify what percentage of our revenues from sales of our temperature management product is derived from off-label use. We are aware, however, that physicians in the United States may be using our temperature management products off-label to treat cardiac arrest due to the 2006 American Heart Association recommendation that cooling be used to treat cardiac arrest. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies, and even criminal sanctions. We do not believe any of our activities constitute promotion of off-label use. Should the FDA determine, however, that our activities constitute promotion of off-label use, the FDA could bring action to prevent us from distributing our temperature management products within the United States for the off-label use, could impose fines and penalties on us and our executives, and could prohibit us from participating in government healthcare programs such as Medicare and Medicaid.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We have cash equivalents and marketable securities that primarily consist of money market accounts and fixed-rate, asset-backed corporate securities. The majority of these investments have maturities within one to five years. We believe that our exposure to interest rate risk is minimal due to the term and type of our investments and that the fluctuations in interest rates would not have a material adverse effect on our results of operations.

We have international subsidiaries in Canada, the United Kingdom, the Netherlands, France, Germany, Austria, Australia, and New Zealand. These subsidiaries transact business in their functional or local currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition.

We use foreign currency forward contracts to manage our currency transaction exposures. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) and, therefore, are marked-to-market with changes in fair value recorded to earnings. These derivative instruments do not subject our earnings or cash flows to material risk since gains and losses on those derivatives generally offset losses and gains on the assets and liabilities being hedged.

We had two foreign currency forward contracts outstanding at June 28, 2009, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances in the notional amount of approximately 11 million Euros. The fair value of these contracts at June 28, 2009 was approximately $15.5 million, resulting in an unrealized loss of approximately $466,000. A sensitivity analysis of a change in the fair value of the derivative foreign exchange contracts outstanding at June 28, 2009 indicates that, if the U.S. dollar weakened by 10% against the different foreign currencies, the fair value of these contracts would decrease by approximately $1.5 million resulting in a total loss on the contracts of approximately $1.9 million. Conversely, if the U.S. dollar strengthened by 10% against the different foreign currencies, the fair value of these contracts would increase by approximately $1.3 million resulting in a total gain on the contracts approximately of $864,000. Any gains and losses on the fair value of the derivative contracts would be largely offset by losses and gains on the underlying transaction. These offsetting gains and losses are not reflected in the analysis below.

Intercompany Receivable Hedge

Exchange Rate Sensitivity: June 28, 2009

(Amounts in $)


	Expected Maturity Dates							Total		Unrealized (loss) gain
	2009		2010	2011	2012	2013	Thereafter	Total		Unrealized (loss) gain
Forward Exchange Agreements (Receive $/Pay Euro) Contract Amount	$	15,011,000						$	15,011,000	$	(466,000	)
Average Contract Exchange Rate		1.3646	—	—	—	—	—		1.3646

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of June 28, 2009, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 28, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

•

“Healthcare Reform Legislation Could Adversely Affect Our Revenue and Financial Condition;”

•

“Current and Future State and Municipal Budget Deficits Could Adversely Affect our Financial Performance;”

•

“The Company Has Entered Into A Strategic Alliance With Welch Allyn Which May Not Be Successful;”

•

“The Company Has Acquired Substantially All the Assets of Alsius Corporation. If We are Not Successful in Fully Integrating this Business, Our Operating Results May be Affected;” and

•

“We May Incur Significant Liability if it is Determined Under FDA Regulations That We Are Promoting Off-Label Use of Our Temperature Management Products;” and

(2) we have modified the following seven risk factors entitled:

•

“If We Fail to Compete Successfully in the Future against Existing or Potential Competitors, Our Operating Results May Be Adversely Affected;”

•

“We Are Conducting Clinical Trials Related to Newer Technologies Which May Prove Unsuccessful and Have a Negative Impact on Future Sales;”

•

“We May be Required to Implement a Costly Product Recall;”

•

“Intangibles and Goodwill We Currently Carry on Our Balance Sheet May Become Impaired;” and

•

“We Have Only One Manufacturing Facility for Each of Our Major Products and Any Damage or Incapacitation of Any of the Facilities Could Impede Our Ability to Produce These Products.”

The risk factors as so modified have been repeated in their entirety for the reader’s convenience in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors.”

Item 5.

Other Information

(a)	Not applicable.

(b)	During the period covered by this report, there were no changes to the procedures by which security holders may recommend nominees to the Board of Directors.

Item 6.

Exhibits


Exhibit No.		Exhibit
3.1		Amended and Restated By-laws. (1)

3.2		Certificate of Amendment to the Company’s Amended and Restated By-laws. (2)

3.3		Certificate of Amendment to the Company’s Amended and Restated By-laws. (3)

3.4		Certificate of Amendment to the Company’s Amended and Restated By-laws. (4)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (5)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (5)

32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6)

32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6)

(1)	Incorporated by reference from the Company’s Registration Statement on Form S-1, as amended, under the Securities Act of 1933 (Registration Statement No. 333-47937 filed with the SEC on May 15, 1992).

(2)	Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 25, 2007.

(3)	Incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 12, 2008.

(4)	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2009.

(5)	Filed herewith.

(6)	Furnished herewith.

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

SIGNATURES

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


	ZOLL MEDICAL CORPORATION

Date: August 7, 2009	By:	/s/ RICHARD A. PACKER
		Richard A. Packer,
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 7, 2009	By:	/s/ A. ERNEST WHITON
		A. Ernest Whiton,
		Vice President of Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Exhibit
3.1		Amended and Restated By-laws. (1)

3.2		Certificate of Amendment to the Company’s Amended and Restated By-laws. (2)

3.3		Certificate of Amendment to the Company’s Amended and Restated By-laws. (3)

3.4		Certificate of Amendment to the Company’s Amended and Restated By-laws. (4)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (5)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (5)

32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6)

32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (6)

(1)	Incorporated by reference from the Company’s Registration Statement on Form S-1, as amended, under the Securities Act of 1933 (Registration Statement No. 333-47937 filed with the SEC on May 15, 1992).

(2)	Incorporated by reference from the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 25, 2007.

(3)	Incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 12, 2008.

(4)	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2009.

(5)	Filed herewith.

(6)	Furnished herewith.