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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 29, 2008.

Or

For the transition period from              to             .

Commission file number 0-20225

ZOLL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

(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 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 (Check one):

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:

This document consists of 35 pages.

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ZOLL MEDICAL CORPORATION

FORM 10-Q

INDEX

Forward-Looking Information

Except for historical information, the matters discussed in this Quarterly Report on Form 10-Q are 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 Conditions 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.

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PART I. FINANCIAL INFORMATION

ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(000’s omitted, except per share data)

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED INCOME STATEMENTS

(000’s omitted, except per share data)

(Unaudited)

See notes to unaudited consolidated financial statements.

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ZOLL MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(Unaudited)

See notes to unaudited consolidated financial statements.

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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 30, 2007 included in its Annual Report on Form 10-K filed with the SEC on December 13, 2007.

Certain amounts in prior year financial statements have been reclassified to conform to current year presentation with no impact on net income or earnings per share. In the fourth quarter of fiscal 2007, the Company changed the presentation of amounts received from the resale of used trade-in equipment and customer charges for technical service to a gross basis as opposed to a net basis. Historically, the Company had treated the sale of trade-in equipment it accepted from customers on the sale of new equipment as the liquidation of a receivable rather than revenue. Similarly, the Company recorded certain amounts received from service customers as a reimbursement of expenses rather than as revenue. This reclassification is immaterial to all periods presented and has no impact on net income or earnings per share. Although these amounts are currently immaterial, it is possible that in the future they could increase as business grows.

2. Segment and Geographic Information

Segment information: The Company operates in a single business segment: the design, manufacture and marketing of a range of non-invasive resuscitation devices and software solutions. These devices and software solutions help healthcare professionals, emergency medical service providers, and first responders diagnose and treat victims of trauma, as well as sudden cardiac arrest. 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 and accessories to the North American hospital market, including the military marketplace, (2) the sale 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 and data collection management software to the international market.

Net sales by customer/product categories were as follows:

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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:

No individual foreign country represented 10% or more of our revenues for the three and nine months ended June 29, 2008 and July 1, 2007, respectively.

3. Comprehensive Income

The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130 (“SFAS 130”) “Reporting Comprehensive Income.” 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 29, 2008 and July 1, 2007, respectively, was as follows:

4. Stock Option Plans

At June 29, 2008, 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”), and 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 2006 Non-Employee Director Stock Option Plan (“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 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.

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Stock-based compensation charges totaled approximately $708,000 and $2.0 million during the three and nine months ended June 29, 2008, respectively, and totaled approximately $465,000 and $1.1 million during the three and nine months ended July 1, 2007, respectively. 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 the nine months ended June 29, 2008 and July 1, 2007:

At June 29, 2008, there was approximately $7.2 million of unrecognized compensation cost related to non-vested awards, which we expect to recognize over a weighted-average period of 2.7 years.

The weighted-average, grant-date fair value of options granted (estimated using the Black-Scholes option-pricing model) was $11.54 and $10.84 for the nine months ended June 29, 2008 and July 1, 2007, respectively. During the nine months ended June 29, 2008, the Company issued 309,964 shares of Common Stock pursuant to exercised options for proceeds of approximately $4.9 million. Total intrinsic value of options exercised for the nine months ended June 29, 2008 and July 1, 2007 was approximately $4.5 million and $11.9 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 29, 2008, as well as changes during the nine months ended June 29, 2008:

The following table summarizes the status of unvested restricted stock awards as of June 29, 2008, as well as changes during the nine months ended June 29, 2008:

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 restricted stock.

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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. Average shares outstanding for diluted earnings per share for the three and nine months ended July 1, 2007 does not include options to purchase 415,000 and 159,000 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 enter into any 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 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities” 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 one foreign currency forward contract outstanding at June 29, 2008, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances, in the notional amount of approximately 7 million Euros. The net settlement amount of this contract at June 29, 2008 is an unrealized loss of approximately $44,000, which is included in earnings within “investment and other income.” The Company had no realized gains or losses from foreign currency forward contracts during the quarters ended June 29, 2008 and July 1, 2007.

As of June 29, 2008, the Company 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, the Company entered into offsetting derivatives, totaling $3.9 million. All of the contracts have been marked to market with changes in fair value recorded to earnings. As of June 29, 2008, the net settlement amount on these contracts was an unrealized loss of approximately $29,000. The Company believes there is no further exposure under these contracts as they effectively offset each other. Net realized losses were approximately $125,000 for the quarter ended June 29, 2008 and $0 for the quarter ended July 1, 2007, and were recorded in “investment and other income” in the consolidated income statement.

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 29, 2008 and July 1, 2007 is as follows:

8. Acquisitions

Assets of Radiant Medical, Inc.

On September 18, 2007, the Company acquired certain assets from Radiant Medical, Inc. (“Radiant”), a private medical technology company developing endovascular temperature therapy products. At the time of the purchase, Radiant was ceasing operations, and, in the opinion of the Company, Radiant had one of the best technologies in the emerging therapeutic hypothermia market and an extensive intellectual property portfolio. The Company believes that the acquisition presents an opportunity to broaden the Company’s resuscitation strategy into the area of induced hypothermia, which is emerging as a standard treatment for resuscitated patients. The Company paid approximately $5.8 million in cash for the assets, which primarily consist of patented technology (with an estimated 15 year weighted-average useful life), and the assets acquired in this acquisition are being utilized at the Company’s Sunnyvale, California subsidiary, ZOLL Circulation, Inc.

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Contingent Consideration for Prior Period Acquisitions

The terms of the March 2004 acquisition of the assets of Infusion Dynamics, Inc. (“Infusion Dynamics”) and 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 Infusion Dynamics and Lifecor through fiscal 2011. Because the prospective earn-out payments for Infusion Dynamics and Lifecor will be based upon revenue growth over several years, a reasonable estimate of the future payment obligations cannot 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.

For fiscal 2007, which was the final earn-out period in connection with the acquisition of Revivant Corporation (“Revivant”), the Company accrued in fiscal 2007 and paid in the first quarter of 2008 approximately $9.4 million to the former shareholders of Revivant. Of this amount, approximately $3.6 million was in the form of cash and the remainder was in the form of 220,864 shares of the Company’s Common Stock. The annual earn-out payments for fiscal years 2006 and 2005 were approximately $2.4 million and $1.6 million, respectively, to the former shareholders of Revivant. Of these amounts approximately $1.2 million (in fiscal 2006) and $783,000 (in fiscal 2005) was paid in cash to the former shareholders of Revivant, and the remainder of these earn-outs for fiscal 2006 and 2005 were in the form of 72,128 shares and 47,600 shares, respectively, of the Company’s Common Stock. The annual earn-out payments were accrued during the respective fiscal year in which they were earned and paid in the respective subsequent fiscal year.

Annual earn-out payments to former shareholders of Infusion Dynamics, in the form of cash, for fiscal 2007, 2006 and 2005 were approximately $11,000, $445,000 and $544,000, respectively. The annual earn-out payments to the former shareholders of Lifecor for fiscal 2007 and 2006 were approximately $3.2 million and $77,000, respectively. The annual earn-out payments were accrued during the respective fiscal year in which they were earned and paid in the respective subsequent fiscal year.

9. Intangibles and Other Assets

Intangibles and other assets consist of:

Amortization of acquired intangibles for the three months ended June 29, 2008 and July 1, 2007 was approximately $732,000 and $625,000, respectively, and is included in operating expenses in the consolidated income statement. For the nine months ended June 29, 2008 and July 1, 2007, amortization of acquired intangibles was approximately $2.2 million and $1.8 million, respectively, and is included in operating expenses in the consolidated income statement.

10. Income Taxes

The Company’s effective tax rate for the three months ended June 29, 2008 was 36%, which was the same as the effective tax rate for the three months ended July 1, 2007.

The Company’s effective tax rate for the nine months ended June 29, 2008 was a tax provision of 36% as compared to 34% for the same period in fiscal 2007. The change in the effective tax rate was caused by the lapse of the research and development tax credit which has not been extended by the U.S. Congress. During the first nine months of fiscal 2008, only one-quarter of a full-year credit is included in our annual rate calculation as opposed to a full-year projected credit in the comparable prior-year period. The prior-year rate also had the benefit of a discrete $176,000 U.S. research and development tax credit recorded during the quarter ended December 31, 2006, due to the enactment into law of the Tax Relief and Healthcare Act of 2006 on December 20, 2006.

Effective October 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a result of the implementation of FIN 48, the Company recognized an increase of approximately $374,000 in the liability for unrecognized tax benefits. All of this increase was reflected as a reduction to the October 1, 2007 balance of retained earnings. At the adoption date of October 1, 2007, the Company had $1.3 million of gross unrecognized tax benefits, which, if recognized, would affect the effective tax rate. At June 29, 2008, the Company had $1.2 million of gross unrecognized tax benefits, all of which, if recognized, would affect the effective tax rate.

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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 Company does not currently have any income tax audits in progress and, therefore, foresee little change in the current reserve for uncertain tax positions in the next twelve months. The Company’s historical practice has been, and continues to be, to recognize interest and penalties related to income tax matters in income tax expense. The Company had $315,000 accrued for interest and penalties at the time of adoption of FIN 48 and $289,000 at June 29, 2008.

11. 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.

12. State of California Order

In the fourth quarter of fiscal 2007, the Company was 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, the Company 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. Title and risk of loss for this equipment passed to the customer upon shipment. At the request of the State of California, the equipment was shipped to three warehouse locations within California in order to provide for rapid deployment in the case of an emergency. At the request of the customer, the Company has provided assistance with the leasing of warehouse facilities. Due to the requirement that the equipment be deployed at a moment’s notice in the event of an emergency, the State of California requested that the Company make arrangements to store and maintain certain of the equipment to ensure proper performance when deployed. The Company considered the specific guidance and criteria including bill-and-hold arrangements, as outlined in the SEC’s Staff Accounting Bulletin No. 104, and concluded the Company has complied with all of the criteria related to revenue recognition. 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 the Company delivered the first installment 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. The Company recognized approximately $8.3 million of revenue related to the delivered equipment in the first nine months of fiscal 2008, because the Company believes that objective and reliable evidence of fair value exists for all remaining undelivered elements, including maintenance, storage, insurance and accessories, in accordance with EITF 00-21. The remaining amount of consideration will be recognized over a five-year period as the undelivered elements are delivered.

13. Marketable Securities

During the second quarter of 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 which are backed by the federal government. During the second and third quarter of 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. During the second quarter of fiscal 2008, the Company recorded a $100,000 impairment charge on these securities based on valuation models. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, the Company may be required to record further impairment charges on these investments. The Company believes these securities are not materially impaired, primarily due to the government guarantee of the underlying securities. At June 29, 2008 the Company also held approximately $600,000 of marketable securities in mortgage-backed securities. During the second quarter of fiscal 2008, the Company recorded a $100,000 impairment charge on these securities based on valuation models. These mortgage-backed securities are collateralized by prime home equity lines of credit and carry a 100% principal and interest guarantee. The Company believes that it will be able to liquidate its investments without significant losses within the next year, or to hold these securities for a longer period of time, if necessary, until market conditions improve.

14. Recent Accounting Pronouncements

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

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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. SFAS 161 will be effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.

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. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement 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. The guidance 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. The Company believes that this new pronouncement will have an immaterial impact on the Company’s financial statements in future periods.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS 115” (“SFAS 159”). SFAS 159 provides entities with the option to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective with fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the implementation of SFAS 159 may have on our consolidated results and financial position.

In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. However, for some companies, the application of SFAS 157 will change current practice. SFAS 157 is effective with fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the implementation of SFAS 157 may have on our consolidated results and financial position.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” to create a single model to address accounting for uncertainty in tax positions. FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions, including a roll forward of tax benefits taken that do not qualify for financial statement recognition. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings for that year and will be presented separately. FIN 48 is effective with fiscal years beginning after December 15, 2006. Only tax positions that are more likely than not to be realized at the effective date may be recognized upon adoption of FIN 48. The Company adopted FIN 48 in the first quarter of fiscal 2008. See Note 10 for further discussion.

We are committed to developing technologies that help advance the practice of resuscitation. With products for pacing, defibrillation, circulation, ventilation, and fluid resuscitation, we provide a comprehensive set of technologies that can 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 29, 2008 for the three and nine months then ended, and the notes thereto.

Sales for the three months and nine months ended June 29, 2008 increased 27% and 35%, respectively, as compared to the comparable periods in the prior year. We experienced strong sales growth in each major part of our business. We believe our recent successes continue to be attributable to multiple factors which include, in no particular order, (1) investments made in new technologies, (2) the

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breadth of product offerings and differentiated features, (3) bolstering our distribution channels, (3) management changes in the Hospital and International markets, and (4) benefits resulting from ongoing regulatory issues at a major competitor, Physio-Control, limiting their ability to deliver product.

Three Months Ended June 29, 2008 Compared To Three Months Ended July 1, 2007

Sales

Net sales by customer/product categories are as follows:

Net sales increased 27% for the three months ended June 29, 2008, compared to the prior-year period.

Sales to the North American hospital market increased approximately $5.9 million, or 29%, compared to the same period a year ago. This increase primarily reflects a higher volume of U.S. military/large government sales of approximately $3.9 million. To a lesser extent, the increase resulted from an increased volume of AEDs sales of approximately $1.5 million.

Sales to the North American pre-hospital market increased approximately $8.3 million, or 24%, compared to the same quarter in the prior year. The increase in North American pre-hospital market sales was the result of increased sales of all of our products, including LifeVest^® (our wearable defibrillator product), professional defibrillators, data management software and AEDs.

International sales increased approximately $6.2 million, or 32%, in comparison to the prior-year period, driven by increased sales volume of professional defibrillators, AEDs, and AutoPulse^®. This increase was primarily the result of a $7.1 million increase in sales to our international distributors in Europe, Latin America and the Middle East. Sales by our international subsidiaries were positively impacted by foreign currency exchange rate fluctuations of approximately $1.3 million. These increases were partially offset by lower sales volume by our subsidiaries in the UK and Germany.

Total sales of the AutoPulse product increased in all our markets, particularly in the international and the North American hospital markets. Total AutoPulse sales were approximately $4.8 million in comparison to $3.7 million in the prior-year quarter.

Gross Margins

Cost of sales consists primarily of material, direct labor, overhead, 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, and overall market conditions.

Gross margin for the three months ended June 29, 2008 decreased from approximately 55.1% to approximately 53.5%, compared to the same period in the prior year. This decrease reflected a higher mix of international distributor sales, which typically carry lower overall gross margins. This decrease was partially offset by a higher mix of Lifevest sales which carry higher overall gross margins. Other factors affecting the fluctuation in gross margin each individually represents 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 decreased to approximately $9 million at June 29, 2008, compared to approximately $14 million at the end of the second quarter of fiscal 2008 and approximately $10 million at July 1, 2007. Typically, our backlog decreases during the first and second quarters, remains flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. In fiscal 2008, our backlog increased in the second quarter (rather than decreasing), and it decreased during the third quarter. However, the amounts in our backlog at the end of the third quarters of fiscal 2008 and 2007 were relatively consistent. We believe the maintenance of a modest backlog will help improve our efficiency, lower our costs and improve our

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profitability as it will make it less likely that we will be required to incur substantial additional costs at the end of the quarter. 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 29, 2008 and July 1, 2007 were as follows:

As a percentage of sales, total operating expenses for the three months ended June 29, 2008 decreased approximately 3% as compared to the three months ended July 1, 2007. This decrease was primarily attributed to overall operating leverage. The increased dollar spending primarily reflected increased personnel-related expenses for the sales force and related sales organization, including commission, salaries and fringe benefits, that are supporting the increased revenue.

As a percentage of sales, selling and marketing expenses decreased approximately 1% compared to the three months ended July 1, 2007. This percentage decrease was attributed to overall operating leverage. Selling and marketing expenses increased approximately $4.7 million for the three months ended June 29, 2008 compared to the three months ended July 1, 2007. The majority of this increase included higher personnel-related expenses for the sales force and related sales organization, including commissions, salaries, and fringe benefits of approximately $3.7 million, to support the larger volume of sales.

As a percentage of sales, general and administrative expenses remained at 8% for the three months ended June 29, 2008 and July 1, 2007. General and administrative expenses increased approximately $1.2 million for the three months ended June 29, 2008 compared to the three months ended July 1, 2007. This increase primarily related to increased salaries and fringe benefits.

As a percentage of sales, research and development expenses for the three months ended June 29, 2008 decreased approximately 1% compared to the three months ended July 1, 2007. This percentage decrease was attributed to overall operating leverage. Research and development expenses increased by approximately $1.0 million for the three months ended June 29, 2008 compared to the three months ended July 1, 2007, due predominantly to personnel-related costs for additional research and development staff.

Income Taxes

Our effective tax rate for the three months ended June 29, 2008 and July 1, 2007 was 36%.

Effective October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a result of the implementation of FIN 48, we recognized approximately $374,000 of increase in our liability for unrecognized tax benefits. All of this increase was reflected as a reduction to the October 1, 2007 balance of retained earnings. At the adoption date of October 1, 2007, we had $1.3 million of gross unrecognized tax benefits, which, if recognized, would affect our effective tax rate. At June 29, 2008, we had $1.2 million of gross unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate.

We are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2004.

We do not currently have any income tax audits in progress and, therefore, foresee little change in our current reserve for uncertain tax positions in the next twelve months. Our historical practice was and continues to be to recognize interest and penalties related to income tax matters in income tax expense. We had $315,000 accrued for interest and penalties at the time of the adoption of FIN 48 and $289,000 at June 29, 2008.

We currently estimate that our fiscal 2008 effective tax rate will be approximately 36%. However, extension of the federal research and development tax credit, if passed by the U.S. Congress, could reduce this rate by approximately 1 percentage point.

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Nine Months Ended June 29, 2008 Compared To Nine Months Ended July 1, 2007

Sales

Net sales by customer/product categories are as follows:

Net sales increased 35% for the nine months ended June 29, 2008, compared to the prior-year period.

Sales to the North American hospital market increased approximately $32.9 million, or 60%, in comparison to the prior-year period. The increase includes a greater volume of U.S. military/large government sales of approximately $15.1 million of revenue compared to the same period last year. Included in this $15.1 million is approximately $8 million of revenue from the previously disclosed State of California order. Excluding U.S. military/large government sales, North American hospital sales increased $17.8 million, or 36%, over the comparable prior-year period. This increase reflects a higher volume of professional defibrillator sales to the North American hospital market of approximately $13.2 million. The remaining increase relates to a higher sales volume of AEDs compared to the prior-year period.

Sales to the North American pre-hospital market increased approximately $22.9 million, or 25%, compared to the same period a year ago. This increase was made up of professional defibrillator, LifeVest, data management software and AED sales growth.

International sales increased approximately $18.7 million, or 35%, compared to the same period in the prior year, driven by increased sales volume of professional defibrillators and AEDs. This increase was predominantly due to strong sales of approximately $12.5 million to our international distributors, primarily in Europe, the Middle East, Latin America and China. Sales by our international subsidiaries increased approximately $6.2 million in comparison to the prior year period, of which approximately $3.7 million was due to the positive impact of foreign currency fluctuations. The remaining $2.5 million increase was due to increased sales in our France and Germany subsidiaries.

Total sales of the AutoPulse product in all our markets increased approximately $1.1 million in comparison with the prior-year period. The strongest sales growth was in the international market.

Gross Margins

Gross margin for the nine months ended June 29, 2008 decreased from approximately 54.3% to approximately 52.1% as compared to the same period in the prior year. The decrease reflected the low gross margin recognized in conjunction with revenue associated with our State of California order. In addition, a higher mix of international distributor business, which carries lower overall gross margins, contributed to the decrease. Each of the other factors affecting the fluctuation in gross margin represents less than one percentage point of our overall gross margin.

Costs and Expenses

Operating expenses for the nine months ended June 29, 2008 and July 1, 2007 were as follows:

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As a percentage of sales, total operating expenses for the nine months ended June 29, 2008 decreased approximately 4% as compared to the nine months ended July 1, 2007. The decrease was attributed to relatively small incremental operating expense associated with the revenue obtained from the State of California order and overall operating leverage.

As a percentage of sales, selling and marketing expenses for the nine months ended June 29, 2008 decreased approximately 2% as compared to the nine months ended July 1, 2007, which is primarily attributed to selling and marketing expense leverage associated with the revenue from the State of California order and overall operating leverage. Selling and marketing expenses increased approximately $16.7 million for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007. The majority of this increase included higher personnel-related expenses for the sales force and related sales organization, including commissions, salaries, and fringe benefits of approximately $11.9 million. These expenses include the impact of hiring additional salespeople.

As a percentage of sales, general and administrative expenses decreased approximately 1% for the nine months ended June 29, 2008, compared to the nine months ended July 1, 2007. This percentage decrease was attributed to leverage associated with the revenue from the State of California order and overall operating leverage. General and administrative expenses increased approximately $4.2 million for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007. The increase included higher personnel-related expenses of approximately $1.8 million and increased legal-related costs.

As a percentage of sales, research and development expenses for the nine months ended June 29, 2008 remained flat compared to the nine months ended July 1, 2007. Research and development expenses increased by approximately $4.3 million for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007, due to increased personnel-related costs for additional research and development staff and clinical trial work.

Income Taxes

Our effective tax rate for the nine months ended June 29, 2008 was 36%, and 34% for the nine months ended July 1, 2007.

The increase in our effective tax rate is due to the lapse of the research and development tax credit which has not been extended by the U.S. Congress. During the first nine months of fiscal 2008, only one-quarter of a full-year research and development credit is included in our annual rate calculation as opposed to a full-year projected credit in the comparable prior-year period. The prior-year rate also had the benefit of a discrete $176,000 U.S. research and development tax credit recorded during the quarter ended December 31, 2006, due to the enactment into law of the Tax Relief and Healthcare Act of 2006 on December 20, 2006.

Liquidity and Capital Resources

Our overall financial condition remains strong. Our cash, cash equivalents and short-term investments at June 29, 2008 totaled $58.2 million, compared with $57.4 million at September 30, 2007.

We reclassified approximately $2 million of our marketable securities to non-current assets due to the recent illiquidity in the auction-rate securities market. The underlying assets of these investments are student loans which are backed by the federal government. During our second quarter of fiscal 2008, auctions failed for our auction rate securities. As a result, our ability to liquidate and fully recover the carrying value of our 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. Our auction rate securities are currently rated AAA. During the second quarter of fiscal 2008, we recorded a $100,000 impairment charge on these securities based on valuation models. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to record further impairment charges on these investments. We believe these securities are not materially impaired, primarily due to the government guarantee of the underlying securities. At June 29, 2008, we also held approximately $600,000 of marketable securities in mortgage-backed securities. During the second quarter of fiscal 2008, we recorded a $100,000 impairment charge on these securities based on valuation models. These mortgage-backed securities are collateralized by prime home equity lines of credit and carry a 100% principal and interest guarantee. We believe we will be able to liquidate our investments without significant losses within the next year, or to hold these securities for a longer period of time, if necessary, until market conditions improve.

We continue to have no long-term debt.

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. We may also need to draw on these funds in the future for potential acquisitions.

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Sources and Uses of Cash

To assist with the discussion, the following table presents the abbreviated cash flows for the nine months ended June 29, 2008 and July 1, 2007:

Operating Activities

Cash provided by operating activities of $19.1 million for the nine months ended June 29, 2008 increased $18.2 million compared to cash provided by operating activities for the nine months ended July 1, 2007 of $0.9 million. The increase in cash provided by operating activities for the nine months ended June 29, 2008 was attributable to a $10.7 million decrease in inventory purchases for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007; a $5.9 million decrease in accounts receivable outstanding; a $4.7 million increase in net income for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007; and a $3.5 million increase in depreciation, amortization and stock-based compensation expense for the nine months ended June 29, 2008 compared to the nine months ended July 1, 2007. These increases to cash provided by operating activities were partially offset by an increased use of cash payments for accounts payable and accrued expenses in the amount of $6.6 million. The $10.7 million decrease in inventory, in part, relates to an approximate $6.8 million cost of inventory shipped during the first quarter of fiscal 2008 related to the State of California order. The $5.9 million decrease in accounts receivable is attributable to improved collections.

Investing Activities

Cash used in investing activities during the nine months ended June 29, 2008 increased approximately $2.7 million as compared to the cash used in investing activities during the nine months ended July 1, 2007. During the nine months ended June 29, 2008, payments of contingent consideration on prior period acquisitions increased approximately $5.1 million, additions of property and equipment increased $2.9 million, and purchases of other assets increased $2.1 million, as compared to the previous-year period. Approximately $7.0 million was used for acquisitions in fiscal 2007, while no acquisitions have been made in the first nine months of fiscal 2008.

Financing Activities

Cash provided by financing activities during the nine months ended June 29, 2008 decreased by approximately $11.5 million from the previous year period. The change reflects a substantially lower number of stock options exercised during the current nine-month period (options for 309,964 shares in the current period compared to options for 952,910 shares in the previous year period), at a similar weighted-average exercise price per share ($15.79 in the current period compared to $14.73 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. Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. When these contingencies are resolved and the consideration is distributable, we will record the fair value of the additional consideration as additional cost of the acquired assets. Our earn-out payment for fiscal 2007 was approximately $11,000, which was accrued for during fiscal 2007 and paid during the first quarter of fiscal 2008.

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 January 2007, we paid approximately $1.2 million in cash and issued 72,128 shares of common stock in

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payment of the 2006 earn-out, which was accrued during fiscal 2006, to the former shareholders of Revivant. 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. Additional consideration will be in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period. Earn-out payments to Lifecor were made in the form of cash for fiscal 2006 and fiscal 2007 in the approximate amounts of $77,000 and $3.2 million, respectively. For both annual earn-outs, the additional consideration was 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.

On September 18, 2007, we acquired certain assets from Radiant Medical, Inc., a private medical technology company developing endovascular temperature therapy products, for approximately $5.8 million in cash. Under the terms of the acquisition, no additional consideration will be paid. See Note 8 for further discussion of the acquisition.

Debt Instruments and Related Covenants

We maintain a working capital line of credit with a commercial bank. Under this working capital line, we may borrow on a demand basis. Currently, we may borrow up to $12.0 million at an interest rate equal to the bank’s base rate. No borrowings were outstanding on this line during the quarter ended June 29, 2008. 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 and motor vehicles 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.

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 use forward contracts to reduce our exposure to foreign currency risks due to fluctuations in exchange rates underlying the value of intercompany accounts receivable denominated in foreign currencies. We had one forward exchange contract outstanding serving to

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mitigate foreign currency risk of our Euro intercompany receivables in the notional amount of approximately 7 million Euros at June 29, 2008. The contract serves as a hedge of a substantial portion of our Euro-denominated intercompany balances. The fair value of the foreign currency derivative contract outstanding at June 29, 2008 was approximately $11.1 million, resulting in an unrealized loss of $44,000 as of June 29, 2008 which is included within “investments and other income” in the consolidated income statement.

As of June 29, 2008, we had contracts outstanding to serve as a hedge of our forecasted sales to our subsidiaries totaling $3.9 million, 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 these contracts have been marked to market with changes in fair value recorded to earnings. As of June 29, 2008, the net settlement amount on these contracts was an unrealized loss of approximately $29,000. We believe there is no further exposure under these contracts as they effectively offset each other. Net realized losses were approximately $125,000 for the quarter ended June 29, 2008 and $0 for the quarter ended July 1, 2007, and were recorded in “investment and other income” in the consolidated income statement.

Legal and Regulatory Affairs

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.

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 devices, disposable electrodes 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.

Our sales to customers often include a cardiac resuscitation device, disposable electrodes 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.” 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

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surrounding product acceptance, the fees are fixed or 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 the fourth quarter of 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. Title and risk of loss for this equipment passed to the customer upon shipment. At the request of the State of California, 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 on their behalf. As a result, the State of California requested that we make arrangements to store and maintain certain of the equipment to ensure proper performance when deployed. We considered the specific guidance and criteria for bill-and-hold arrangements as outlined in the SEC’s Staff Accounting Bulletin No. 104 and concluded we have complied with all of the criteria for revenue recognition. 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 installment of the equipment during the fourth quarter of the fiscal year 2007, no revenue was recognized because objective and reliable evidence of fair value did not exist for all undelivered elements. We recognized approximately $8.3 million of revenue related to the delivered equipment in the first nine months of fiscal 2008, because we believe that objective and reliable evidence of fair value exists for all remaining undelivered elements, including maintenance, storage, insurance and accessories. The remaining amount of consideration will be recognized over a five-year period as the undelivered elements are delivered.

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 third 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 information concerning the accounting treatment of Trade-In Allowances, see the next section “Allowance for Doubtful Accounts / Sales Returns and Allowances / Trade-In Allowances.”

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.

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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 with the allowance for doubtful accounts on our balance sheet.

As of June 29, 2008, our accounts receivable balance of $87.7 million is reported net of allowances of $7.2 million. We believe our reported allowances at June 29, 2008 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 (“ARB 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.

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 $3.8 million at June 29, 2008 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 29, 2008, our inventory was recorded at net realizable value requiring adjustments of $6.7 million, or 9.5% of our $70.6 million gross inventories.

Goodwill

At June 29, 2008, we had approximately $37 million in goodwill, primarily resulting from our acquisitions of Revivant (approximately $27 million), certain assets of BIO-key International, Inc. (approximately $5 million), the assets of Infusion Dynamics (approximately $4 million), and the assets of Lifecor (approximately $1 million). In accordance with SFAS No. 142, “Goodwill and

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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 an 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

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 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.

Prior to October 3, 2005, the Company 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, the Company did not recognize compensation expense in association with options granted at or above the market price of the Company’s Common Stock at the date of grant.

Refer to Note 4 to the consolidated financial statements for further discussion and analysis of the impact of adoption in our income statement.

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Risk Factors

The following Risk Factors contain no material changes from the Risk Factors contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 and filed on December 13, 2007, with the following exceptions: (1) we have deleted the risk factor entitled “The Impact on the Company of the Suspension of Shipments by Physio-Control, a Division of Medtronic, May Be Difficult to Predict,” (2) we have added a new risk factor entitled “The Resumption of Shipments by Physio-Control, a Division of Medtronic, May Adversely Affect Our Revenues and Profits,” (3) we have deleted the risk factor entitled “General Economic Conditions May Cause Our Customers to Delay Buying Our Products Resulting in Lower Revenues,” (4) we have added a new risk factor entitled “General Economic Conditions, Which Are Largely Out of the Company’s Control, May Adversely Affect the Company’s Financial Condition and Results of Operations,” (5) we have deleted the risk factor entitled “Compliance With Changing Regulation of Corporate Governance, Public Disclosure and Accounting Matters May Result in Additional Expenses,” and (6) we have deleted the risk factor entitled “If There is an Adverse Outcome with Respect to the Award of Interest and Legal Fees in the Adept Litigation, the Company Could be Required to Pay a Larger Sum of Money Than We Have Accrued.” The Risk Factors as so modified have been repeated in their entirety for the reader’s convenience.

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, Inc. (“Physio-Control”) and Royal Philips Electronics (“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 dominant 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, Physio-Control and Philips and other competitors each have significantly greater resources than we do. Accordingly, Physio-Control, 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. In addition, although our biphasic waveform technology is unique, our competitors have devised alternative biphasic waveform technology. Medtronic previously announced its intention to spin off its external defibrillator business into a separate publicly-traded company and announced a suspension of U.S. shipments of its external defibrillators because of system quality issues. 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 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, Welch Allyn, Inc., 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 has announced its intention to enter the hospital market through cooperation with Cardiac Science Corporation. Their success may impair our ability to gain market share.

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 and management in the emergency medical system market. 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.

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The Resumption of 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 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 U.S. Food and Drug Administration (“FDA”) regarding its quality system improvements for its external defibrillator products. Under the consent decree, Physio-Control will be allowed to continue limited 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:

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.

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We have noticed that as the PAD market has grown, there have been an increasing number of smaller, start-up companies entering the market. In order to gain market share, these companies compete mainly on price. If these companies are able to capture a larger market share with lower prices, this may cause declining prices and negatively affect our operating results. Also, the internet is playing a bigger role in generating sales of AEDs. This could result in lower pricing.

We Acquired New Products, Such as the AutoPulse, Power Infuser, and LifeVest, and New Technology, Such as the Catheter-Based Hypothermia Technology. If We Are Not Successful in Growing Our Business with These Products, Our Operating Results May Be Affected.

We have acquired the AutoPulse, an automated non-invasive cardiac support pump, the Power Infuser, a device that provides highly controlled, rapid delivery of intravenous (IV) fluids to trauma victims, the LifeVest, a wearable external defibrillator system, and catheter-based hypothermia technology. As part of the successful development of the market for these products, where applicable, we must:

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.

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.

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.

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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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.

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 impacted 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.

For example, in the past in the U.S., many states experienced deficits and shortfalls of revenue to cover expenditures. As a result, states cut their spending and support to local cities and towns, who then in turn reduced their spending for capital equipment purchases for their EMS services. We believe that this had a negative impact on our revenues in the North American EMS market.

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:

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

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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.

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:

We, like most of our U.S. competitors, have received warning letters from the FDA in the past, and 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.

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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, 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 international 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.

We may continue our use of forward contracts and other instruments in the future 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:

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.

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

Approximately 30% of our sales for the nine months ended June 29, 2008 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:

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 120 U.S. and over 70 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:

We have, for example, patents and pending patent applications for our proprietary biphasic technology. Our competitors could develop biphasic technology that has comparable or superior clinical efficacy to our biphasic technology and if our patents do not adequately protect our technology, our competitors would be able to obtain patents claiming aspects similar to our biphasic technology or our competitors could design around our patents.

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

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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 acquired Revivant (now ZOLL Circulation, Inc.) and the assets of each of Infusion Dynamics, Lifecor (now ZOLL Lifecor Corporation), Radiant Corporation (now part of ZOLL Circulation), and BIO-key International, Inc.’s fire records management software business (now a part of ZOLL Data Systems). 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:

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

At June 29, 2008, we had approximately $73 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.

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.

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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.

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

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.

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 one forward exchange contract outstanding serving as a hedge of our Euro intercompany receivables in the notional amount of approximately 7 million Euros at June 29, 2008. The contract serves as a hedge of a substantial portion of our Euro-denominated intercompany balances. The fair value of the foreign currency derivative contract outstanding at June 29, 2008 was approximately $11.1 million, resulting in an unrealized loss of $44,000 as of June 29, 2008. A sensitivity analysis of a change in the fair value of the Euro derivative foreign exchange contract outstanding at June 29, 2008 indicates that, if the U.S. dollar weakened by 10% against the Euro, the fair value of this contract would decrease by approximately $1.1 million, resulting in a total loss on the contract of approximately $1.2 million. Conversely, if the U.S. dollar strengthened by 10% against the Euro, the fair value of this contract would increase by $1.0 million, resulting in a total gain on the contract of $961,000. Any gains and losses on the fair value of the derivative contract would be largely offset by losses and gains on the underlying transaction. These offsetting gains and losses are not reflected in the analysis above.

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Intercompany Receivable Hedge

Exchange Rate Sensitivity: June 29, 2008

(Amounts in $)

As of June 29, 2008, we had contracts outstanding to serve as a hedge of our forecasted sales to our subsidiaries totaling approximately $3.9 million, all maturing in less than twelve months. Because these derivatives did not qualify for hedge accounting in accordance with SFAS 133, the Company entered into offsetting derivatives totaling $3.9 million. All of the contracts have been marked to market with changes in fair value recorded to earnings. As of June 29, 2008, the net settlement amount on these contracts was an unrealized loss of approximately $29,000. The Company believes there is no further exposure under these contracts as they effectively offset each other. A sensitivity analysis of a change in the fair value of the derivative foreign exchange contracts outstanding at June 29, 2008 indicates that, if the U.S. dollar weakened by 10% against the foreign currencies, the fair value of these contracts would decrease by approximately $26,000, resulting in a total loss on the contracts of approximately $55,000. Conversely, if the U.S. dollar strengthened by 10% against the foreign currencies, the fair value of these contracts would increase by $24,000, resulting in a total loss on the contracts of approximately $5,000. Any gains and losses on the fair value of the derivative contract would be partially offset by losses and gains on the underlying transaction. These offsetting gains and losses are not reflected in the analysis above.

Forecasted Sales Hedge

Exchange Rate Sensitivity: June 29, 2008

(Amounts in $)