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

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

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

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

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

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

Sales

Net sales by customer/product categories are as follows:



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

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

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

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

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

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

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

Gross Margins

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

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

Backlog

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

Costs and Expenses

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



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

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

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

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

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

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

Investment and other income (loss), net

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

Income Taxes

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

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

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

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

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

Sales

Net sales by customer/product categories are as follows:



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

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

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

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

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

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

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

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

Gross Margins

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

Costs and Expenses

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



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

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

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

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

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

Investment and other income (loss), net

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

Income Taxes

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

Liquidity and Capital Resources

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

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

Cash Requirements

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

Sources and Uses of Cash

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



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

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

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

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

Investments

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

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

We exercised our option to acquire the business and assets of Lifecor on March 22, 2006 and acquired the business and assets on April 10, 2006. We assumed Lifecor's outstanding debt (plus an additional $3.0 million owed to us, which was cancelled) and certain stated liabilities. We paid the third-party debt in April 2006. We agreed to pay additional consideration in the form of . . .