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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal Year Ended December 31, 2003

OR

For the transition period from                  to                 

Commission File Number 0-19567

CARDIAC SCIENCE, INC.

(Exact Name of registrant as specified in its Charter)

1900 Main Street, Suite 700, Irvine, CA 92614

(Address of Principal Executive Offices) (Zip Code)

Issuer’s telephone number (949) 797-3800

Securities registered under Section 12(b) of the Exchange Act:

None.

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.001 Par Value

(Title of Class)

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

Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K:  x

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on June 30, 2003, as reported by the Nasdaq National Market System, was approximately $160,381,000. Shares of voting stock held by each officer and director and by each person who owns 10% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes.

There were 80,576,128 shares of the registrant’s Common Stock outstanding as of March 11, 2004.

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TABLE OF CONTENTS

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PART I

Overview

Cardiac Science is a leading developer, manufacturer and marketer of life-saving public access defibrillators, or automated external defibrillators (“AEDs”), and the largest corporate provider of comprehensive AED/CPR training services. We also manufacture and market a unique therapeutic in-hospital patient monitor-defibrillator that instantly and automatically treats cardiac patients with life-threatening heart rhythms and those that suffer sudden cardiac arrest (“SCA”). More than 450,000 people in the United States die each year from SCA. SCA is the leading cause of death in both the United States and Europe. Approximately two thirds of SCA deaths occur outside a hospital, and according to the American Heart Association (“AHA”) survival rates for victims of SCA average 5% outside the hospital. For victims of SCA, survival is directly linked to the amount of time between the onset of SCA and receiving a defibrillation shock, so that for every minute that goes by without a defibrillation shock, a victim’s chance of survival is reduced by approximately 10%. Additionally, the average survival rate for patients suffering an in-hospital SCA-event, is estimated to be less than 25%—a rate that has not improved since the 1960s.

Our proprietary RHYTHMx^® software technology, and STAR^® Biphasic energy delivery system, form the technology platform for our line of AED products, the Powerheart AED^®, and our unique therapeutic monitor-defibrillator, the Powerheart^® Cardiac Rhythm Module^®, or Powerheart^® CRM^®. Our products and technology are designed to easily and effectively treat victims of SCA whether outside or inside a hospital in the shortest time frame possible, thereby significantly increasing a victim’s chance of survival. Once the electrodes of our Powerheart AED are placed on a patient, our device instantly and accurately detects the presence of any life-threatening arrhythmias and will advise the user to deliver a shock if required. In the case of our in-hospital Powerheart CRM, which continuously monitors a patient’s heart rhythms in the event of a life-threatening arrhythmia, can automatically deliver a potentially life-saving shock to the patient, with no human intervention.

We are active in new product development initiatives, including expanding and enhancing our existing Powerheart AED product line, as well as integrating our RHYTHMx and STAR Biphasic technology into new cardiac resuscitation product platforms for our strategic Original Equipment Manufacturer (“OEM”) partner General Electric Medical Systems (“GEMS”). We have a portfolio of 82 issued patents relating to our core technology and products.

In September 2001, we acquired Survivalink Corporation (“Survivalink”), a privately held Minneapolis, Minnesota-based manufacturer of AEDs. The acquisition of Survivalink enabled us to enter the rapidly growing AED marketplace, which we estimated to have worldwide sales of $200 million in 2003 and, according to Frost & Sullivan and our estimates, is expected to grow to approximately $650 million in sales in 2006.

In November 2001, we acquired approximately 95% of the outstanding shares of Artema Medical AB, (“Artema”) a Swedish based developer, manufacturer and marketer of standard hospital-based emergency defibrillators and patient monitoring equipment, which also had operations in Denmark. This acquisition provided us with a network of international distributors and the infrastructure required to establish our international headquarters in Copenhagen, Denmark.

In May 2002, we placed $50 million in 6.9% senior notes due May 2007 with Perseus, LLC, a merchant bank and private equity fund management company. We used the proceeds from this financing to retire $27 million in short term notes issued in connection with our acquisition of Survivalink and for working capital purposes. The interest on the notes accrues, but is not payable until May 2005. As part of the placement, the investors also received warrants to purchase 10 million shares of our common stock at $3.00 per share and warrants to purchase 3 million shares of our common stock at $4.00 per share.

In October 2003, we purchased substantially all the assets and certain liabilities of Complient Corporation (“Complient”), a Cleveland, Ohio based, privately held provider of comprehensive AED/CPR training and program management services designed to ensure successful AED deployments. The addition of these services means we are the only AED manufacturer offering a single source, turnkey AED deployment solution, which we believe provides us with a competitive advantage at point of sale, particularly with larger, multi-facility purchasers.

Our corporate headquarters is located in Irvine, California, and our research and development facility is located in Lake Forest, California. Our manufacturing facility is located in Minneapolis, Minnesota, and our international headquarters are located in Copenhagen, Denmark. We also have a facility related to the delivery of AED/CPR training and program management services located in Cleveland, Ohio. Our corporate headquarters is located at 1900 Main Street, Suite 700, Irvine, CA 92614 and the telephone number is (949) 797-3800.

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Business Strategy

Our primary business objective is to become the market leader in the rapidly growing global AED marketplace, which according to Frost & Sullivan and our estimates should reach $650 million in 2006. Our secondary objective is to increase the rate of adoption of our in-hospital Powerheart CRM product, and to enter the traditional hospital “crash-cart” defibrillation market, estimated to total $300 million per year. We believe that achieving these objectives will result in consistent and significant revenue growth and profitability. We expect to achieve our objectives by focusing on the following core strategies:

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Sudden Cardiac Arrest

The Prevalence of SCA

Sudden Cardiac Arrest (“SCA”) is the leading cause of death of Americans. Each year, more than 450,000 people in the U.S. die from SCA. Death can occur in minutes if the SCA victim receives no treatment. External defibrillation is the only known treatment, but it must occur as soon as possible after the onset of SCA in order for it to be effective.

The Heart

The heart has four chambers, the two upper, smaller chambers are called the left and right atria and the two lower, larger and stronger chambers are referred to as the left and right ventricles. Blood is pumped throughout the circulatory system by a series of highly coordinated contractions of the heart’s four chambers. If these contractions do not occur in a synchronized manner, then the transportation of blood throughout the body is diminished. Under normal conditions, an electrical impulse is initiated in a bundle of highly specialized cells located in the right atrium. This bundle of cells, referred to as the sinus node, is also appropriately known as the heart’s natural pacemaker. From the sinus node, this electrical current moves across a specific

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path in the atria, and to the ventricles, causing the chambers to contract and pump blood. If the heart is to beat properly, then the electrical current, beginning in the atria, must follow a precise path so that the heart’s chambers beat in a synchronized and coordinated fashion.

Arrhythmias

If the heart deviates from this normal series of electrical impulses, then abnormal heart rhythms result, and the ability of the heart to effectively pump blood throughout the circulatory system is diminished. Although some arrhythmias are short in duration and have little effect on the heart’s normal rhythm, arrhythmias that last for some time may cause the heart to beat too fast—tachycardia—or too slow—bradycardia. If tachycardia originates in the ventricles, it is referred to as ventricular tachycardia (“VT”), otherwise it is known as supraventricular tachycardia (“SVT”). Tachycardia in the ventricles requires prompt treatment. VT may result from serious heart disease and can be treated with medicines and by treating the cause.

While atrial fibrillation and bradycardia, as described below, are serious conditions affecting heart rhythm and effectiveness, it is the first type of arrhythmia described below, ventricular fibrillation, that is immediately life threatening and must be corrected by defibrillation to prevent sudden cardiac death. Our products are capable of diagnosing all of these cardiac conditions and applying therapy to reestablish regular heart rhythm. Our technology and devices are designed to detect and treat the three types of arrhythmia.

Ventricular Fibrillation and SCA

Ventricular fibrillation (“VF”) is a lethal form of arrhythmia in which disordered electrical activity in the heart causes the ventricles to contract in a rapid, unsynchronized, uncoordinated fashion. With the onset of VF, little or no blood is pumped from the heart to the brain and vital organs, resulting in collapse and sudden death unless medical help is provided immediately. This loss of heart function is known as sudden cardiac arrest and to prevent death, the only treatment remains defibrillation—the application of an electric shock to resynchronize the heart’s disordered electrical activity to a normal rhythm.

Atrial Fibrillation

Atrial fibrillation occurs when the atria emit uncoordinated electrical signals, causing the atrial chambers to contract too fast, pumping blood unevenly. Although the heart beat will be irregular, these electrical signals will not always be transmitted to the ventricles, still allowing the ventricles to continue to pump blood throughout the circulatory system. Although AF is not life threatening, it can eventually lead to SCA and to other problems, including chronic fatigue, congestive heart failure and stroke. According to the AHA, patients with AF are five times more likely to suffer a stroke and 15% of all strokes occur in people with AF. More than two million Americans currently suffer from AF.

Cardioversion and drug therapy are the common treatment modalities for AF. Cardioversion therapy is applied by a defibrillator which delivers an electric shock that is synchronized with a patient’s heartbeat, returning the atria to its normal rhythm. Our Powerheart CRM and Powerheart AEDs both have cardioversion capability.

Bradycardia

Bradycardia occurs when the heart beats too slowly, generally less than 60 beats per minute, depending on age. Bradycardia can cause fatigue, dizziness, lightheadedness and fainting. It is treated on an emergency basis through the administration of drugs or invasive temporary pacing, in which a wire is inserted into the heart to deliver a current, or noninvasive temporary pacing, where external electrodes are attached to a patient deliver an electrical stimulus. Our Powerheart CRM is noninvasive pacing capable.

Where Does SCA Strike?

Factors contributing to the onset of SCA include coronary heart disease, drug abuse, respiratory arrest, electrocution, drowning, choking and trauma. Death from SCA is sudden and unexpected, occurring without warning or immediately after the onset of symptoms. The AHA estimates that 50% of SCA victims have no prior indication of heart disease—their first symptom is SCA. And for those with a known history of heart attacks, the chance of sudden cardiac death is four to six times greater than the that of the general population.

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According to the AHA, almost 60% of SCA incidents are witnessed. It is estimated that 95% of SCA victims die before reaching the hospital. Survival is directly linked to the amount of time between the onset of SCA and defibrillation: a victim’s chances of survival are reduced by approximately 10% with every minute of delay.

Average response time for emergency personnel to arrive on scene in the U.S. is approximately 8-12 minutes after calling 911. The average time from collapse to providing defibrillation varies widely across the country. Communities with public access defibrillation (“PAD”) programs in place, where AEDs are placed in public buildings, at sporting events and in emergency vehicles, response times are significantly reduced. In some venues, when the first shock is delivered within 3-5 minutes, the reported survival rates from SCA are as high as 48% to 74%. Other studies show that police equipped with AEDs can cut response times to SCA victims by about three minutes when compared to historical response times, significantly improving a victim’s chance of survival.

Our Core Technology

All of our products incorporate our proprietary RHYTHMx technology. This platform technology is designed to detect and discriminate life-threatening arrhythmias. Our STAR Biphasic technology is designed to optimize the delivery of a potentially life-saving electric shock to victims of SCA. We have integrated our core technology, along with other proprietary technology that we have developed into our Powerheart AED and CRM product lines. We also sell accessories and disposable products, including our proprietary disposable defibrillator electrodes, and are actively licensing certain components of our core technology to third-parties for integration into other products.

Our RHYTHMx Technology

Our proprietary RHYTHMx technology allows for the detection and identification of life-threatening arrhythmias and, in the case of our CRM, automatic delivery of the appropriate measured therapy, or in the case of our Powerheart AED, instructions to deliver the appropriate shock. Our patented RHYTHMx software algorithm offers the unique ability of filtering noise and artifact from a patient’s EKG signal without compromising its ability to correctly identify heart rhythms that are life-threatening—shockable, or non-life-threatening—non-shockable.

RHYTHMx begins by filtering the patient’s EKG signal to reduce noise artifact and then detects the heart’s QRS complexes in conjunction with the patient’s heart rate. The heart’s ECG signals contain wave shapes that are referred to as P-QRS-T waves. While a normal heartbeat contains each of these wave shapes, in the case of the chaotic and disorganized rhythm of ventricular fibrillation, these wave shapes—or QRS complexes—are absent or indistinguishable. If the heart rhythm is considered shockable by RHYTHMx, and it persists, then a shock is indicated. Further analysis by RHYTHMx, which occurs in a fraction of a second, classifies the shockable rhythm as requiring a synchronous shock—in the case of a life-threatening VT—or an asynchronous shock—in the case of life-threatening VF.

Clinical results with our RHYTHMx technology demonstrated 100% sensitivity (correct identification of shockable rhythms) and 99.4% specificity (correct identification of non-shockable rhythms). The average time to first shock was 21 seconds and normal rhythm was restored by the device’s first shock in 96.2% of the cases. These results were based on data from a multi-center clinical trial conducted between February 1993 and May 1997 using early versions of our original Powerheart device. The trial was divided into two phases, with 155 patients enrolled and 104 patients tested, at Arizona Heart Institute, University of California Irvine Medical Center and University of Southern California Medical Center. We received FDA clearance to market RHYTHMx technology as a stand-alone device in August 1998.

Another study, the European Powerheart Trial, was presented during the “late breaking” clinical trial session of the North American Society of Pacing and Electrophysiology at San Diego in May 2002, and was subsequently published in the Journal of the American College of Cardiology. In the study, 117 patients in 10 European medical centers in Germany, Spain, Italy and Finland were monitored. The patients included 51 at risk of cardiac arrest located in special monitoring wards (intensive or coronary care units or in the emergency room), and 66 who were undergoing electrophysiological testing or implantation of cardioverter-defibrillators because of suspected or documented ventricular tachyarrhythmias. During a total of 1,240 hours of testing, there were no adverse events, with 1,988 heart rhythm events documented and 115 of those requiring treatment through defibrillation. The mean response time of our Powerheart device was 14.4 seconds. The trial’s investigators concluded that our Powerheart device is safe and effective in detecting, monitoring and treating spontaneous arrhythmias and that the use of the device will shorten response times and significantly improve the outcome of patients with in-hospital cardiac arrest.

Our platform RHYTHMx technology is integral to our Powerheart AED and CRM products. We also license our RHYTHMx technology for use in certain other wearable defibrillators.

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Our STAR Biphasic Technology

Our Self-Tracking Active Response (“STAR”) Biphasic waveform technology allows our Powerheart AED and CRM defibrillator devices to deliver the most effective therapy possible by delivering an optimized amount of energy in response to SCA. STAR Biphasic quickly assesses the unique characteristics of a patient and customizes the defibrillation energy he or she receives.

The STAR Biphasic waveform treats cardiac patients individually, based on three important characteristics: impedance, defibrillation threshold and cellular response.

Impedance is the number one difficulty in delivering current to the heart in external defibrillation. Tissue such as skin, fat, muscle and bone, surround the heart and impede the flow of energy delivered by a defibrillator. Impedance varies from person to person and in order to optimize energy delivery, adjustments must be made for a patient’s impedance. Our STAR Biphasic waveform technology provides optimized energy delivery by measuring a patient’s impedance and customizing a waveform to deliver the most effective defibrillation energy. This customization occurs for even the most difficult high-impedance patients. STAR Biphasic technology delivers optimal therapy for every patient.

Defibrillation threshold (“DFT”) is defined as the minimum current required to defibrillate the heart and establish normal rhythm. DFT varies from person to person, based primarily on a person’s anatomy, disease condition and metabolic state of the heart. Failure to exceed a patient’s DFT means failure to defibrillate a patient’s heart. STAR Biphasic technology automatically escalates defibrillation energy to ensure that a patient’s DFT is exceeded as rapidly as possible.

During the delivery of any defibrillation shock, the cell membranes of the heart are charged, until the cells depolarize. This allows normal electrical pathways to reestablish control and produce a coordinated rhythm. If any residual charge remains on the cells, i.e., they do not fully depolarize, then refibrillation may occur. The STAR Biphasic waveform has been uniquely designed to neutralize any residual charge through a process of charge balancing. STAR Biphasic precisely controls the energy delivered in the first phase of defibrillation and balances any residual cellular charge during the second phase of defibrillation. By neutralizing the residual charge, STAR Biphasic minimizes the likelihood of refibrillation and provides the optimal environment to defibrillate the heart.

The STAR Biphasic waveform was validated in a clinical trial led by researchers at the Cleveland Clinic and Cedars-Sinai Medical Center. This multi-center study, designed according to FDA guidelines, determined that the STAR Biphasic waveform was safe and effective. The study’s high success rates resulted in statistically significant results with a smaller sample size than initially expected.

In addition to the use of STAR Biphasic waveform technology in our defibrillator devices, we also license this technology to selected partners internationally.

Our Products

The Powerheart AED

Our Powerheart AED product line is powered by our RHYTHMx and STAR Biphasic technology, and is the only AED that can provide continuous monitoring capabilities before, during and after SCA, protecting the victim against delays in therapy and the reoccurrence of another life-threatening arrhythmia following resuscitation.

Reflecting the merger of Survivalink and Cardiac Science in September 2001, our Powerheart AED combines industry-leading AED expertise with advanced arrhythmia detection technology. In 2003, our Powerheart AED and related services and accessories represented 91% of our company-wide revenue and our devices have been deployed by such companies as Harrah’s Entertainment, Coca Cola, General Electric, Procter & Gamble, Exxon, Pepsi, Anheuser Busch and Merrill Lynch. Our Powerheart AED has also been chosen by many local governments and municipalities for use in respective community Public Access Defibrillation (“PAD”) programs, the United States Navy, Army and Air Force, as well as by numerous schools and educational facilities throughout the U.S.

We believe that our Powerheart AED offers the following competitive advantages:

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Our proprietary self-testing AED defibrillator electrodes are interchangeable for body placement and are supplied pre-gelled with a self-adhesive. We have also developed and are marketing our proprietary FDA-cleared pediatric defibrillation electrode system, designed for use with our AED, to deliver reduced defibrillation energy to infants and children up to 8-years old, or up to 55 lbs. These innovative pediatric electrodes are suitably sized for a child’s smaller torso, and are less than half the size of our adult AED electrodes.

The Powerheart CRM

The chances of survival for a patient suffering SCA in a hospital remains at less than 25%. Because of the time it takes to defibrillate patients, even under monitored conditions, this survival rate has not changed in the last 40 years. And those that do survive are typically faced with a longer and more expensive hospital stay.

The Powerheart CRM, attached to patients via our disposable defibrillator electrodes, continuously monitors a patient’s cardiac rhythm, and if a life-threatening arrhythmia is detected, automatically delivers a life-saving defibrillation shock within seconds and with no human intervention.

Therapeutic monitoring with the Powerheart CRM offers cardiac patients the best chance of survival from SCA and represents a potential new standard of care for medical facilities worldwide. In December 2001, we received clearance from the FDA to market the Powerheart CRM to medically supervised environments such as hospitals, medical and dental surgery centers, physician offices, clinics and nursing homes in the United States. We have also received the necessary approvals to market the Powerheart CRM in Europe, Canada, Australia and other regions around the world. Our Powerheart CRM is in numerous hospitals worldwide.

Our Powerheart CRM is a unique therapeutic monitor incorporating state-of-the-art technology that offers medical facilities the following features and benefits:

We also market our proprietary disposable defibrillator electrodes for use with the Powerheart CRM. These disposable defibrillator electrodes provide reliable ECG monitoring, defibrillation and external pacing performance and offer reduced motion artifact caused by patient movement. The compact design and radiotransluscence of the Powerheart CRM disposable defibrillator electrodes also allows clearer views of the chest under x-ray and fluoroscopy and a new hydrogel adhesive reduces the potential for skin irritation.

Miscellaneous Products

As part of the Artema acquisition, we marketed a low-end line of patient monitors. The Diascope G2 is a compact, transportable vital signs monitor designed for use in hospitals and day surgery units and has been marketed in certain international markets. In 2003 we sold approximately $2.5 million of this product, compared to $3.9 million in 2002.

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In connection with the Complient acquisition, we marketed a line of CPR related resuscitation products and accessories, including training mannequins and an audible CPR prompt device. These products, which accounted for $730,000 in revenue in the quarter ended December 31, 2003 are sold primarily through distributors in the U.S.

In February 2004, we made a strategic decision to discontinue the Diascope patient monitor product line and sell the CPR training related product line, both of which had below average gross margins and used disproportionate manufacturing, sales and administrative resources. We believe that exiting these product lines will allow us to focus our resources on our core AED products and services and our in-hospital CRM technology.

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Our Markets

We segment the market for our devices and technology into two principal categories: AEDs and related accessories and AED/CPR services, and in-hospital therapeutic monitoring-defibrillation (Powerheart CRM).

AED Market Segments

We estimate the worldwide AED market in 2003 was approximately $200 million, with the U.S. AED market, comprising 85% of the worldwide market, growing at approximately 30% with faster growth recorded in certain international markets. We expect the worldwide market for AEDs in 2004 to be between $260 million to $270 million, and believe international markets will become a larger proportion of the overall market for AEDs.

We estimate that we now hold approximately 28% of the worldwide market share in AEDs, up from 15% at the end of 2001. We believe that we are the leader in two of our market segments, the U.S. government agency workplace segment and the U.S. corporate workplace market. The following are our market segment highlights:

In-Hospital Therapeutic Monitoring-Defibrillation (Powerheart CRM)

Traditionally, hospitals have deployed manual or semi-automatic defibrillators to treat SCA victims. Standard defibrillators require supervision by highly skilled medical personnel to analyze and interpret the patient’s electrocardiogram and to manually deliver a shock using handheld paddles. Standard defibrillators are typically positioned in the hospital at locations such as critical care and cardiac care units, emergency and operating rooms and electrophysiology labs. We estimate that there are 6,600 hospitals in the United States.

Despite the availability of standard defibrillators to treat SCA in hospitals, numerous hospital studies have documented delays of five minutes or more between the onset of cardiac arrest to the arrival of the first medical team member. Clinical studies show that the average survival rate of patients who have an in-hospital SCA is estimated at less than 25%, a rate of survival that has not improved since the 1960s. We believe that our Powerheart CRM is well positioned to provide hospitals with a therapeutic monitoring alternative which will result in an increase in survival rates and a reduction in patient care costs.

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Technology Licensing

We are seeking strategic relationships with third parties to license our RHYTHMx and STAR Biphasic proprietary technologies for use in patient monitoring type devices.

During 2002, we entered into three separate licensing agreements with Zoll Medical, Inc., Lifecor, Inc., and Innomed Medical Co. We licensed our STAR Biphasic technology for use into standard emergency defibrillators for sales internationally and licensed certain patents relating to wearable defibrillators and other proprietary features of our AEDs, as well as licensing of our platform RHYTHMx technology. In consideration for these licenses we received cash and ongoing royalty payments.

AED Market Drivers

SCA kills approximately 450,000 people in the United States each year. A few minutes after the onset of SCA, brain damage can start to occur and death will result unless the victim’s heart is shocked back into rhythm by a defibrillator. According to the AHA almost 60% of all SCAs are witnessed by a bystander. Moreover, the AHA currently estimates that 95% of SCA victims die before reaching the hospital. Communities that strategically place AEDs in public buildings, arenas, airports and emergency vehicles can significantly reduce response times. In venues where bystanders or first responders can defibrillate a victim within three to five minutes, the reported survival rates from SCA are as high as 48% to 74%.

There is now widespread acknowledgement and increasing awareness that AEDs save lives and can be safely used by lay people. The AHA has publicly encouraged widespread deployment of AEDs through community AED programs.

Legislation is a key market driver, and numerous AED-related bills have been introduced at the Federal level and in State governments in the past two years, which we believe will facilitate the growth of new and existing markets for AEDs:

Sales and Marketing

In 2003, we expanded our indirect and OEM AED distribution channels. Our marketing efforts were focused on the U.S. corporate workplace and the U.S. government agency workplace market segments. As a result of this effort, we believe that we are the market leaders in those segments. We currently have 61 direct AED sales people in the United States and also have over 50 distributors focusing on certain domestic market segments.

Outside the U.S., we distribute the Powerheart AED through 50 international distributors and have a presence in all major foreign markets. In 2003, we established direct sales operations in the United Kingdom and Germany. Our international

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distribution channel is managed from our Copenhagen office by a group of 9 sales managers who each have sales responsibility for certain regions of the world.

We currently have 3 specialists supporting our CRM sales and marketing effort, and also utilize distributors in certain regions in the United States and internationally. In addition, in 2003 we signed an OEM agreement with GEMS whereby it distributes the CRM through its distribution channels. We are also focused on the collection of clinical data supporting the cost-effectiveness and improved patient outcomes of our Powerheart CRM.

Competition

Our principal competitors in the AED market are Philips Medical’s Heartstream division, Medtronic Physio-Control and ZOLL Medical Corporation. We believe that Philips Medical is currently the market leader with an estimated 33% market share.

Our experience indicates that the key criteria that buyers of AEDs exhibit in their purchasing decision is:

We believe that our Powerheart AED compares favorably with our competitors’ products in the AED market based on these factors as well as on other competitive determinants. We also believe that our ability to provide a complete turnkey AED deployment solution provides us with a competitive advantage over other manufacturers, particularly in the government and corporate workplace segments.

The Powerheart CRM is the only FDA-cleared external defibrillator that provides fully automatic detection and treatment for patients suffering from life-threatening arrhythmias. We compete against numerous companies in the hospital marketplace where we sell our Powerheart CRM.

Manufacturing

We manufacture our Powerheart AEDs and Powerheart CRMs at our 25,000 square foot manufacturing facility in Minnetonka, Minnesota. Our current in-place assembly and manufacturing capacity will allow us to build approximately 80,000 AEDs annually. In 2003, we manufactured approximately 30,000 AEDs, compared with 18,000 in 2002. We outsource the manufacture of major subassembly components such as printed circuit boards primarily for the benefit of reduced cost, and perform final assembly and testing in our facility.

Our FDA-registered Minnetonka facility is ISO certified for the design and manufacture of medical products. Our certifications allow us to design and manufacture medical products with the CE mark for shipment to Europe and to ship FDA-cleared products in the United States.

The manufacturing processes used to produce our products are required to comply with FDA enforced Good Manufacturing Practices (”GMP”) regulations which cover the design, testing, production, control and documentation of our products. In those foreign jurisdictions where we market our products, we are also required to comply with and obtain regulatory approvals and clearances. These regulatory requirements also apply to our third party contract manufacturers, as well as to some of our suppliers. The FDA and foreign counterparts conduct periodic inspections of manufacturing facilities to ensure compliance with “Quality System Regulation,” GMP, and other regulations, such as those promulgated by the International Standards Association. Any concern raised by such inspections could result in regulatory action, delays or termination of production.

Intellectual Property

We believe that our intellectual assets, including trademarks, patents, trade secrets and proprietary technology, are extremely valuable and constitute a cornerstone of our business. We own 82 U.S. and foreign patents relating to our automatic defibrillation technology platform and its various applications. We intend to file additional patent applications relating to each of our products and our underlying proprietary technology, as well as around new technological inventions that we are developing. We believe that our patents and proprietary technology provide us with a competitive advantage over our competitors. We will

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aggressively defend our inventions and also look for opportunities to generate royalty fees from licensing our intellectual property.

We have a wide range of patents covering the technology found in our AEDs, including our RescueReady technology, which features one button operation, pre-connected disposable electrode pads and self-test capabilities. Other patents we have been issued cover our proprietary RHYTHMx arrhythmia detection software technology, our STAR Biphasic defibrillation waveform technology and our disposable therapy electrodes.

During 2003, we were granted six additional U.S. patents and one European patent relating to our core technology and key aspects of our RHYTHMx analysis algorithm software.

Clinical Studies

We are actively engaged in, and are pursuing the sponsorship of, clinical studies at hospital medical centers both in the U.S. and Europe, relating to our Powerheart CRM product. These studies are primarily focused on demonstrating clinical efficacy, along with improved survival rates and the economic benefits associated with deployment of our Powerheart technology for hospitalized at-risk cardiac patients. We anticipate that the results of these studies will be presented in abstract form at conferences, and if accepted, as manuscripts published in peer reviewed medical journals. Various studies are either ongoing, planned or proposed, at luminary medical centers in the U.S. and Europe.

A 117-patient, 10-center study, published February, 2003 in the Journal of the American College of Cardiology, demonstrates that our Powerheart CRM is not only safe and effective, but significantly shortens hospital response time to SCA. Because time to defibrillation is critical to patient survival, the study investigators concluded that our Powerheart CRM has the potential to significantly improve the outcome of patients with SCA.

Government Regulation

In the United States, clinical testing, manufacturing, packaging, labeling, promotion, marketing, distribution, registration, record keeping and reporting, clearance or approval of medical devices generally are subject to regulation by the FDA. Medical devices intended for human use are classified into three categories, subject to varying degrees of regulatory control. Class III devices, which we believe cover certain of our products, are subject to the most stringent controls.

In October 1997, we received 510(k) clearance from the FDA to market the clinical version of the original Powerheart in the United States. In August 1998, we received 510(k) clearance from the FDA to market RHYTHMx and to integrate it into other stand-alone defibrillator monitors. In January 2000, we received clearance from the FDA to market the commercial version of the original Powerheart in the United States. In February 2001, we received notification from the FDA that allows our original Powerheart to be used in outpatient surgery centers, nursing homes and at home when prescribed by a physician. In December 2001, the FDA granted us 510(k) clearance to market our Powerheart CRM in medically supervised environments such as hospitals, medical and dental surgery centers, physician offices, clinics and nursing homes. In October 2001, the FDA granted us 510(k) clearance to market a new advanced version of our monitoring-defibrillation-pacing electrodes.

In February, 2002, the FDA granted us 510(k) clearance to market our Powerheart AED for the emergency treatment of victims of sudden cardiac arrest and in January 2003, the FDA granted us 510(k) clearance to market our Powerheart AED for use on children under eight-years of age.

We have also received the necessary approvals to market the Powerheart CRM, Powerheart AED and related product accessories within Europe, Canada, Australia and other regions of the world.

Our products are subject to FDA review of labeling, advertising and promotional materials, as well as record keeping and reporting requirements. Failure to comply with any of the FDA’s requirements, or the discovery of a problem with any of the products, could result in FDA regulatory or enforcement action. Further, any changes to the products or their labeling may require additional FDA submissions, review, clearance or approval.

Research and Development

We are committed to improving and expanding our product line through the application of our existing patented and proprietary technology, and through the research and development of new technology. Our core RHYTHMx and STAR Biphasic

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technologies have multiple patient monitoring and therapeutic applications, and we continue to seek out new device embodiments integrating our proprietary technology, enhancing or expanding our own product line, or by licensing to a third-party.

Research and development expenses for the years ended December 31, 2003, 2002 and 2001 were $5.5 million, $6.1 million, and $8.6 million, respectively. We intend to continue to devote resources and capital to research and development so we can improve and refine our existing products and technology, develop and commercialize our products currently under development, and develop new applications for our technology.

Backlog

As of December 31, 2003, we had a backlog of $700,000 in training related orders, as compared to a backlog of $877,900 as of December 31, 2002. The backlog of orders in 2003 was related to AED/CPR training services which were ordered but yet not delivered. Revenue on AED/CPR training services is recognized when the services are delivered.

Employees

As of December 31, 2003, we had 284 full-time employees, of which 97 employees were involved in worldwide sales and marketing functions, 29 were involved in supporting our research and development activities, 104 were in manufacturing and 54 were general and administrative personnel. None of our employees are represented by a collective bargaining arrangement and we believe our relationship with our employees is satisfactory. We may add additional personnel as we grow.

General Information

We maintain an Internet website at www.cardiacscience.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as reasonably practicable following the date they are filed with or furnished to the SEC.

A Warning About Forward-Looking Information and the Safe Harbor Under the Securities Litigation Reform Act of 1995

This Annual Report on Form 10-K and the other reports, releases, and statements (both written and oral) issued by us and our officers from time to time may contain statements concerning our future results, future performance, intentions, objectives, plans, and expectations that are deemed to be “forward-looking statements.” These statements, including statements regarding:

Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results, performance, and achievements may differ significantly from those discussed or implied in the forward-looking statements as a result of a number of known and unknown risks and uncertainties including, without limitation, those

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discussed below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure you that the results discussed or implied in such forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in such forward-looking statements, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “plans,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to revise any of these forward-looking statements.

Sometimes we communicate with securities analysts. It is against our policy to disclose to analysts any material non-public information or other confidential commercial information. You should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We have a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. If reports issued by securities analysts contain projections, forecasts or opinions, those reports are not our responsibility.

Availability of SEC Filings

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You can read our SEC filings over the Internet at the SEC’s website at http://www.sec.gov. We also make our SEC filings available free of charge through our Internet website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Our website address is www.cardiacscience.com. The reference to our website address does not constitute incorporation by reference into this report of the information contained at that site.

Risk Factors

The risks set forth below are not intended to be exhaustive. These are the factors that we believe could cause actual results to be different from expected and historical results. Our industry is very competitive and changes rapidly. Sometimes new risks emerge and we may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.

If the worldwide AED market does not grow as projected, our sales and results may suffer.

According to Frost & Sullivan and our estimates, the worldwide AED market is expected to grow from $155 million in annual sales in 2002 to $650 million in 2006. Our current level of operations is based on assumptions concerning the future expected growth of AED markets, and if such assumptions are significantly different from actual AED market growth rates, then we may not be able to successfully grow our revenue and, as a result, our level of revenue may not be able to support our current or future level of operations.

If we fail to successfully compete against new or existing competitors, our operating results may suffer.

Our principal competitors relating to our AED product line are Medtronic Physio-Control and Philips Heartstream. Due to their dominant market position and well established customer relationships, it may be difficult for us to increase our market share and penetrate new markets. In addition, these competitors are part of much larger organizations, and thus have significantly greater resources than we do. Accordingly, Medtronic Physio-Control and Philips Heartstream may increase the resources they devote to the development and marketing of AEDs, which could materially impact our results.

We also compete against other companies that manufacture and sell external defibrillator devices to hospitals, where we sell our Powerheart CRM. These companies include Medtronic Physio-Control, Philips Heartstream and ZOLL Medical Corporation. Many of the manufacturers of these competing external devices are well established in the medical device field, have substantially greater experience than us in research and development, obtaining regulatory clearances, manufacturing, and sales and marketing, and have significantly greater financial, research, manufacturing, and marketing resources than us.

Other companies may develop invasive or non-invasive products capable of delivering comparable or greater therapeutic benefits than our products, or which offer greater safety or cost effectiveness than our products. Furthermore, future technologies or therapies developed by others may render our products obsolete or uneconomical, and we may not be successful in marketing our products against such competitors.

The markets for our products, in particular our Powerheart AED, are subject to price competition, which could be detrimental to our profitability.

The market for AEDs is highly competitive and is subject to significant price competition because price is an important purchase decision criteria for many customers. Average selling prices for AEDs have eroded during recent years and are projected to continue declining, and principal competitors have substantially greater resources and experience than we do, which may provide them with a competitive advantage as price erosion continues or if it accelerates. If this occurs, our level of sales and profitability may suffer.

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We recently acquired Complient Corporation, and we may acquire other businesses, the integration of which may prove difficult.

We recently acquired Complient Corporation, and 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:

General economic conditions and geopolitical uncertainty may affect the purchasing decisions of our customers, which may result in lower revenues.

Many of our customers face challenges in their respective markets due to general economic conditions relating to fluctuating demand for their services and budgetary or financing constraints. As a result, an economic downturn in any of the markets in which we compete may affect the purchase decisions of our customers, which may in turn negatively impact our revenue and sales growth. In addition, global geopolitical uncertainty and war may also negatively impact a customer’s decision making process or timing.

We have a history of losses.

We have a history of losses, and expect to incur some losses in the future. We were formed in 1991 and have been engaged primarily in organizational activities, research and development, pre-clinical testing, human clinical trials, and capital raising activities, until the introduction of our first commercial product in December 1999.

We are a relatively new entrant without a significant presence in the hospital market. If we are not successful in this market, our operating results may suffer.

Our Powerheart CRM is designed for bedside use in hospitals and clinics and competes against other external defibrillator products. We are relatively new to this market, and as such, face a number of challenges, including acceptance by hospital administrative and medical staff, long purchasing decision processes, and competitors’ pre-existing relationships with customers. If we are not successful in gaining market acceptance of our Powerheart CRM, our operating results may suffer.

Recurring sales of our disposable defibrillator electrodes may not grow.

Our business strategy within the in-hospital marketplace, where we market our Powerheart CRM, is to generate recurring revenue from the sale of our disposable defibrillator electrode pads, which for sanitary, performance and safety reasons, must be replaced every 24-hours. Although we have developed proprietary smart chip technology to ensure that only our electrodes will be used with the Powerheart CRM, there can be no assurance that other companies will not develop electrode adapters that will allow generic electrodes to be used with our devices. If we are not successful in preventing the use of generic electrodes with our products, or if customers do not follow the recommended protocol of regularly changing electrodes, we may not experience future sales growth of our proprietary disposable electrode pads.

Uncertain customer decision processes and long sales cycles may cause fluctuations in our operating results.

Many of our AED customers are municipalities and other quasi-governmental groups, such as schools and law enforcement agencies. As a result, these customers have numerous decision makers, as well as varying levels of procedures that must be adhered to before a purchase of our products can be made. The same is true regarding our in-hospital Powerheart CRM product, which faces several levels of purchase decision makers, at the departmental and hospital-wide level. Accordingly, the purchasing decisions of many of our customers are characterized by a protracted decision making process, which may result in period-to-period fluctuations in our operating results.

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Supply shortages can cause delays in manufacturing and delivering products.

We rely upon unaffiliated suppliers for the material components and parts used to assemble our products. Most parts and components purchased from suppliers are available from multiple sources. We believe that we will be able to continue to obtain most required components and parts from a number of different suppliers, although there can be no assurance of continued availability. The lack of availability of certain components could require a major redesign of our products and could result in production and delivery delays.

During 2002, we issued $50 million in 6.9% senior notes, which are collateralized by all of our assets.

In May 2002, we placed $50 million in 6.9% senior notes due May 2007 with an investor group. Interest on the senior notes accrues, but is not payable until May 2005. The senior notes are collateralized by a senior blanket security interest in our assets. If we default on these senior notes, we may become subject to claims by note holders seeking to enforce their security interest in our assets. Such claims, if they arise, may substantially restrict or even eliminate our ability to utilize our assets in conducting our business, and may cause us to incur substantial legal and administrative costs.

Our auditors have expressed doubt about our ability to continue as a going concern.

We received a report on our consolidated financial statements from our independent auditors for the years ended December 31, 2003 and 2002 that includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern without, among other things, obtaining additional financing to support expansion plans, manufacturing, research and development activities, or achieving a level of revenues adequate to support our cost structure.

Our operating results may fluctuate from quarter to quarter, which could cause our stock price to be volatile.

The market prices of many publicly traded companies, including emerging companies in the healthcare industry, have been and can be expected to be highly volatile. The future market price of our common stock could be significantly impacted by:

Our quarterly financial results are often impacted by the receipt of a large number of customer orders in the last weeks of a quarter. Absent these orders, our sales could fall short of our targets, thus causing our stock price to decline.

We must comply with governmental regulations and industry standards.

We are subject to significant regulation by authorities in the United States and foreign jurisdictions regarding the clearance of our products and the subsequent manufacture, marketing, and distribution of our products once approved. The design, efficacy, and safety of our products are subject to extensive and rigorous testing before receiving marketing clearance from the U.S. Food and Drug Administration (“FDA”). The FDA also regulates the registration, listing, labeling, manufacturing, packaging, marketing, promotion, distribution, record keeping and reporting for medical devices. The process of obtaining FDA clearances is lengthy and expensive, and we cannot assure you that we will be able to obtain the necessary clearances for marketing our

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products on a timely basis, if at all. Failure to receive, or delays in receiving, regulatory clearances would limit our ability to commercialize our products, which would have a material adverse effect on our business, financial condition, and results of operations. Even if such clearances are granted by the FDA, our products will be subject to continual regulatory review. Later discovery of previously undetected problems or failure to comply with regulatory standards may result in product labeling restrictions, costly and time-consuming product recalls, withdrawals of clearances, or other regulatory or enforcement actions. Moreover, future governmental statutes, regulations, or policies, or changes in existing statutes, regulations, or policies, may have an adverse effect on the development, production, or distribution of our products.

Any regulatory clearance, if granted, may include significant limitations on the uses for which our products may be marketed. FDA enforcement policy strictly prohibits the marketing of cleared medical devices for unapproved uses. In addition, the manufacturing processes used to produce our products will be required to comply with the Good Manufacturing Practices or “GMP” regulations of the FDA. These regulations cover design, testing, production, control, documentation, and other requirements. Enforcement of GMP regulations has increased significantly in the last several years, and the FDA has publicly stated that compliance will be more strictly scrutinized. Our facilities and manufacturing processes and those of certain of our third party contract manufacturers and suppliers, if any, will be subject to periodic inspection by the FDA and other agencies. Failure to comply with applicable regulatory requirements could result in, among other things:

To market our products in certain foreign jurisdictions, we must obtain required regulatory clearances and approvals and otherwise comply with extensive regulations regarding safety and quality. Compliance with these regulations and the time required for regulatory reviews vary from country to country. We cannot assure you that we will obtain regulatory clearances and approvals in foreign countries, and we may be required to incur significant costs in applying for, obtaining, or maintaining foreign regulatory clearances and approvals.

We are exposed to numerous risks associated with international operations.

We market our products in international markets. International operations entail various risks, including:

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Our business is dependent upon our executive officers, and our ability to attract and retain other key personnel.

Our success is dependent in large part on the continued employment and performance of our Chairman and Chief Executive Officer, Raymond W. Cohen, as well as other key management and operating personnel. The loss of any of these persons could have a material adverse effect on our business. We do not have key person life insurance on any of our employees other than Mr. Cohen.

Our future success will also depend upon our ability to retain existing key personnel, and to hire and to retain additional qualified technical, engineering, scientific, managerial, marketing, and sales personnel. The failure to recruit such personnel, the loss of such existing personnel, or failure to otherwise obtain such expertise would have a material adverse effect on our business and financial condition.

We may face product liability claims.

The testing, manufacturing, marketing and sale of medical devices subjects us to the risk of liability claims or product recalls. For example, it is possible that our products will fail to deliver an energy charge when needed by the patient, or that they will deliver an energy charge when it is not needed. As a result, we may be subject to liability claims or product recalls for products to be distributed in the future or products that have already been distributed. Although we maintain product liability insurance in the countries in which we conduct business, we cannot assure you that such coverage is adequate or will continue to be available at affordable rates. Product liability insurance is expensive and may not be available in the future on acceptable terms, if at all. A successful product liability claim could inhibit or prevent commercialization of our products, impose a significant financial burden on us, or both, and could have a material adverse effect on our business and financial condition.

Our technology may become obsolete.

The medical equipment and healthcare industries are characterized by extensive research and rapid technological change. The development by others of new or improved products, processes, or technologies may make our products obsolete or less competitive. Accordingly, we plan to devote continued resources, to the extent available, to further develop and enhance our existing products and to develop new products. We cannot assure you that these efforts will be successful.

We depend on patents and other intellectual property rights that we may not be able to protect.

Our success will depend, in part, on our ability to obtain and maintain patent rights, preserve our trade secrets, and operate without infringing on the proprietary rights of third parties. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions and therefore may be highly uncertain. We cannot assure you that:

Furthermore, others may have developed or could develop similar products or patent rights, may duplicate our products, or design around our current or future patents. In addition, others may hold or receive patents which contain claims having a scope that covers products developed by us. We also rely upon trade secrets to protect our proprietary technology. Others may independently develop or otherwise acquire substantially equivalent know-how, or gain access to and disclose our proprietary technology. We cannot assure you that we can ultimately protect meaningful rights to our proprietary technology. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Such litigation, if it occurs, could result in substantial expense to us and a diversion of our efforts, but may be necessary to enforce our patents;

An adverse determination in any such litigation could subject us to significant liability to third parties or require us to seek licenses from third parties. Although patent and intellectual property disputes in the medical device industry have often been

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settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Moreover, we cannot assure you that necessary licenses would be available to us on satisfactory terms, if at all. If such licenses cannot be obtained on acceptable terms, we could be prevented from marketing our products. Accordingly, an adverse determination in such litigation could have a material adverse effect on our business and financial condition.

In February 2003, we announced we had filed a patent infringement action against Philips Medical Systems North America, Inc., Philips Electronics North America Corporation and Koninklijke Philips Electronics N.V. (“Philips”) in the United States District Court for the District of Minnesota. The suit charged that Philips’ automated external defibrillators sold under the names “HeartStart OnSite Defibrillator” and “HeartStart Home Defibrillator” infringed at least seven of our United States patents. In the same action, we also sought a declaration from the Court that our products do not infringe several of Philips’ patents. In June 2003, we filed our First Amended Complaint further accusing Philips’ “HeartStart FR2” automated external defibrillator of infringing our U.S. Patents and removing four of the Philips’ patents from suit pursuant to an agreement between the parties. The Philips “HeartStart Home Defibrillator,” which was recently cleared by the FDA for marketing in the United States, is promoted by Philips as including, among other things, pre-connected disposable defibrillation electrodes and daily self-testing of electrodes and battery, features that the suit alleges are key competitive advantages of our Powerheart and Survivalink AEDs and are covered under our patents. On June 19, 2003, Philips filed a Complaint against us in the United States District Court for the Western District of Washington. Philips’ Complaint alleged patent infringement of ten of Philips’ U.S. Patents by our Powerheart and Survivalink AEDs. Five of the asserted patents were already contained in our Minnesota case against Philips. We made a motion to dismiss the Washington case as duplicative and the motion was granted. Philips made a motion in the Minnesota case to have its patents severed from that action, but the motion was denied. At this stage, we are unable to predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.

Our ability to issue preferred stock could adversely affect common stockholders.

Our certificate of incorporation authorizes the issuance of preferred stock with such designations, rights, and preferences as may be determined from time to time by our board of directors, without any further vote or action by our stockholders. Therefore, our board of directors is empowered, without stockholder approval, to issue a class of stock with dividend, liquidation, conversion, voting, or other rights, which could adversely affect the voting power or other rights of the holders of our common stock.

Anti-takeover provisions may discourage takeover attempts.

Provisions of the Delaware General Corporation Law and our certificate of incorporation may discourage potential acquisition proposals, or delay or prevent a change of control.

Future issuances of our common stock could cause our stock price to decline.

We currently have reserved 14,000,000 shares of common stock for issuance upon the exercise of options that may be granted under our 1997 Stock Option/Stock Issuance Plan, as amended, and 14,286,735 shares for issuance upon the exercise of currently outstanding warrants. The holders of these options or warrants may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us. The exercise of these options or warrants and the sale of the common stock obtained upon exercise would have a dilutive effect on our stockholders and may have a material adverse effect on the market price of our common stock.

Significant decreases in our stock price could result in our having to record an impairment charge related to our goodwill.

Applicable accounting standards require that goodwill be tested for impairment at least annually or whenever evidence of potential impairment exists. If, in any period, our stock price decreases to the point where the fair value of our goodwill, as determined by our market capitalization, is less than the book value of our goodwill, we would be required to record an impairment charge in that period.

Our corporate headquarters is located in Irvine, California, and encompass approximately 22,000 square feet. Our lease for this property expires in 2008 and our annual net rent expense for this facility is approximately $458,000. Our R&D facility, located in Lake Forest, California comprises approximately 10,000 square feet. This lease expires in 2008 and our annual net rent expense is approximately $120,000. We also have a manufacturing facility located in Minnetonka, Minnesota, totaling approximately 31,000 square feet. The lease on this facility expires in 2007 and our annual net rent expense for this facility is approximately $335,000. We also have international sales and marketing offices in Copenhagen, Denmark, Manchester, England and Dresden, Germany.

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In February 2003, we announced that we had filed a patent infringement action against Philips Medical Systems North America, Inc., Philips Electronics North America Corporation and Koninklijke Philips Electronics N.V. (“Philips”) in the United States District Court for the District of Minnesota. The suit charged that Philips’ automated external defibrillators sold under the names “HeartStart OnSite Defibrillator” and “HeartStart Home Defibrillator” infringed at least seven of our United States patents. In the same action, we also sought a declaration from the Court that our products do not infringe several of Philips’ patents. In June 2003, we filed our First Amended Complaint further accusing Philips’ “HeartStart FR2” automated external defibrillator of infringing our U.S. Patents and removing four of the Philips’ patents from suit pursuant to an agreement between the parties. The Philips “HeartStart Home Defibrillator,” which was recently cleared by the U.S. Food and Drug Administration (“FDA”) for marketing in the United States, is promoted by Philips as including, among other things, pre-connected disposable defibrillation electrodes and daily self-testing of electrodes and battery, features that the suit alleges are key competitive advantages of our Powerheart and Survivalink AEDs and are covered under our patents. On June 19, 2003, Philips filed a Complaint against us in the United States District Court for the Western District of Washington. Philips’ Complaint alleged patent infringement of ten of Philips’ U.S. Patents by our Powerheart and Survivalink AEDs. Five of the asserted patents were already contained in our Minnesota case against Philips. We made a motion to dismiss the Washington case as duplicative and the court granted our motion. Philips made a motion in the Minnesota case to have its patents severed from that action, but the motion was denied. At this stage, we are unable to predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.

On April 30, 2003, we filed a Complaint against Defibtech, LLC for patent infringement in the United States District Court for the District of Minnesota. The Complaint alleged that Defibtech’s Sentry and Reviver AEDs infringe our patented disposable electrode pre-connect technology. Defibtech answered the Complaint with no counterclaims. At this stage, we are unable to predict the outcome of this litigation or its ultimate effect, if any, on our financial condition.

In the ordinary course of business, various lawsuits and claims are filed against us. While the outcome of these matters is currently not determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our operations or financial position.

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On November 17, 2003, the Company held an annual meeting of the stockholders. Seven persons, five of whom were existing members of the Board of Directors, were nominees for election at the annual meeting. All of the following persons were elected as directors at the annual meeting:

Proposals voted on at the annual meeting were:

The following table shows the matters voted upon except election of the Directors which is detailed above, votes cast for, against or withheld as the number of abstentions and broker non-votes.

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PART II

Market Information

In September 2000, our common stock was accepted for trading on the NASDAQ National Market under the symbol “DFIB”. The following table sets forth for the periods indicated the high and low closing prices for our common stock as reported on NASDAQ National Market.

Holders

As of March 11, 2004, there were approximately 938 holders of record of our common stock.

Dividends

We have never paid any cash dividends on our common stock. We presently intend to retain earnings, if any, to finance our operations and therefore do not anticipate paying any cash dividends in the foreseeable future. The payment of any dividends will depend upon, among other things, our earnings, assets and general financial condition.

Recent Sales of Unregistered Securities

In July 2003, we signed multi-year strategic OEM, distribution and development agreements with GE Medical Systems Information Technologies pursuant to which GE will market AEDs and CRMs under the GE name in Europe, Asia, the Middle East and other international markets. In connection with the development agreement, we issued GE a warrant to purchase 750,000 shares of our common stock with an exercise price of $3.00 per share. In September 2003, we completed a private placement of 2,233,334 shares of common stock at $3.75 per share. We also issued warrants to purchase 223,333 shares of our common stock with an exercise price of $5.00 per share in connection with the transaction. In October 2003, we acquired substantially all of the assets of Complient Corporation for 10,250,000 shares of our common stock, subject to a lock-up agreement and general indemnification escrow. All of the shares issued in these recent sales of unregistered securities were registered for resale on Form S-3 (333-110898).

The sale and issuance of these securities were deemed to be exempt from registration under the Securities Act of 1933, as amended in reliance upon Section 4(2) of the Securities Act of 1933, as amended. The recipient of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions these sales were made without general solicitation or advertising. Each recipient was an accredited investor. All recipients had adequate access, through their relationship with us, to information about us.

To the extent we received proceeds from the above referenced recent sales of unregistered securities, we expect to use the net proceeds for working capital and other general corporate purposes, which may include commercial activities relating to existing product sales and anticipated product launches and acquisitions of companies, products or technology, although there are no current agreements with respect to any such acquisitions. If we engage in such acquisitions of companies, products, rights or technology in order to execute our business strategy, we may need to raise additional capital. Pending such uses, we intend to invest the net proceeds from the offering in short-term, interest-bearing, investment grade securities.

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The following selected financial information is derived from our consolidated financial statements. You should read this summary financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes.

Statement of Operations Data:

(In thousands, except share and per share data)

Selected Balance Sheet Data:

(In thousands, except share and per share data)

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Summarized Quarterly Data:

(In thousands, except share and per share data)

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(In thousands, except share and per share data)

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto set forth herein.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Results of Operations

On October 21, 2003, in a move to capture additional revenue related to the sale of our AEDs, we acquired substantially all the assets and liabilities of Complient Corporation, the nation’s leading independent provider of AED and CPR training and comprehensive AED program management. Corporations, municipalities, schools, government agencies and others who purchase and deploy AEDs are required by certain federal and state laws to obtain a medical prescription and have designated personnel trained annually in AED use and CPR by a certified trainer. Traditionally, buyers of AEDs have had to arrange for their own training with non-profit organizations or off-duty paramedics, coordinate their own site assessment and deployment, and assure ongoing compliance with recertification and other regulations. Complient was the first organization of its kind to offer a comprehensive training program that included the management and coordination of all aspects of AED deployment including site surveys, medical direction, web-based software for record-keeping and AED/CPR training with 150 certified trainers on staff covering all 50 states nationwide. Strategically, Complient fits well with us and was a logical extension of our core business. The acquisition provides additional point-of-sale revenue as well as a recurring revenue opportunity linked to AED sales. Moreover, we believe this will provide us with a significant competitive advantage over our competitors who do not offer comparable programs. We reduced Complient’s non-trainer staff by approximately one third and have substantially completed the integration of its operations into ours as of December 31, 2003. In 2002, Complient generated revenue of approximately $12.6 million from sales of AEDs and related services.

At the end of 2003, we made a strategic decision to discontinue the “no cap” Powerheart CRM placement business model in U.S. hospitals in favor of a capital sale model focused on key distribution relationships such as those we entered into in 2003 with General Electric Medical Systems and the Premier, Inc. buying group. In 2001, we adopted the “no cap” model, whereby we marketed the Powerheart to U.S. hospitals directly, and agreed to place Powerheart units in a customer’s facility, while retaining ownership of the unit, with no upfront capital equipment charge to the customer in exchange for an agreement to purchase our proprietary, disposable defibrillation electrodes monthly or quarterly. We believed this “no cap” model would increase the rate of adoption of our AECD/CRM technology by addressing the capital budget constraints many U.S. hospitals face and would ultimately result in higher levels of recurring revenue from disposable electrodes. While this model did initially increase adoption of the technology, it has failed to produce the expected levels of revenue required to continue with this business model going forward. As a result of this strategic change, we incurred a $2.9 million inventory impairment charge to write down the value of first generation Powerheart and Powerheart CRM in-hospital defibrillators in inventory and at certain customer sites. However, there are a number of customer sites where the technology has been successfully deployed and that are generating sufficient revenue on disposable electrode sales to justify the continuation of this program for those specific customers.

Revenue

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

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Net revenue for the year ended December 31, 2003 increased $11.9 million or 23.9% compared to the year ended December 31, 2002. This increase was primarily attributable to our expanding share of the growing worldwide market for AEDs. Sales of AED products and related accessories and services, which represented 91.2% of our total revenue, increased by $18 million, or 46.6%. The AED product line, led by the Powerheart AED G3, continued to be the principal growth driver and was fueled and complemented by the acquisition of Complient and the addition of AED/CPR training and program management services, which accounted for $1.5 million of sales in 2003, primarily in the period following the acquisition of Complient on October 21, 2003. In addition, we sold $4.2 million of emergency defibrillators, monitors, training equipment and accessories in 2003 compared to $10.2 million in 2002. This decrease of $6 million, or 58.9%, is due to the fact that we dedicated less resources to our patient monitoring line, which is not part of our core AED and hospital defibrillation markets, and has resulted in a strategic change for 2004 to exit the patient monitoring line, along with the training related equipment and supplies product line we acquired from Complient. Sales of Powerheart CRMs and related accessories were $431 for 2003 compared to $240 in 2002, which represents less than 1% of total revenue in both years. Sales of our Powerheart proprietary disposable defibrillation electrodes related to the first generation Powerheart and the Powerheart CRM were $828 for 2003 and $1,038 for 2002. The lack of growth in these in-hospital products contributed to the business model change in late 2003 discussed earlier under “Results of Operations.”

Gross Margin

Cost of goods sold for the year ended December 31, 2003 was $28,543, including an impairment charge of $2,917, compared to $24,737 for the year ended December 31, 2002. Gross margins as a percentage of revenue, including the impairment charge, improved to 53.9% in 2003 from 50.6% in 2002. The improvement was a result of increased sales of higher margin AEDs as a percentage of total revenue from 77.1% in 2002 to 91.2% in 2003, as well as the reduced cost of the AED product line due to significant cost reduction initiatives taken in 2003 and the introduction of our new lower cost version Powerheart AED G3 in August 2003.

Operating Expenses

The following is a summary of operating expenses as a percentage of net revenue:

Sales and marketing expenses increased by 7.5% to $18.6 million for the year ended December 31, 2003, but decreased as a percentage of revenue to 30.0% in 2003 from 34.6% in 2002. The absolute dollar increase is primarily attributable to increased sales and marketing activities related to international sales operations ($1,228), including the establishment of direct sales operations in the U.K and Germany, and increased U.S. sales activities related to the growth of AED related sales ($1,073), including new sales and marketing expenses related to program management and training services pursuant to the acquisition of Complient. This increase is offset by a decrease in the sales and clinical efforts associated with the Powerheart CRM in-hospital product line ($1,129). The decrease in expenses as a percentage of revenue reflects our operating leverage and an increasing mix of revenue flowing through lower-cost indirect distribution channels.

Research and development expenses for the year ended December 31, 2003 decreased 8.5% compared to 2002. In 2003, research and development expenses were 8.9% of revenue, down from 12.1% of revenue in 2002. The absolute dollar decrease is primarily attributable to: (i) the development and completion of the Powerheart CRM project in 2002 which resulted in higher salaries, bonuses and benefits as well as project design, consulting and materials expenses during 2002 and (ii) the fact that we reallocated resources previously focused on preproduction activities included in research and development expenses in 2002, but now focused on Company-wide operations which are included in general and administrative in 2003. The second half of 2003

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compared with the first half of 2003 shows an increase in research and development expenses directly related to more headcount and project costs associated with the development of a standard crash-cart biphasic defibrillator for GEMS pursuant to a development agreement signed in July 2003. An increase in research and development expenditures is expected to continue into 2004 based on the anticipated completion date of this project in the fourth quarter of 2004.

General and administrative expenses increased $3.2 million or 28.3% during the year ended December 31, 2003 compared with 2002. As a percentage of revenue, general and administrative expenses increased to 23.8% in 2003 from 22.9% in 2002. This increase was primarily comprised of new expenses, primarily headcount and facilities, related to the Complient acquisition ($435), our relocation of corporate headquarters and expansion of corporate, manufacturing and R&D facilities in 2003 ($936), increased salaries and benefits ($675), depreciation expense ($449) and the fact that we reallocated resources previously focused on preproduction activities included in research and development expenses in 2002, but now focused on Company-wide operations which are included in general and administrative in 2003 ($585).

Amortization of intangibles was $1,656 for the year ended December 31, 2003, a decrease of $455 or 21.6% from the $2,111 for the year ended December 31, 2002. The decrease is primarily the result of certain identifiable intangible assets becoming fully amortized during 2003 offset by approximately two months of amortization of intangibles related to the Complient acquisition.

Interest

Interest expense for the year ended December 31, 2003 was $6,031 compared to interest expense of $4,452 for 2002. The increase was a result of a full year of interest expense and warrant and debt issuance cost amortization in 2003 associated with the senior secured promissory notes issued in May 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Results of Operations

On September 26, 2001, we acquired Survivalink which enabled us to enter the rapidly growing public access defibrillation market and has contributed significantly and positively to the results of our operations. On November 30, 2001 we acquired a 94.7% ownership interest in Artema which allowed us to gain access to a line of manual emergency defibrillators and patient monitors. In addition to the new product line, we significantly expanded our international distribution channel through which we were able to sell additional Powerheart AEDs and CRMs during 2002. We also established our international sales and marketing headquarters in Copenhagen, Denmark where Artema had certain operations.

In 2001, we also made a fundamental shift in the way we market the Powerheart CRM in the U.S. away from a capital equipment model, where sales of the Powerheart were made to a large distributor Medtronic Physio-Control, to a recurring revenue business model. Under this model, we market the Powerheart directly to U.S. hospitals, and agree to place Powerheart units in a customer’s facility, while retaining ownership of the unit, with no upfront capital equipment charge, in exchange for an agreement to purchase a specific number of our proprietary, disposable defibrillation electrodes monthly or quarterly. We believe this model will increase the rate of adoption of our AECD technology by addressing the capital budget constraints many U.S. hospitals face and will ultimately result in higher levels of recurring revenue from disposable electrodes.

Revenue

Net revenue for the year ended December 31, 2002 increased $39,392 or 369.8% to $50,043 as compared to $10,651 for the year ended December 31, 2001. This increase was primarily attributable to our acquisition of Survivalink which generated $38,572 in Powerheart AED and related accessory sales in 2002 as compared to $6,519 in 2001. This increase in AED revenue was largely due to the timing of the Survivalink acquisition which we owned for approximately 90 days in 2001. In addition, based on our acquisition of Artema, we sold approximately $10.2 million of emergency defibrillators and monitors and related accessories in 2002, as compared to $1.4 million for the one month we owned the company in 2001. Sales of Powerheart CRMs and accessories were $240 for the year ended December 31, 2002, a decrease of $1,122 or 82.4% compared to $1,362 for the comparable period in 2001, as a result of transitioning from a traditional capital equipment distribution model to our strategy of placing Powerheart units at customer locations. Sales of our Powerheart proprietary disposable defibrillation electrodes increased $551 or 113.1% to

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$1,038 for the year ended December 31, 2002, compared to $487 for the comparable period in 2001, as a result of a greater number of Powerheart units in the field generating electrode utilization.

Gross Margin

Cost of goods sold for the year ended December 31, 2002 was $24,737 as compared to $7,975 for the year ended December 31, 2001. Gross margins as a percentage of revenue improved to 50.6% in 2002 from 25.1% in 2001 (including the write-down of first generation Powerheart inventory). The improvement was primarily a result of the increase, as a percentage of total revenue, of the higher margin AEDs and accessories. In addition, the cost of goods sold of the Powerheart AED decreased approximately 19% throughout the year of 2002.

Operating Expenses

Sales and marketing expenses were $17,325 or 34.6% of revenue for the year ended December 31, 2002, as compared to $8,972 or 84.2% of sales in 2001. This increase is attributable to absorbing a full year of sales expenses (as compared to three months in 2001) including wages, commissions, travel and related expenses ($8,701), associated with our U.S. direct AED sales force, and the expansion of this sales force from 17 representatives at the end of 2001 to 55 at the end of 2002.

Research and development expenses for the year ended December 31, 2002 were $6,053, a decrease of $2,522 or 29.4% compared to $8,575 for 2001. This decrease is attributable to the completion of the Powerheart CRM project which resulted in lower salaries, bonuses and benefits ($458) associated with headcount reductions and reductions in project design, consulting and materials expenses ($1,861). In addition, we recorded the recovery of a previously written off note receivable from HeartSine Technologies, a privately held research and development firm ($236).

General and administrative expenses were $11,474 for the year ended December 31, 2002, an increase of $4,539 or 65.5% over the $6,935 for the year ended December 31, 2001. This increase was primarily comprised of increased patent related legal expenses ($1,702), and increased salaries and benefits ($698), travel ($263), insurance ($574) and depreciation expense ($539) associated with the full year integration of the Survivalink and Artema acquisitions.

Amortization of goodwill and other intangibles was $2,111 for the year ended December 31, 2002, an increase of $371 or 21.3% from the $1,740 for the year ended December 31, 2001. The increase resulted primarily from a full year of amortization of intangibles from the Survivalink ($1,570) and Artema ($185) acquisitions. These increases were offset by the discontinuation of goodwill amortization as of December 31, 2001 in accordance with SFAS No. 142.

Interest

Interest expense for the year ended December 31, 2002 was $4,452 compared to interest expense of $594 for the same period in 2001. The increase was primarily attributable to interest expense relating to the Survivalink notes ($1,134) and interest expense and warrant and debt issuance cost amortization associated with the Senior Debt issued in May of 2002 ($3,207).

Liquidity and Capital Resources

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The increase in our current ratio and working capital and the decrease in our cash and cash equivalents are primarily due to the increase in accounts receivable and inventories resulting from our market share and revenue growth in 2003.

At December 31, 2003, our days sales outstanding on accounts receivable (“DSO”) was approximately 105 days compared to approximately 70 days at December 31, 2002. The increase in our DSO is primarily attributable to an increasing mix of revenue flowing through indirect distribution channels which typically have longer payment terms. We expect our DSO in 2004 to average around 90 days and expect to move towards that level in the first two quarters of 2004.

In February 2004, we secured a $5 million line of credit with Silicon Valley Bank. The line of credit will be used to provide additional working capital, as needed, to fund our continued growth. This 24-month facility is collateralized by accounts receivable, inventory and cash and cash equivalents, has an interest rate of the bank’s prime rate plus .75% (with a floor of 5%) payable monthly, and requires us to maintain certain financial covenants.

From inception, our sources of funding for operations and mergers and acquisition activity were derived from placements of debt and equity securities. In 2001, we raised approximately $37 million in a series of private equity placements and through the exercise of outstanding options and warrants. In May 2002, we entered into a Senior Note and Warrant Purchase Agreement with investors pursuant to which the investors loaned us $50 million. We in turn repaid the $26,468 plus accrued interest in senior promissory notes relating to the Survivalink acquisition. In September 2003, we raised $8.4 million in a private equity placement of 2,233,334 shares of our common stock at $3.75 per share to a small group of institutional and accredited investors. In connection with this offering, we also issued 223,333 five-year warrants with an exercise price of $5.00 per share. The proceeds from this offering will fund the acceleration of current product development projects associated with the recently announced partnership with GEMS and for working capital for future strategic initiatives.

In March 2004, we amended the Senior Note and Warrant Agreement in order to ease certain financial covenants into 2005 to reflect our actual and expected financial results. In exchange for these modifications, we issued the note holders 500,000 additional warrants to purchase shares of common stock at $3.95 per share.

From inception through December 31, 2003, we have incurred losses of approximately $106 million. Recovery of the Company’s assets is dependent upon future events, the outcome of which is indeterminable. Additionally, transition to profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

Cash used by operating activities for the year ended December 31, 2003 decreased by $4,434 or 21.3%, to $16,347 from $20,781 for the year ended December 31, 2002. This decrease was primarily attributable to a $3,734 or 34.5% decrease in our operating loss year to year including the non-cash impairment charge in 2003.

Cash provided by investing activities for the year ended December 31, 2003 increased by $312 to $219 in 2003 compared to cash used by investing activities in 2002 of $93. This increase was primarily attributable to the refund of cash invested in MRL of $3,001 offset by higher property and equipment expenditures and the Lifetec and Complient acquisitions and related costs in 2003. Property and equipment purchases increased in 2003 primarily due to additional leasehold improvements for our new corporate headquarters in Irvine, CA, our new R&D facility in Lake Forest, CA and our expanded manufacturing facility in Minnetonka, MN. Some of these leasehold improvements have been reimbursed to us by our landlords and will be accounted for as credits to rent expense over the life of the related leases.

Cash provided by financing activities for the year ended December 31, 2003 decreased by $10,960 or 53.5% to $9,509 in 2003 from $20,469 in 2002. This decrease was primarily due to the net proceeds of $20,746 from the senior secured promissory notes issued, after repayment of the Survivalink notes, in 2002 offset by the net proceeds received in 2003 for the private equity placement of $8,331 and an increase in proceeds from the exercises of stock options year to year of $1,338.

Based on meeting our internal sales growth targets, we believe that our current cash balances, combined with net cash that we expect to generate from operations and our unused line of credit of $5 million, will sustain our ongoing operations for at least the next twelve months. In the event that we require additional cash to support our operations during the next twelve months, we will attempt to raise the required capital through either debt or equity arrangements. We cannot provide any assurance that the required capital will be available on acceptable terms, if at all, or that any financing activity will not be dilutive to our current stockholders. If we are not able to raise additional funds, we may be required to significantly curtail our operations and this would have an adverse effect on our financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements other than non-cancelable operating leases entered into in the ordinary course of business. For liquidity purposes, we choose to lease our facilities, automobiles, and certain equipment instead of purchasing them.

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Contractual Obligations and Other Commercial Commitments

We had no material commitments for capital expenditures as of December 31, 2003.

The following table presents our expected cash requirements for contractual obligations outstanding as of December 31, 2003:

Income Taxes

As of December 31, 2003, the Company has research and experimentation credit carry forwards for federal and state purposes of approximately $3 million and $1 million, respectively. These credits begin to expire in 2006 for federal purposes and carry forward indefinety for California state purposes. The Company has capital loss carry forwards of approximately $1 million for both federal and state purposes which begin to expire in 2004 for federal purposes and carry forward indefinately for state purposes. The Company also has approximately $134 million and $74 million, respectively, of federal and state net operating loss carry forwards which will begin to expire in 2006 and 2005, respectively. The utilization of net operating loss and tax credit carry forwards may be limited under the provisions of Internal Revenue Code Sections 382 and 1503 and similar state provisions. The limitations could result in the expiration of our net operating loss carry forwards and research and experimentation credit carry forwards before full utilization.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses for each period.

The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

Valuation of Accounts Receivable

We maintain an allowance for uncollectible accounts receivable to estimate the risk of extending credit to customers. The allowance is estimated based on customer compliance with credit terms, the financial condition of the customer, and collection history, where applicable. Additional allowances could be required if the financial condition of our customers were to be impaired beyond our estimates.

Valuation of Inventory

Inventory is valued at the lower of cost (estimated using the first-in, first-out method) or market. We periodically evaluate the carrying value of inventories and maintain an allowance for obsolescence to adjust the carrying value, as necessary, to the lower of cost or market. The allowance is based on physical and technical functionality as well as other factors affecting the recoverability of the asset through future sales. Unfavorable changes in estimates of obsolete inventory would result in an increase in the allowance and a decrease in gross profit.

Goodwill and Other Intangibles

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which became effective January 1, 2002, goodwill and other intangible assets with indeterminate lives are no longer subject to amortization but are tested for impairment

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annually or whenever events or changes in circumstances indicate that the asset might be impaired. Other intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Should an impairment in goodwill be determined, it could result in a material charge to operations (see Note 6 and Note 9 of the consolidated financial statements for further discussion on intangibles and amortization periods).

Valuation of Long-Lived Assets

In accordance with SFAS No. 144, long-lived assets and intangible assets with determinate lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the asset with the estimated undiscounted future cash flows associated with the use of the asset and its eventual disposition. Should the review indicate that the asset is not recoverable, the Company’s carrying value of the asset would be reduced to its estimated fair value, which is generally measured by future discounted cash flows. In our estimate, no provision for impairment is currently required on any of our long-lived assets.

Revenue Recognition

We record revenue in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB 101 requires that product sales be recognized when there is persuasive evidence of an arrangement which states a fixed and determinable price and terms, delivery of the product has occurred in accordance with the terms of the sale, and collectibility of the sale is reasonably assured. We generally record product sales when we have received a valid customer purchase order for product at a stated price, the customer’s credit is approved, and we have shipped the product to the customer whereby title and risk have passed to the customer. Some of our customers are distributors which sell goods to third party end users. We are not contractually obligated to repurchase any inventory from distributors or end user customers. For certain identified distributors where collection may be contingent on the distributor’s resale, revenue recognition is deferred and recognized on a “sell through” basis. Training and AED service revenue is deferred and recognized at the time the training occurs. AED program management services pursuant to agreements that existed with Complient customers are deferred and amortized straight-line over the related contract period. License fees are generally deferred and recognized systematically over the term of the license agreement.

Product Warranty

Products sold are generally covered by a warranty against defects in material and workmanship for a period of one to five year. We accrue a warranty reserve to estimate the risk of incurring costs to provide warranty services. The accrual is based on our historical experience and our expectation of future conditions. An increase in warranty claims or in the costs associated with servicing those claims would result in an increase in the accrual and a decrease in gross profit.

Litigation and Others Contingencies

We regularly evaluate our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes. We are not presently affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on our results of operations or financial position. As additional information about current or future litigation or other contingencies becomes available, we will assess whether such information warrants the recording of additional expense relating to these contingencies. To be recorded as expense, a loss contingency must generally be both probable and measurable. If a loss contingency is material but is not both probable and estimable, we will disclose it in notes to the financial statements.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities-an interpretation of ARB No. 51. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, and (ii) the equity investors lack an essential characteristic of a controlling

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financial interest. It applies to all variable interest entities established after January 31, 2003 and is effective July 1, 2003 for any variable interest entity acquired prior to February 1, 2003. The application of FIN 46 did not have a significant impact on the Company’s consolidated financial statements.

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

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

Interest Rate and Market Risk. We do not use derivative financial instruments in our investment portfolio. We are averse to principal loss and try to ensure the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. We attempt to mitigate default risk by investing in only the safest and highest credit quality securities. At December 31, 2003, we invested our available cash in money market securities of high credit quality financial institutions.

Interest expense on our existing long-term debt commitments is based on a fixed interest rate and therefore it is unaffected by fluctuations in interest rates.

Foreign Currency Exchange Rate Risk. The majority of our international sales are made through our international sales office in Copenhagen primarily in U.S. dollars. Some sales to the U.K. are in pounds and to Germany in Euros, and thus may be adversely affected by fluctuations in currency exchange rates. Additionally, fluctuations in currency exchange rates may adversely affect foreign demand for our products by increasing the price of our products in the currency of the countries in which the products are sold. Our operations outside of the United States are maintained in their local currency. All assets and liabilities of our international subsidiaries are translated to U.S. dollars at year-end exchange rates in effect during the year. Translation adjustments arising from the use of differing exchange rates are included in accumulated other comprehensive income in stockholders equity. Gains and losses on foreign currency transactions are included in operations and were not material in any period.

For an index to the financial statements and supplementary data, see Item 15(a).

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REPORT OF INDEPENDENT AUDITOR

The Board of Directors and Stockholders

Cardiac Science, Inc.

Irvine, California

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Cardiac Science, Inc. and Subsidiaries (the “Company”) at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets.” Accordingly effective January 1, 2002, the Company ceased amortization of its goodwill.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has suffered recurring losses from operations which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Orange County, California

February 27, 2004 (except for Note 23, as to which the date is March 15, 2004)

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CARDIAC SCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)