We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year and the primary factors that accounted for those changes. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our consolidated financial statements as of September 28, 2008 and for the year then ended and the notes accompanying those consolidated financial statements.

Executive Overview

We are committed to developing technologies that help advance the practice of resuscitation. With products for pacing, defibrillation, circulation, ventilation, and fluid resuscitation, we provide a comprehensive set of technologies that help clinicians, EMS professionals, and lay rescuers resuscitate sudden cardiac arrest or trauma

victims. We also design and market software that automates the documentation and management of both clinical and non-clinical information.

We believe our recent successes continue to be attributable to multiple factors which include, in no particular order, (1) new defibrillator products,
(2) investments made in new technologies, (3) the breadth of product offerings and differentiated features, (4) bolstering our distribution channels,
(5) management changes in the Hospital and International markets, and
(6) benefits resulting from competitors' regulatory issues.

We ended fiscal 2008 with approximately $71 million of cash and investments and no long-term debt. We completed fiscal 2008 with record revenues of approximately $398 million. Our sales growth was strong in all major areas of our business. The growth was mainly due to the increased volume of professional defibrillator platform sales which include the M Series product, E Series and R Series. Other contributors included increased volume of AEDs, the LifeVest product, data management products, and other resuscitation equipment including Military and AutoPulse products.

Results of Operations

Fiscal 2008 Compared to Fiscal 2007

Sales

Our net sales increased 29% to $398 million in fiscal 2008 compared to $309.5 million in the prior fiscal year.

Net sales by customer/product categories were as follows:

                                                       2008           2007         % Change
(000's omitted)                                      ---------      ---------      --------
Devices and Accessories to the Hospital
Market-North America                                 $ 117,106      $  85,275            37 %
Devices, Accessories, and Data Management
Software to the Pre-hospital Market-North
America                                                161,667        131,233            23 %
Other Products to North America                         22,633         20,881             8 %
                                                     - -------      - -------      -------- -
Subtotal North America                                 301,406        237,389            27 %
All Products to the International Market                96,612         72,062            34 %
                                                     - -------      - -------      -------- -
Total Sales                                          $ 398,018      $ 309,451            29 %
                                                     - -------      - -------      -------- -

Our sales to the North American Hospital market increased $31.8 million, or 37%, in 2008. The increase of sales to the North American Hospital market was primarily due to increased volume of U.S. military sales of approximately $14 million, and increased volume of our professional defibrillator products to other customers of approximately $13 million, including the M Series and R Series products. The remaining increase of approximately $5 million was due to the volume of AED sales to the North American Hospital market.

Our sales to the North American Pre-hospital market increased $30.4 million, or 23%, in 2008. The increase in Pre-hospital sales was due to increased volume of the LifeVest product of approximately $10 million, increased volume of professional defibrillators of approximately $9 million, data management software products of approximately $7 million and, to a lesser extent, increased volume of AEDs and AutoPulse products.

International sales increased by $24.6 million, or 34%, to $96.6 million in 2008 compared to $72.1 million in 2007. The increase in International sales was driven by increased volume of professional defibrillator sales of $15 million. This growth was primarily a function of the continued success of our M Series product, as our newer platforms build momentum. Other contributors to the increase included increased volume of AEDs of

approximately $8 million, and increased volume of AutoPulse. Included in these increases are approximately $4 million of benefit from foreign exchange fluctuations. Geographical areas where sales experienced significant growth included Latin America and Eastern Europe, both with growth of approximately $4 million; China, with growth of approximately $2.4 million; and France and Germany, both with growth of approximately $2 million.

Foreign exchange rates have become more volatile. The recent, sudden strengthening of the U.S. dollar potentially impacts us in two ways. For sales to international distributors which are denominated in U.S. dollars, our goods may appear more expensive. Our foreign subsidiary sales which are denominated in local currency may translate into fewer U.S. dollar revenues. Although it is difficult to predict how foreign exchange rates will fluctuate prospectively, this sudden volatility of the U.S. dollar may have a significantly greater impact on future results than it has historically.

Total sales of the AutoPulse product to all our markets increased by approximately $3.1 million, or 21%, to $17.8 million in fiscal 2008, compared to $14.7 million for fiscal 2007. We believe the outlook for the AutoPulse continues to remain strong.

Gross Margins

Cost of sales consists primarily of material, labor, overhead, and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposable electrodes. These products are primarily sold to the Hospital, Pre-hospital, and International markets. We sell data collection software, mainly to the Pre-hospital market. Our consolidated gross margin may fluctuate considerably depending on unit volume levels, mix of product and customer class activity levels, and overall market conditions.

Overall, gross margins for fiscal 2008 decreased to approximately 53% compared to 54.5% in fiscal 2007. A low-margin California order, which occurred in the first quarter of fiscal 2008, accounts for approximately 1 percentage point of the decrease in gross margin. To a lesser extent, the margin was also unfavorably affected by increased International sales, which carry lower-than-average margins. Offsetting the decrease in the overall gross margin was the favorable effect of the LifeVest product which carries higher-than-average margin. Other than the impact of the California order, each of the remaining factors causing the fluctuation in gross margin represents less than a percentage point of our overall gross margin.

Backlog

We ended fiscal 2008 with a backlog of approximately $7.9 million. Our backlog did not grow in the fourth quarter as it typically has, which we believe is indicative of the current economic environment which may have caused capital spending to be constrained. We believe we need to maintain a permanent backlog level of orders that will not be shipped at the end of each quarter. We believe this will help us improve our efficiency, lower our costs and improve our profitability as it will make it less likely that we will be required to incur substantial additional costs at the end of the quarter. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Costs and Expenses



Operating expenses were as follows:



                                                % of                  % of      Change
                                      2008      Sales       2007      Sales       %
       (000's omitted)              ---------   -----     ---------   -----     ------
       Selling and marketing        $ 111,835      28 %   $  91,855      30 %       22 %
       General and administrative      30,681       8 %      26,203       8 %       17 %
       Research and development        32,398       8 %      28,686       9 %       13 %
                                    - -------   ----- -   - -------   ----- -   ------ -
       Total expenses               $ 174,914      44 %   $ 146,744      47 %       19 %
                                    - -------   ----- -   - -------   ----- -   ------ -

Selling and marketing expenses increased approximately $20 million for the year ended September 28, 2008 compared to the same period last year. Approximately $14 million of the increase related to increased personnel-related costs, including salaries, commissions and stock-based compensation for selling and marketing employees. The remaining increase primarily relates to increases in selling and marketing personnel travel and tradeshow expenses. Selling and marketing expenses decreased as a percentage of revenues as we have been able to achieve greater efficiency with our sales organization and marketing efforts as our revenue has grown.

General and administrative expenses increased approximately $4.5 million for the year ended September 28, 2008 compared to the previous year. Approximately $3 million of the increase related to increased personnel-related costs including salaries and stock-based compensation for general and administrative employees.

Research and development expenses increased approximately $3.7 million for the year ended September 28, 2008 compared to fiscal 2007. Approximately $2.4 million of the increase related to increased personnel-related costs including salaries and stock-based compensation for research and development employees. Other contributors include increased clinical trial work related to the AutoPulse and LifeVest.

Investment and Other Income (Expense)

Investment and other income (expense) decreased to ($258,000) in fiscal 2008, as compared to $3.6 million in the previous year. This decrease reflected foreign exchange losses on marking our foreign denominated intercompany receivable balances to the spot rate at the end of the year, lower average interest rates and a $200,000 reserve on certain investments in mortgage-backed and auction rate securities.

Income Taxes

Our effective tax rate for fiscal 2008 decreased to 34% compared to 35% in fiscal 2007. The decreased rate resulted from an increase in the Section 199 deduction (production deduction) benefit from 3% in fiscal 2007 to 6% in fiscal 2008 along with a decision made in the fourth quarter of fiscal 2008 not to provide U.S. taxes on undistributed earnings of our foreign subsidiaries. These benefits were partially offset by the expiration of a research and development credit at December 31, 2007, allowing only one quarter of benefit in fiscal 2008. Subsequent to our fiscal year end, Congress has extended the research and development credit through December 31, 2009. The benefit from this Congressional action will be recognized in fiscal 2009.

Effective October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). As a result of the implementation of FIN 48, we recognized approximately $374,000 of increase in our liability for unrecognized tax benefits. All of this increase was reflected as a reduction to the October 1, 2007 balance of retained earnings. At the adoption date of October 1, 2007, we had $1.3 million of gross unrecognized tax benefits, which, if recognized, would affect goodwill and our effective tax rate. At September 28, 2008, we had $3.3 million of gross unrecognized tax benefits, all of which, if recognized, would affect goodwill and our effective tax rate.

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

We do not currently have any income tax audits in progress and, therefore, foresee little change in our current reserve for uncertain tax positions in the next twelve months. Our historical practice is to recognize interest and penalties related to income tax matters in income tax expense. We had $315,000 accrued for interest and penalties at the time of the adoption of FIN 48 and $480,000 at September 28, 2008.

We currently estimate that our fiscal 2009 effective tax rate will be approximately 35%.

Fiscal 2007 Compared to Fiscal 2006

Sales

Our net sales increased 21% to $309.5 million in fiscal 2007 compared to $255.6 million in the prior year.

Net sales by customer/product categories were as follows:

                                                       2007           2006         % Change
(000's omitted)                                      ---------      ---------      --------
Devices and Accessories to the Hospital
Market-North America                                 $  85,275      $  78,093             9 %
Devices, Accessories, and Data Management
Software to the Pre-hospital Market-North
America                                                131,233        101,675            29 %
Other Products to North America                         20,881         19,336             8 %
                                                     - -------      - -------      -------- -
Subtotal North America                                 237,389        199,104            19 %
All Products to the International Market                72,062         56,529            27 %
                                                     - -------      - -------      -------- -
Total Sales                                          $ 309,451      $ 255,633            21 %
                                                     - -------      - -------      -------- -

Our sales to the North American Hospital market increased $7.2 million, or 9%, in 2007. The increase of sales to the North American Hospital market was primarily due to increased volume of our professional defibrillator products of approximately $11 million, including the M Series and the new R Series product and a $3 million higher volume of AED sales. This increase was, offset by a lower volume of U.S. military sales for 2007 of approximately $8 million as compared to 2006.

Our sales to the North American Pre-hospital market increased $29.6 million, or 29%, in 2007. North American Pre-hospital results also include the results of ZOLL Lifecor (the assets of which were acquired in April 2006) for a full twelve months in fiscal 2007 as opposed to only six months in fiscal 2006. Other factors contributing to the increase include increased volume of AEDs of approximately $8 million and data management software products of approximately $6 million in the Pre-hospital market and, to a lesser extent, increased volume of professional defibrillators and AutoPulse products.

International sales increased by $15.5 million, or 27%, to $72.1 million in 2007 compared to $56.5 million in 2006. The increase in International sales was driven by increased volume of professional defibrillator sales. The growth was primarily a function of the continued success of our M Series product, as our newer platforms are still relatively early in their sales cycles. Other contributors to the increase included increased volume of AutoPulse and AEDs of approximately $2.3 million and $1.5 million, respectively. Geographical areas where sales experienced significant growth included the United Kingdom, approximately $2.1 million; Russia and Germany, approximately $1.5 million each; and Eastern Europe, Middle East, and Netherlands, approximately $1.4 million each.

Total sales of the AutoPulse product to all our markets increased by approximately $4.7 million, or 47%, to $14.7 million, compared to $10.0 million for fiscal 2006.

Gross Margins

Overall, gross margins for fiscal 2007 remained relatively flat at approximately 54.5% compared to fiscal 2006. Gross margins were favorably affected in fiscal 2007 by the mix of the results of ZOLL Lifecor (which was acquired in April 2006), and an increase in sales of data management software, which carries higher-than-average margins. The favorable impact was offset by increased International sales, which carry lower-than-average margins, and sales of our AutoPulse product, which currently carries a lower-than-average margin due to current low production volumes. Each of the factors describing the fluctuation in gross margin represents less than a percentage point of our overall gross margin.

Backlog

We ended fiscal 2007 with a backlog of approximately $24.3 million, which includes approximately $8 million related to our California Homeland Security order, as we typically build a backlog in the fourth quarter. All of this backlog shipped during fiscal 2008. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Costs and Expenses



Operating expenses were as follows:



                                                % of                  % of      Change
                                      2007      Sales       2006      Sales       %
       (000's omitted)              ---------   -----     ---------   -----     ------
       Selling and marketing        $  91,855      30 %   $  78,366      31 %       17 %
       General and administrative      26,203       8 %      22,417       9 %       17 %
       Research and development        28,686       9 %      23,394       9 %       23 %
                                    - -------   ----- -   - -------   ----- -   ------ -
       Total expenses               $ 146,744      47 %   $ 124,177      49 %       18 %
                                    - -------   ----- -   - -------   ----- -   ------ -

Selling and marketing expenses increased approximately $13.5 million for the year ended September 30, 2007 compared to the previous year. Approximately $6.3 million of the increase related to increased personnel-related costs, including salaries, commissions and stock-based compensation for selling and marketing employees. The inclusion of expenses related to the ZOLL Lifecor business, following the April 2006 asset acquisition, accounted for approximately $4.6 million of this increase as these expenses were included for only six months of the prior year. Selling and marketing expenses decreased as a percentage of revenues as we have been able to achieve greater efficiency with our related sales organization and marketing efforts as our revenue has grown.

General and administrative expenses increased approximately $3.8 million for the year ended September 30, 2007 compared to the previous year. The inclusion of expenses related to the ZOLL Lifecor business, following the April 2006 asset acquisition, accounted for approximately $2.2 million of this increase as these expenses were included for only six months of the prior year. Other contributors included $1.4 million of increased personnel-related costs including salaries and stock-based compensation for general and administrative employees.

Research and development expenses increased approximately $5.3 million for the year ended September 30, 2007 compared to the previous year. Approximately $2.9 million of the increase related to increased clinical trial work as we initiated a new clinical trial related to the AutoPulse. Other contributors included $2.0 million of increased personnel-related costs including salaries and stock-based compensation for research and development employees. The inclusion of expenses related to the business of ZOLL Lifecor also accounted for approximately $700,000 of this increase as these expenses were included for only six months of the prior year.

Investment and Other Income

Investment and other income increased to $3.6 million in fiscal 2007, as compared to $2.1 million in the previous year. This increase was due to the increase in interest earned as a result of increased cash balances maintained for a majority of the fiscal year and increased foreign currency exchange gains compared to the prior year.

Income Taxes

Our effective tax rate for fiscal 2007 and 2006 was a provision of 35%. The 2007 rate was negatively affected by the elimination of the deduction for extraterritorial income, which was available only for the first quarter of fiscal 2007. It was positively affected by the retroactive reinstatement of the research and development

credit in fiscal 2007 as part of the Tax Relief and Health Care Act of 2006. This Act not only provided us with a full fiscal year benefit of the research and development credit in 2007, it also allowed us to book the tax credits related to R&D expenses incurred in our last three fiscal quarters of 2006.

Financial Condition

Liquidity and Capital Resources

Our overall financial condition continues to remain strong. Our cash, cash equivalents, and short-term and long-term investments at September 28, 2008 totaled $71.1 million compared with $57.4 million at September 30, 2007. We continue to have no long-term debt.

As we have previously discussed, with the January 2007 suspension of U.S. shipments from the Medtronic Physio-Control unit, we have used cash, and it is possible we will use additional cash to assist customers who transition to our products with various financing arrangements.

Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid marketable securities on hand, along with cash to be generated by future operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future.

Sources and Uses of Cash



To assist with the discussion, the following table presents the abbreviated cash
flows for the years ended September 28, 2008, September 30, 2007, and October 1,
2006:



                                                   2008          2007          2006
   (000's omitted)                               ---------     ---------     ---------
   Net cash provided by operating activities     $  35,378     $   5,667     $  28,467
   Cash used in investing activities               (42,588 )     (31,153 )     (23,964 )
   Cash provided by financing activities             7,336        18,948         1,689
   Effect of foreign exchange rates on cash         (1,082 )       1,338           369
                                                 - ------- -   - ------- -   - ------- -
   Net change in cash and cash equivalents            (956 )      (5,200 )       6,561
                                                 - ------- -   - ------- -   - ------- -
   Cash and cash equivalents-beginning of year      37,631        42,831        36,270
                                                 - ------- -   - ------- -   - ------- -
   Cash and cash equivalents-end of year         $  36,675     $  37,631     $  42,831
                                                 - ------- -   - ------- -   - ------- -

Operating Activities

Cash provided by operating activities increased $29.7 million in fiscal 2008 to $35.4 million compared to $5.7 million in 2007. This increase in cash from operating activities was primarily attributable to a decrease in cash required for inventory of approximately $22 million compared to the prior year. The increase in inventory purchases in fiscal 2007 relative to fiscal 2006 includes the impact of building inventory to support higher levels of business, including approximately $5 million related to our California Homeland Security order, new product offerings, such as the R Series, additional order activity related to the continued suspension of U.S. shipments by our largest competitor, and evaluation units. Other factors having a positive effect on 2008 operating activities include increased collections of accounts receivable compared to the prior year and an increase in net income of $6.8 million. This increase was partially offset by the timing of payments of accounts payable and accrued expenses.

Investing Activities

Cash used in investing activities increased approximately $11.4 million in fiscal 2008 to $42.6 million as compared to $31.2 million in the prior year. This increasing use of cash was primarily attributable to the increase in net purchases of marketable securities during the fiscal year of approximately $15 million. This increase in investing activities was partially offset by the decrease in acquisition-related payments in fiscal 2008 as the assets of BIO-Key International and Radiant Corporation were purchased in fiscal 2007. Property and equipment additions for fiscal 2008 totaled approximately $15 million, which is consistent with prior year additions. We anticipate additions for fiscal 2009 to be consistent with fiscal 2008.

Financing Activities

Cash provided by financing activities was approximately $7.3 million for fiscal 2008 in comparison to approximately $18.9 million in the previous year. The change reflects a lower number of stock options exercised during 2008 (approximately 349,000 shares in 2008 and 989,000 shares in 2007) at a higher weighted-average exercise price per share ($15.66 in 2008 and $14.60 in 2007). Similarly, the excess tax benefit from the exercise of stock options decreased from $4.5 million in the previous year to $1.9 million for fiscal 2008, due to the lower number of stock options exercised during 2008.

Investments

In March 2004, we acquired substantially all the assets of Infusion Dynamics. Under the terms of the acquisition, we are obligated to make additional earn-out payments through 2011 ("contingencies") based on performance of the acquired business. Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. As these contingencies are resolved and the consideration is distributable, we . . .