Form 10-Q

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the three month period from April 3, 2006 to July 2, 2006.

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to .

Commission file number 0-20225

ZOLL MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)


Massachusetts		04-2711626
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification number)

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

(978) 421-9655

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

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


Class		Outstanding at August 1, 2006
Common Stock, $0.02 par value		9,656,391

This document consists of 34 pages.

ZOLL MEDICAL CORPORATION

FORM 10-Q

INDEX


		Page No.
PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements:

	Consolidated Balance Sheets (unaudited) July 2, 2006 and October 2, 2005	3

	Consolidated Statements of Operations (unaudited) Three and Nine Months Ended July 2, 2006 and July 3, 2005	4

	Consolidated Statements of Cash Flows (unaudited) Nine Months Ended July 2, 2006 and July 3, 2005	5

	Notes to Consolidated Financial Statements (unaudited)	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	31

ITEM 4.	Controls and Procedures	32

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	33

ITEM 1A.	Risk Factors	33

ITEM 5.	Other Information	33

ITEM 6.	Exhibits	33

	Signatures	34

Forward-Looking Information

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZOLL MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except per share data)

(Unaudited)


	July 2, 2006			October 2, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	39,193		$	36,270
Short-term investments		18,158			14,553
Accounts receivable, less allowance of $6,970 at July 2, 2006, and $5,555 at October 2, 2005		50,043			47,733
Inventories:
Raw materials		17,949			15,993
Work-in-process		5,124			6,848
Finished goods		14,005			15,796

		37,078			38,637
Prepaid expenses and other current assets		7,895			8,055

Total current assets		152,367			145,248
Property and equipment, at cost:
Land, building and building improvements		1,170			1,159
Machinery and equipment		53,821			43,938
Construction in progress		4,992			3,796
Tooling		11,414			10,415
Furniture and fixtures		3,114			2,981
Leasehold improvements		5,149			4,475

		79,660			66,764
Less: accumulated depreciation		52,640			43,272

Net property and equipment		27,020			23,492

Investments		1,310			1,250
Notes receivable		868			2,443
Goodwill		23,602			21,594
Patents, net		13,612			12,207
Deferred tax asset		3,124			3,124
Intangibles and other assets, net		11,784			10,178

	$	233,687		$	219,536

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,550		$	9,020
Deferred revenue		11,131			9,332
Accrued expenses and other liabilities		22,278			19,756

Total current liabilities		45,959			38,108
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, authorized 1,000 shares, none issued and outstanding Common stock, $0.02 par value, authorized 19,000 shares, 9,656 and 9,599 issued and outstanding at July 2, 2006 and October 2, 2005, respectively		193			192
Capital in excess of par value		116,282			115,515
Accumulated other comprehensive loss		(3,316	)		(3,104	)
Retained earnings		74,569			68,825

Total stockholders’ equity		187,728			181,428

	$	233,687		$	219,536

See notes to unaudited consolidated financial statements.

ZOLL MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(000’s omitted, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	July 2, 2006		July 3, 2005		July 2, 2006		July 3, 2005
Net sales	$	64,267	$	51,093	$	176,560	$	154,213
Cost of goods sold		27,978		21,660		77,649		66,680

Gross profit		36,289		29,433		98,911		87,533
Expenses:
Selling and marketing		20,523		18,826		58,374		57,473
General and administrative		6,383		4,612		16,252		13,509
Research and development		6,050		5,824		16,795		17,472

Total expenses		32,956		29,262		91,421		88,454

Income (loss) from operations		3,333		171		7,490		(921	)
Investment and other income		634		79		1,347		411

Income (loss) before income taxes		3,967		250		8,837		(510	)
Provision (benefit) for income taxes		1,437		118		3,093		(235	)

Net income (loss)	$	2,530	$	132	$	5,744	$	(275	)

Basic earnings (loss) per common share	$	0.26	$	0.01	$	0.60	$	(0.03	)

Weighted average common shares outstanding		9,632		9,576		9,626		9,557
Diluted earnings (loss) per common and common equivalent share	$	0.26	$	0.01	$	0.59	$	(0.03	)

Weighted average common and common equivalent shares outstanding		9,719		9,632		9,704		9,557

See notes to unaudited consolidated financial statements.

ZOLL MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(Unaudited)


	Nine Months Ended
	July 2, 2006			July 3, 2005
OPERATING ACTIVITIES:
Net income (loss)	$	5,744		$	(275	)
Charges not affecting cash:
Depreciation and amortization		8,632			8,148
Writeoff of investment in AED@Home		—			324
Stock-based compensation expense		467			—
Tax benefit from the exercise of stock options		—			106
Unrealized (gain)/loss from hedging activities		—			(18	)
Changes in current assets and liabilities:
Accounts receivable		(1,137	)		10,908
Inventories		1,199			(10,649	)
Prepaid expenses and other current assets		291			256
Accounts payable, deferred revenue and accrued expenses		8,237			(3,352	)

Cash provided by operating activities		23,433			5,448
INVESTING ACTIVITIES:
Purchases of marketable securities		(27,255	)		(2,390	)
Sales of marketable securities		23,650			14,079
Additions to property and equipment		(7,929	)		(5,901	)
Disposals of property and equipment					268
Payments for acquisitions, net of cash acquired		(7,045	)		(8,020	)
Milestone payment related to prior year acquisition		(1,327	)		(405	)
Other assets, net		(1,187	)		(780	)

Cash used for investing activities		(21,093	)		(3,149	)
FINANCING ACTIVITIES:
Exercise of stock options		263			425

Cash provided by financing activities		263			425
Effect of exchange rates on cash and cash equivalents		320			(200	)

Net increase in cash and cash equivalents		2,923			2,524
Cash and cash equivalents at beginning of period		36,270			40,685

Cash and cash equivalents at end of period	$	39,193		$	43,209

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes	$	1,311		$	1,163
Non-cash activity during the period:
Common stock issued at fair value for acquisition of Revivant	$	625		$	8,179
Forgiveness of debt upon acquisition of Lifecor	$	2,729		$	—

See notes to unaudited consolidated financial statements.

ZOLL MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include provisions for returns, bad debts and the estimated lives of fixed assets. Actual results may differ from these estimates. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. The information contained in the interim financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended October 2, 2005 included in its Form 10-K filed with the Securities and Exchange Commission (“SEC”).

2. Segment and Geographic Information

Segment information: The Company operates in a single business segment: the design, manufacture and marketing of a range of non-invasive resuscitation devices and software solutions. These devices and software help healthcare professionals, emergency medical service providers, and first responders diagnose and treat victims of trauma, as well as sudden cardiac arrest. In order to make operating and strategic decisions, ZOLL’s chief executive officer (the “chief operating decision maker”) evaluates revenue performance based on the worldwide revenues of four customer/product categories but, due to shared infrastructures, profitability is based on an enterprise-wide measure. These customer/product categories consist of (1) the sale of resuscitation devices and accessories to the North American hospital market including the military marketplace, (2) the sale of the same items and data collection management software to the North American pre-hospital market, (3) the sale of disposable/other products in North America, and (4) the sale of resuscitation devices, accessories, disposable electrodes and data collection management software to the international market.

Net sales by customer/product categories were as follows:


	Three Months Ended				Nine Months Ended
(000’s omitted)	July 2, 2006		July 3, 2005		July 2, 2006		July 3, 2005
Hospital Market - North America	$	20,742	$	17,367	$	55,046	$	48,188
Pre-hospital Market - North America		23,011		17,032		65,519		52,968
Other - North America		4,925		5,040		14,449		14,734
International Market		15,589		11,654		41,546		38,323

	$	64,267	$	51,093	$	176,560	$	154,213

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

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


	Three Months Ended				Nine Months Ended
(000’s omitted)	July 2, 2006		July 3, 2005		July 2, 2006		July 3, 2005
United States	$	46,749	$	37,875	$	126,395	$	109,542
Foreign		17,518		13,218		50,165		44,671

	$	64,267	$	51,093	$	176,560	$	154,213

No individual foreign country represented 10% or more of our revenues for the three months and nine months ended July 2, 2006 and July 3, 2005.

3. Comprehensive Income

The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards No. 130 (“SFAS 130”) “Reporting Comprehensive Income.” SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Other comprehensive income, as defined, includes all

changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities, foreign currency translation and the changes in fair value of the effective portion of our outstanding cash flow hedge contracts. Total comprehensive income for the three and nine months ended July 2, 2006 and July 3, 2005, was as follows:


	Three Months Ended					Nine Months Ended
(000’s omitted)	July 2, 2006		July 3, 2005			July 2, 2006			July 3, 2005
Net income (loss)	$	2,530	$	132		$	5,744		$	(275	)
Unrealized gain (loss) on available-for-sales securities, net of tax		3		(12	)		94			(72	)
Foreign currency translation adjustment		234		(524	)		(306	)		(1,173	)
Net unrealized gain on cash flow hedges		—		—			—			18

Total comprehensive income (loss)	$	2,767	$	(404	)	$	5,532		$	(1,502	)

4. Stock Option Plans

At July 2, 2006, the Company had two active stock-based compensation plans under which stock-based grants may be issued, and two other stock-based compensation plans under which grants are no longer being made. No further grants are being made under the Company’s 1992 Stock Option Plan (“1992 Plan”) and 1996 Non-Employee Directors’ Stock Option Plan (“1996 Plan”), and option grants remain outstanding under both such plans. The Company’s active plans are the Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”) and the 2006 Non-Employee Director Stock Option Plan (“2006 Plan”).

On November 15, 2005, the Board of Directors authorized, subject to the approval of the stockholders at the 2006 Annual Meeting held on January 25, 2006, (i) an additional 315,000 shares available for issuance (for a total authorized of 1,260,000 shares) pursuant to nonqualified stock options to be granted from time to time under the 2001 Plan, plus 60,000 shares to be issued as restricted Common Stock from time to time under the 2001 Plan; and (ii) the adoption of the 2006 Plan, with 55,000 shares authorized for issuance, to replace the existing 1996 Plan, which expired in April 2006. Both proposals were approved by the Company’s stockholders at the 2006 Annual Meeting.

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

The Company adopted the provisions of Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS 123R”), beginning October 2, 2005, using the modified prospective transition method. SFAS 123R requires the Company to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (a) all share-based payments granted after the effective date under SFAS 123R, and (b) all awards granted under SFAS 123 to employees prior to the effective date that remain unvested on the effective date. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

Prior to October 2, 2005, the Company used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and therefore the Company did not recognize compensation expense in association with options granted at or above the market price of the Company’s Common Stock at the date of grant.

On July 22, 2005, the Company accelerated the vesting of the Company’s outstanding stock options with an exercise price greater than the closing price of the Company’s Common Stock on that date ($26.62). The Company accelerated the vesting to reduce the effects of the adoption of SFAS 123R, which requires companies to recognize stock-based compensation associated with stock options based on the fair value method. Had the Company not taken this action, $3.6 million of stock-based compensation charges would have been recorded in the statement of operations through fiscal 2008 (approximately $2 million in fiscal 2006; approximately $1 million in fiscal 2007; and approximately $600,000 in fiscal 2008).

As a result of adopting SFAS 123(R), stock-based compensation charges during the three and nine months ended July 2, 2006 totaled approximately $207,000 and $475,000, respectively. As a result of adopting SFAS 123(R), earnings before income taxes for the three and nine months ended July 2, 2006 decreased by $190,000 and $436,000, respectively. Net earnings decreased by $115,000 and $262,000 for the three and nine month period ended July 2, 2006, respectively, or $0.01 and $0.03 per diluted share, respectively. These results reflect stock compensation expense of $190,000 and tax benefits of $76,000 for the three month period, and stock compensation expense of $436,000 and tax benefits of $175,000 for the nine month period. Total stock-based compensation expense capitalized as part of inventory for the three and nine month period was approximately $17,000 and $39,000, respectively.

The following table presents a reconciliation of reported net income (loss) and per share information to pro forma net loss and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation last year. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model:


(000’s omitted, except per share data)	Three Months Ended July 3, 2005			Nine Months Ended July 3, 2005
Net income (loss)-as reported	$	132		$	(275	)
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		(591	)		(1,858	)

Net loss-pro forma	$	(459	)	$	(2,133	)

Earnings (loss) per share:
Basic – as reported	$	0.01		$	(0.03	)

Basic – pro forma	$	(0.05	)	$	(0.22	)

Diluted – as reported	$	0.01		$	(0.03	)

Diluted – pro forma	$	(0.05	)	$	(0.22	)

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the nine months ended July 2, 2006 and July 3, 2005:


	2006		2005
Dividend yield	0	%	0	%
Expected volatility	47.8	%	66.4	%
Risk-free interest rate	4.51	%	3.82	%
Expected lives (years)	6.25		5.00

Historical Company information was the primary basis for the expected volatility assumption. The Company was unable to use historical information to estimate the expected lives and therefore used the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 107. Forfeiture rates used for executives and non-executives, based on historical information, ranged from 5% to 25%.

Changes in outstanding stock options for the nine months ended July 2, 2006, were as follows:


	Number of Stock Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value ($000’s)
Outstanding at October 2, 2005	1,262,952		$	33.77
Granted	211,000			23.29
Exercised	(14,582	)		18.08
Forfeited	(92,923	)		31.72

Outstanding at July 2, 2006	1,366,447		$	30.39	6.17	$	5,838

Exercisable at July 2, 2006	1,122,041		$	31.88	5.47	$	3,596

Vested and expected to vest at July 2, 2006	1,266,205		$	30.35	6.26	$	5,589

At July 2, 2006, there was approximately $3.1 million of unrecognized compensation cost related to non-vested awards, which we expect to recognize over a weighted-average period of 3.34 years.

The weighted-average grant-date fair value of options granted (estimated using the Black-Scholes option-pricing model) was $12.22 for the nine months ended July 2, 2006, and $17.39 for the nine months ended July 3, 2005. Total intrinsic value of options exercised for the nine months ended July 2, 2006 and July 3, 2005 was $154,000 and $504,000, respectively. It is the Company’s policy to issue new shares upon the exercise of options.

The following table summarizes the status of unvested restricted stock awards as of July 2, 2006 as well as changes during the three months ended July 2, 2006:


	Shares	Weighted-Average Fair Value
Unvested at April 2, 2006	—	$	—
Granted	19,050		26.47
Vested	—		—
Forfeited	—		—

Unvested at July 2, 2006	19,050	$	26.47

5. Earnings per Share

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


	Three Months Ended		Nine Months Ended
(000’s omitted)	July 2, 2006	July 3, 2005	July 2, 2006	July 3, 2005
Average shares outstanding for basic earnings per share	9,632	9,576	9,626	9,557
Dilutive effect of stock options and restricted stock grants	87	56	78	0

Average shares outstanding for diluted earnings per share	9,719	9,632	9,704	9,557

Average shares outstanding for diluted earnings per share does not include options to purchase 1,179,737 shares of Common Stock for the three months and nine months ended July 2, 2006 as their effect would have been antidilutive. For the three months ended July 3, 2005, average shares outstanding for diluted earnings per share does not include options to purchase 1,091,875 shares of Common Stock as their effect would have been antidilutive. During the nine months ended July 3, 2005, the effect of stock options was excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive due to the net loss incurred.

6. Derivative Instruments and Hedging Activities

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

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

The Company had one foreign currency forward contract outstanding at July 2, 2006, serving to mitigate the foreign currency risk of a substantial portion of our Euro-denominated intercompany balances, in the notional amount of approximately 3 million Euros. The net settlement amount of these contracts at July 2, 2006 is an unrealized loss of approximately $172,000 which is included in earnings.

The Company occasionally uses foreign currency forward contracts to manage its currency transaction exposures from forecasted foreign currency-denominated sales to its subsidiaries. These currency forward contracts are designated as cash flow hedges under SFAS 133; therefore, the effective portion of the gain or loss is reported as a component of “other comprehensive income” and will be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the derivative’s change in fair value would be recognized currently through earnings regardless of whether the instrument is designated as a hedge.

At July 2, 2006, the Company had no outstanding foreign currency forward contracts serving as cash flow hedges.

Net realized losses from foreign currency forward contracts totaled $105,000 during the quarter ended July 2, 2006 and are included in the consolidated statement of operations within “investment and other income”, compared to net realized gains of $421,000 for the prior year’s quarter.

7. Product Warranties

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

Product warranty activity for the nine months ended July 2, 2006 and July 3, 2005 are as follows:


(000’s omitted)	Beginning Balance		Accruals for Warranties Issued During the Period		Decrease to Preexisting Warranties		Ending Balance
July 2, 2006	$	3,263	$	902	$	542	$	3,623
July 3, 2005	$	2,679	$	819	$	373	$	3,125

8. Acquisitions

In March 2006, the Company exercised its option to acquire the assets of Lifecor, Inc. (“Lifecor”; now ZOLL Lifecor Corporation), a privately owned medical equipment company that designs, manufactures and markets a wearable external defibrillator system (“LifeVest”). In April 2006, the Company closed on the acquisition of the assets of Lifecor. The Company believes that the acquisition presents an opportunity to expand our presence in the resuscitation market because the LifeVest provides patients with the benefit of unhindered mobility. As a result of the transaction, ZOLL acquired Lifecor’s assets and business, assumed Lifecor’s outstanding debt (which included the forgiveness of approximately $3 million of debt owed to ZOLL), and also assumed certain stated liabilities, for a total consideration of approximately $10 million. Additional consideration will be in the form of earn-out payments to Lifecor based upon future revenue growth over certain stipulated threshold amounts of the acquired business over a five-year period through fiscal 2011. Beginning April 3, 2006, the results of operations of Lifecor are included in the consolidated income statement of the Company. In connection with the acquisition of Lifecor, a manufacturing agreement was terminated. The terms of the agreement were deemed to be at fair value, and therefore no gain or loss was recognized.

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


(000’s omitted)
Assets:
Current assets	$	2,052
Property and equipment		2,468
Goodwill		1,963
Intangible assets subject to amortization (estimated 9 year weighted-average useful life):		5,400

Total assets acquired		11,883

Liabilities:
Current liabilities		2,288
Deferred revenue		417
Debt assumed		7,888

Total liabilities assumed		10,593

Net assets acquired	$	1,290

The $2.0 million of goodwill will be assigned to our only reportable segment which is the design, manufacture and marketing of an integrated line of proprietary non-invasive cardiac resuscitation devices, and systems used for emergency resuscitation of cardiac arrest victims. All of the goodwill is expected to be deductible for income tax purposes.

Supplemental Pro Forma Information

The unaudited pro forma combined condensed statements of income for the period ended July 2, 2006 give effect to the acquisition of Lifecor as if the acquisition had occurred at the beginning of the period, April 3, 2006, and the beginning of the year, October 3, 2005, as well as the corresponding periods in the prior year after giving effect to certain adjustments, including amortization of the intangibles subject to amortization and related income taxes.

The unaudited pro forma combined condensed statements of income are not necessarily indicative of the financial results that would have occurred if the Lifecor acquisition had been consummated on April 4, 2005 or October 4, 2004, nor are they necessarily indicative of the financial results which may be attained in the future.

The pro forma statement of income is based upon available information and upon certain assumptions that the Company’s management believes are reasonable. The Lifecor acquisition is being accounted for using the purchase method of accounting. The allocation of the purchase price is preliminary. Final amounts could differ from those reflected in the pro forma statement of income, and such differences could be significant.


(000’s omitted)	Three Months Ended					Nine Months Ended
	July 2, 2006		July 3, 2005			July 2, 2006		July 3, 2005
Net sales	$	64,267	$	52,295		$	180,742	$	157,366
Net income	$	2,530	$	(380	)	$	4,781	$	(2,121	)
Net income per common share
Basic	$	0.26	$	(0.04	)	$	0.50	$	(0.22	)
Diluted	$	0.26	$	(0.04	)	$	0.49	$	(0.22	)

Certain of the Company’s business combinations involve the payment of contingent consideration. The October 2004 acquisition of Revivant Corporation (now ZOLL Circulation, Inc.) provided for milestone payments, tied to the completion of certain clinical trials of the AutoPulse^™ Resuscitation System through 2006. These arrangements are not considered contractual obligations until the milestone is met. During the second quarter of fiscal 2005, the Company made a milestone payment of $1 million, related to the publication of clinical data, in the form of $500,000 in cash and 15,188 shares of the Company’s Common Stock. As of July 2, 2006, assuming all future milestones were met, additional required payments would be approximately $12 million in cash and Common Stock. However, based on the results reported on a trial that was discontinued in 2005 (the ASPIRE trial), the probability of further milestones being met is considered to be remote.

The terms of the acquisition of Revivant, as well as the terms of the March 2004 acquisition of the assets of Infusion Dynamics, Inc. (“Infusion Dynamics”), and the April 2006 acquisition of the assets of Lifecor, provide for possible annual earn-out payments based upon revenue growth over a multi-year period. Such payments may be due with respect to Revivant through fiscal 2007 and with respect to Infusion Dynamics and Lifecor through fiscal 2011. Because all of these prospective earn-out payments will be based upon revenue growth over several years, a reasonable estimate of the future payment obligations cannot be determined. Annual earn-out payments to Infusion Dynamics, in the form of cash, for fiscal 2004 and 2005 were approximately $405,000 and $544,000, respectively. The Company also has paid approximately $1.6 million in earn-out payments for fiscal 2005 to the former shareholders of Revivant, approximately $783,000 in the form of cash and 23,800 shares of the Company’s Common Stock.

9. Intangibles and Other Assets

Intangibles and other assets consist of:


(000’s omitted)	Weighted Average Life	July 2, 2006				October 2, 2005
(000’s omitted)	Weighted Average Life	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Prepaid license fees	20 years	$	10,166	$	1,654	$	10,071	$	1,349
Patents	10 years		16,636		3,024		14,024		1,817
Other assets	—		4,917		1,645		3,003		1,547

		$	31,719	$	6,323	$	27,098	$	4,713

As noted in Note 8 above, the Company exercised its option to acquire the assets of Lifecor. As part of purchase accounting, the option to acquire Lifecor, valued at $1.3 million, previously classified within “intangibles and other assets” on the balance sheet, has been reclassified to goodwill. Based on the preliminary valuation, $2.3 million was assigned to developed technology which is classified within “patents, net” on the balance sheet and $3.1 million was assigned to doctor relationships which is classified within “intangibles and other assets” on the balance sheet.

Amortization of acquired intangibles for the three months ended July 2, 2006 and July 3, 2005 was approximately $580,000 and $302,000, respectively, and is included in operating expenses in the consolidated income statement. For the nine months ended July 2, 2006 and July 3, 2005, amortization of acquired intangibles was approximately $1,380,000 and $906,000, respectively, and is included within general and administrative expenses in the consolidated income statement.

10. Income Taxes

The Company’s effective tax rate for the three months ended July 2, 2006 was a tax provision of 36% as compared to a tax provision of 47% for the same period in fiscal 2005. The current quarter effective tax rate reflects the expiration of the research and development credit at the end of 2005 and the current phase-out of the extraterritorial income exclusion. The prior year third quarter tax rate reflected a change in the year-to-date tax rate reflecting lower than expected annual earnings. This adjustment to the tax rate in a quarter with nominal earnings distorted the effective tax rate for the period.

Our effective tax rate for the nine months ended July 2, 2006, was a tax provision of 35% as compared to a tax benefit of 46% for the same period in fiscal 2005. The difference in the effective tax rate is mainly due to a discrete $130,000 U.S. research and development tax credit which was enacted during the quarter ended January 2, 2005 as part of the American Jobs Creation Act. This discrete credit, when applied to a period with a taxable loss, resulted in a higher effective tax rate.

11. Legal Proceedings

The patent infringement lawsuit brought by William S. Parker against the Company, reported in the Company’s quarterly report on Form 10-Q for the quarter ended April 2, 2006, has been settled. The terms of the settlement, which are confidential, impose no limitations or restrictions on the Company or its business, and did not have a material impact on the Company’s financial condition, results of operations or cash flow.

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

12. Recent Accounting Pronouncements

In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 (beginning of our 2008 fiscal year), with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

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

We are committed to developing technologies that help advance the practice of resuscitation. With products for pacing, defibrillation, circulation, ventilation, and fluid resuscitation, we provide a comprehensive set of technologies that can help clinicians, EMS professionals, and lay rescuers resuscitate sudden cardiac arrest or trauma victims. We also design and market software that automates the documentation and management of both clinical and non-clinical information.

We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our consolidated financial statements as of July 2, 2006 and for the quarter and nine-month periods then ended, and the notes thereto.

Three Months Ended July 2, 2006 Compared To Three Months Ended July 3, 2005

Sales

Net sales by customer/product categories are as follows:


(000’s omitted)	July 2, 2006		July 3, 2005		% Change
Devices and Accessories to the Hospital Market-North America	$	20,742	$	17,367	19	%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		23,011		17,032	35	%
Other Products to North America		4,925		5,040	(2	)%

Subtotal North America		48,678		39,439	23	%
All Products to the International Market		15,589		11,654	34	%

Net Sales	$	64,267	$	51,093	26	%

Net sales increased 26% for the three months ended July 2, 2006, compared to the prior-year quarter.

Sales to the North American hospital market increased approximately $3.4 million, or 19%, compared to the same quarter in the prior year. This increase reflects an increase in U.S. military sales of approximately $3.7 million. The increase in military revenues reflects the receipt and shipment of two additional non-contractual military orders totaling approximately $5 million for which we had no forward visibility.

Sales to the North American pre-hospital market increased approximately $6.0 million, or 35%, compared to the same period a year ago. The North American pre-hospital market includes the results of Lifecor which were not included in the comparable period in the prior year. The growth in the North American pre-hospital market also includes increased shipments of professional defibrillators. The increase in professional defibrillator revenue was predominantly driven by volume and, to a lesser extent, price resulting from sales of the higher-priced E Series, which began shipping in September 2005. E Series sales exceeded 50% of professional defibrillator shipments during the quarter. The total increase attributable to Lifecor and higher professional defibrillator sales accounted for approximately 75% of the increase in pre-hospital shipments. The bulk of the remaining increase is attributable to AED sales.

Total sales of our AED Plus product in all markets increased $2.6 million, or 38%, to $9.5 million compared to the same period in the prior year. However, there were approximately $2 million of AED orders that could not be produced and shipped in the prior-year comparable quarter. Had these units shipped in the prior year quarter, current quarter growth would have been in the high single digits or modestly lower than our estimate of market growth. This slower growth rate in the AEDs is in line with our strategy to accept lower growth in exchange for higher profitability.

International sales increased approximately $3.9 million, or 34%, in comparison to the prior-year period. Sales by our international subsidiaries increased $2.5 million and were particularly strong in the UK. Sales to our international distributors increased approximately $1.7 million, predominantly driven by Latin America.

Total sales of the AutoPulse product in all our markets were $2.7 million compared to $1.7 million in the prior-year quarter. The increase reflects volume growth in both the North American pre-hospital and International markets. We believe that the increase in the number of units of the AutoPulse being sold reflects continuing market acceptance of the product.

Gross Margins

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

Gross margin for the three months ended July 2, 2006 decreased approximately one percentage point from 57.6% to 56.5% as compared to the same period in the prior year. A higher relative mix of international revenues had a negative impact on gross margins as international revenues tend to carry gross margins that are lower than our corporate average gross margin. Additionally, higher sales volume of our AutoPulse product had a negative impact on gross margins, because the AutoPulse, a new product with relatively low production volumes, has higher relative production costs

than many of our other products. These negative affects on margin were partially offset by sales of our LifeVest product (which was acquired in April 2006) which carry higher than average gross margins. Each of the factors describing the fluctuation in gross margin represents one percentage point or less on our overall gross margin.

Backlog

Orders are subject to cancellation or rescheduling by customers. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Backlog increased to approximately $8.5 million at the end of the three months ended July 2, 2006 as compared to approximately $8 million at the end of the prior quarter. Typically, our backlog decreases during the first and second quarters and increases during the fourth quarter due to the purchasing practices of our customers. We believe the maintenance of a modest backlog will help 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.

Costs and Expenses

Operating expenses for the three months ended July 2, 2006 and July 3, 2005 were as follows:


(000’s omitted)	July 2, 2006		% of Sales		July 3, 2005		% of Sales		Change %
Selling and marketing	$	20,523	32	%	$	18,826	37	%	9	%
General and administrative		6,383	10	%		4,612	9	%	38	%
Research and development		6,050	9	%		5,824	11	%	4	%

Total expenses	$	32,956	51	%	$	29,262	57	%	13	%

Selling and marketing increased approximately $1.7 million for the three months ended July 2, 2006 compared to the three months ended July 3, 2005. The inclusion of Lifecor expenses, following the April 2006 acquisition, accounted for a substantial portion of this increase as these expenses were not included in the prior year’s quarter expenses. In addition, the increase reflected increased North American marketing programs and promotions, salaries, trade shows and other related spending totaling $450,000. Other factors include higher personnel-related expenses among the salesforce and related sales organization, including commission and salaries and fringes, partially offset by lower provision for bad debt. Selling and marketing expenses decreased as a percentage of revenues as we have been able to achieve efficiency with our related sales organization and marketing efforts as our revenues have grown.

General and administrative expenses increased approximately $1.8 million for the three months ended July 2, 2006 compared to the three months ended July 3, 2005. The inclusion of Lifecor expenses, following the April 2006 acquisition, accounted for the largest portion of this increase as these expenses were not included in the prior year’s quarter expenses. In addition, increased legal-related costs accounted for approximately $500,000 of the increase. Other factors include increased personnel-related costs including stock-based compensation for general and administrative employees.

Research and development expenses increased by approximately $225,000 for the three months ended July 2, 2006 compared the three months ended July 3, 2005. The inclusion of Lifecor expenses, following the April 2006 acquisition, accounted for a substantial portion of this increase as these expenses were not included in the prior year’s quarter expenses. We currently anticipate that our research and development expenses related to clinical trial work may increase toward the end of the year and beyond as we initiate a new clinical trial related to the AutoPulse.

Income Taxes

The Company’s effective tax rate for the three months ended July 2, 2006 was a tax provision of 36% as compared to a tax provision of 47% for the same period in fiscal 2005. The current quarter’s effective tax rate reflects the expiration of the research and development credit at the end of 2005 and the current phase-out of the extraterritorial income exclusion. The prior year third quarter tax rate reflected a change in the year-to-date tax rate reflecting lower than expected annual earnings. This adjustment to the tax rate in a quarter with nominal earnings distorted the effective tax rate for the period.

Nine Months Ended July 2, 2006 Compared To Nine Months Ended July 3, 2005

Sales

Net sales by customer/product categories are as follows:


(000’s omitted)	July 2, 2006		July 3, 2005		% Change
Devices and Accessories to the Hospital Market-North America	$	55,046	$	48,188	14	%
Devices, Accessories, and Data Management Software to the Pre-hospital Market-North America		65,519		52,968	24	%
Other Products to North America		14,449		14,734	(2	)%

Subtotal North America		135,014		115,890	17	%
All Products to the International Market		41,546		38,323	8	%

Net Sales	$	176,560	$	154,213	14	%

Net sales increased 14% for the nine months ended July 2, 2006 compared to the same period a year earlier.

North American hospital sales increased approximately $6.9 million, or 14%, from the comparable prior year period. Within this market, sales to the U.S. Military increased approximately $5.8 million.

Sales to the North American pre-hospital market increased approximately $12.6 million, or 24%, compared to the same period in the prior year. The North American pre-hospital market includes the third quarter results of Lifecor, which were not included in the comparable period in the prior year. The growth in the North American pre-hospital market also includes increased shipments of professional defibrillators. The increase was predominantly driven by volume and, to a lesser extent, price resulting from sales of the higher-priced E Series, which began shipping in September 2005. E Series sales exceeded 50% of professional defibrillator shipments during the nine-month period. The total increase attributable to Lifecor and higher professional defibrillator sales accounted for more than 90% of the increase in pre-hospital shipments. We also experienced decreased sales of our AEDs to this market of approximately $800,000 which, we believe, is a result of fewer state-wide purchases that have been funded by federal grants as well as our decision to accept lower growth in the AED sales as we focus on achieving higher profitability.

Total sales of our AED product in all markets were $28.1 million, in comparison to $23.5 million for the same period last year. The increase reflects strong volume growth in the North American hospital market ($2.9 million) and International markets ($2.5 million) , partially offset by lower sales to the pre-hospital market.

International sales increased by approximately $3.2 million in comparison to the prior year nine-month period. This increase was driven by an increase in AED sales of approximately $2.5 million and an increase in AutoPulse sales of approximately $800,000.

Total sales of the AutoPulse product to all our markets were $6.6 million, in comparison to $5.0 million for the same nine-month period in the prior year. We believe we are continuing to see increased market acceptance of the AutoPulse as customers assess the results of various clinical trials and develop experience with the product.

Gross Margins

Gross margins for the nine months ended July 2, 2006 decreased eight-tenths of a percentage point from 56.8% to 56.0% compared to comparable prior year period. This decrease was partially due to the impact of lower foreign exchange rates and the increase in our international sales. Our international sales typically carry a lower gross margin as compared to our corporate overall margin. Additionally, gross margin was negatively affected by higher sales of the AutoPulse, a new product with low production volumes and higher production costs. Gross margins were increased due to the shift in mix of professional defibrillator sales from the M Series to the E Series, which carry relatively higher gross margins. Gross margins were also positively affected by the inclusion of Lifecor results (which was acquired in April 2006) which have higher average gross margins. Each of the factors describing the fluctuation in gross margin represents less than a percentage point on our overall gross margin.

Costs and Expenses

Operating expenses for the nine months ended July 2, 2006 and July 3, 2005 were as follows:


(000’s omitted)	July 2, 2006		% of Sales		July 3, 2005		% of Sales		Change %
Selling and marketing	$	58,374	33	%	$	57,473	37	%	2	%
General and administrative		16,252	9	%		13,509	9	%	20	%
Research and development		16,795	10	%		17,472	11	%	(4	)%

Total expenses	$	91,421	52	%	$	88,454	57	%	3	%

Selling and marketing increased approximately $900,000 for the nine months ended July 2, 2006 compared to the nine months ended July 3, 2005. The inclusion of Lifecor expenses, following the April 2006 acquisition, accounted for a substantial portion of this increase as these expenses were not included in the prior year’s quarter expenses. Selling and marketing expenses decreased as a percentage of revenues as we have been able to achieve efficiency with our related sales organization and marketing efforts as our revenues have grown.

General and administrative expenses increased approximately $2.7 million for the nine months ended July 2, 2006 compared to the nine months ended July 3, 2005. Increased personnel-related costs, including stock-based compensation, accounted for approximately $1 million. In addition, the inclusion of Lifecor expenses, following the April 2006 acquisition, accounted for a significant portion of this increase as these expenses were not included in the prior year’s quarter expenses. Other factors include increased bad debt provision, increased legal-related costs and increase insurance costs, partially offset by a decrease in consulting fees related to Sarbanes-Oxley compliance activities.

Research and development expenses decreased by approximately $700,000 for the nine months ended July 2, 2006 compared the nine months ended July 3, 2005. This decrease resulted from reduced spending related to clinical matters, including such costs related to the AutoPulse. We currently anticipate that our research and development expenses related to clinical trial work may increase toward the end of the year and beyond as we initiate a new clinical trial related to the AutoPulse. Partially offsetting the decrease was the inclusion of Lifecor expenses, following the April 2006 acquisition.

Income Taxes

Liquidity and Capital Resources

Our overall financial condition remains strong. Our cash and cash equivalents at July 2, 2006 totaled $39.2 million, compared with $36.3 million at October 2, 2005. In addition, we reported short-term investments of $18.2 million at July 2, 2006 in comparison to $14.6 million at October 2, 2005. We maintain a working capital line of credit with a commercial bank, currently permitting borrowings up to $12 million (no borrowings are outstanding). We have no long-term debt.

Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to the Revivant, Infusion Dynamics, and Lifecor acquisitions. We may also need to draw on these funds in the future for potential acquisitions.

Sources and Uses of Cash

To assist with the discussion, the following table presents the abbreviated cash flows for the nine months ended July 2, 2006, and July 3, 2005:


(000’s omitted)	Nine months ended July 2, 2006			Nine months ended July 3, 2005
Net income (loss)	$	5,744		$	(275	)
Changes not affecting cash		9,099			8,560
Changes in current assets and liabilities		8,590			(2,837	)

Cash provided by operating activities		23,433			5,448
Cash used for investing activities		(21,093	)		(3,149	)
Cash provided by financing activities		263			425
Effect of foreign exchange rates on cash		320			(200	)

Net change in cash and cash equivalents		2,923			2,524
Cash and cash equivalents – beginning of period		36,270			40,685

Cash and cash equivalents – end of period	$	39,193		$	43,209

Operating Activities

The improvement in cash provided by operating activities from $5.4 million for the nine-month period ended July 3, 2005 to cash provided by operating activities of $23.4 million for the nine-month period ended July 2, 2006 was attributable to an approximate $11.8 million increase in cash due to lower levels of inventory purchases, an approximately $11.6 million increase in cash due to the timing of payments of accounts payable and accrued expenses, and, in part ($6.0 million), to a change from a net loss in the prior year period to net income in the current year quarter, offset by an increase in accounts receivable due to increased sales levels. Inventory purchases in the prior year period were significant due to the purchase of inventory associated with a then-recent U.S. military “state of readiness” contract award and due to additional AutoPulse inventory built subsequent to the acquisition of Revivant.

Investing Activities

The $17.9 million increase in cash used in investing activities reflects a reported increase in net purchases of marketable securities of approximately $15.4 million ($3 million represents a reclassification of marketable securities to short-term investments from cash and cash equivalents), an increase of approximately $2.0 million in net fixed asset additions, and earn-out payments of approximately $1 million related to the acquisition of Revivant, as compared to the investing activities in the prior year period.

Financing Activities

Cash provided by financing activities during the nine-month period ended July 2, 2006 decreased by approximately $161,000 from the previous year period. The change reflects a lower number of stock options exercised during the current nine-month period (options for 14,582 shares in the current period compared to options for 30,024 in the previous year period), although at a higher weighted-average exercise price per share ($18.08 in the current period verses $14.14 in the previous year period).

Investments

As of July 2, 2006, we had investments in privately held technology companies with a carrying value of $1.3 million. We have performed a review of these investments and determined the carrying value of these investments approximates their fair value.

In March 2004, we acquired substantially all the assets of Infusion Dynamics, a manufacturer of fluid resuscitation products. Under the terms of the acquisition, we are obligated to make earn out payments through 2011 (“contingencies”) based on the performance of the acquired business. Earn-out payments to Infusion Dynamics were made in the form of cash for fiscal 2004 and 2005 in the approximate amounts of $405,000 and $544,000, respectively. Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. When these contingencies are resolved and the consideration is distributable, we will record the fair value of the additional consideration as additional cost of the acquired assets.

We exercised our option to acquire Revivant, the manufacturer of the AutoPulse, on October 12, 2004. We paid $15 million in the form of cash and shares of our Common Stock as the initial merger consideration. Additional contingent consideration under the merger agreement is tied to certain clinical developments (milestone payments) and increases in revenue (earn-out payments). In January 2005, we paid $1 million as a milestone payment, in the form of a cash payment of $500,000 and the issuance of 15,188 shares of Common Stock. We may be required to make future milestone payments, estimated to be approximately $12 million, tied to the completion of certain clinical trials of the AutoPulse through 2006. However, based on the inconclusive results reported on the ASPIRE trial, we consider the probability of this milestone being met to be remote. We may also make additional earn-out payments for the years 2006 and 2007 based on the growth of AutoPulse sales. In February 2006, we paid approximately $783,000 in cash and issued 23,800 shares in payment of the 2005 earn-out to the former shareholders of Revivant. Because additional earn-out payments are based on the growth of AutoPulse sales, a reasonable estimate of the potential total purchase price cannot be determined. All payments will generally be a combination of cash and shares of our Common Stock.

We exercised our option to acquire the business of Lifecor on March 22, 2006, and acquired the business on April 10, 2006. We assumed Lifecor’s outstanding debt (plus an additional $3.0 million owed to us, which was cancelled), and certain stated liabilities as discussed in Note 8 to the consolidated financial statements. We paid the third-party debt in April 2006. Additional consideration will be in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period. Because additional consideration will be based on the growth of sales over a five-year period, a reasonable estimate of the total acquisition cost cannot be determined.

Debt Instruments and Related Covenants

We maintain a working capital line of credit with a commercial bank. Under this working capital line, we may borrow on a demand basis. Currently, we may borrow up to $12.0 million at an interest rate equal to the bank’s base rate. No borrowings were outstanding on this line during the quarter ended July 2, 2006. There are no covenants related to this line of credit.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements consist of non-cancelable operating leases entered into in the ordinary course of business and one minimum purchase commitment contract for a critical raw material component. The table shown below in the next section titled “Contractual Obligations and Other Commercial Commitments” shows the amounts of our operating lease commitments and purchase commitments payable by year. For liquidity purposes, we choose to lease our facilities and motor vehicles instead of purchasing them.

Contractual Obligations and Other Commercial Commitments

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


(000’s omitted) Contractual Obligations	Payments Due by Period
(000’s omitted) Contractual Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Non-Cancelable Operating Lease Obligations	$	8,205	$	2,141	$	3,714	$	2,350	$	—
Purchase Obligations		190		190		—		—		—

Total Contractual Obligations	$	8,395	$	2,331	$	3,714	$	2,350	$	—

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

Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table above. These include the milestone payments to the former stockholders of Revivant, tied to the completion of certain clinical trials of the AutoPulse through 2006. These arrangements are not considered contractual obligations until the milestone is met. As of July 2, 2006, assuming all future milestones were met, additional required payments would be approximately $12 million in cash and ZOLL Common Stock. However, based on the results reported on a trial that was discontinued in 2005 (the ASPIRE trial), the probability of this milestone being met is considered to be remote.

Contractual obligations that are contingent upon future performance and growth of sales are not included in the table above. These include the additional earn-out payments for the assets of Infusion Dynamics through fiscal 2011; additional earn-out payments for Revivant through fiscal 2007; and the earn-out payments for the assets of Lifecor through fiscal 2011. Because all of these earn-out payments are based upon the growth of sales over several years, a reasonable estimate of the future payment obligations cannot be determined.

Hedging Activities

risk of our Euro intercompany receivables in the notional amount of approximately 3 million Euros at July 2, 2006. The contract serves as a hedge of a substantial portion of our Euro-denominated intercompany balances. The fair value of the foreign currency derivative contract outstanding at July 2, 2006 was approximately $3.8 million, resulting in an unrealized loss of $172,000. We had no forward exchange contracts outstanding serving as a hedge of a portion our forecasted sales to our subsidiaries at July 2, 2006.

Net realized gains (losses) from foreign currency forward contracts totaled ($105,000) and $19,000 for the three-month and nine-month period ended July 2, 2006, respectively, and are included in the consolidated statement of income compared to net realized gains of $421,000 and $165,000 for the prior year comparable periods. Any gains or losses on the fair value of the derivative contract would be largely offset by the losses and gains on the underlying transaction. These offsetting gains and losses are not reflected above.

Legal and Regulatory Affairs

The patent infringement lawsuit brought by William S. Parker against the Company, reported in our quarterly report on Form 10-Q for the quarter ended April 2, 2006, has been settled. The terms of the settlement, which are confidential, impose no limitations or restrictions on our business, and did not have a material impact on our financial condition, results of operations or cash flow.

We are, from time to time, involved in the normal course of business in various other legal proceedings, including contract, intellectual property, employment and product liability suits. Although we are unable to quantify the exact financial impact of any of these matters, we believe that none of the currently pending proceedings will have an outcome material to our financial condition or business.

Critical Accounting Estimates

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

Revenue Recognition

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

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

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

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

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

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

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

Under a separate contract awarded under the U.S. military’s Patient Movement Initiative (PMI) Program, the Company shipped defibrillators to the U.S. military in 2003. The U.S. military has been a long-time customer of ours, but the PMI Program represented a large, discrete purchase of many additional units. In 2004, we shipped additional defibrillators under the PMI Program and completed performance under this contract.

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

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

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

As of July 2, 2006 our accounts receivable balance of $50 million is reported net of allowances of $7.0 million. We believe our reported allowances at July 2, 2006 are adequate. If the financial conditions of our customers were to deteriorate, however, resulting in their inability to make payments, we might need to record additional allowances, resulting in additional expenses being recorded for the period in which such determination was made.

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

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

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

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

Warranty Reserves

Our products are sold with warranty provisions that require us to remedy deficiencies in quality or performance over a specified period of time, usually one year for pre-hospital customers and five years for hospital customers. Revenue is deferred for pre-hospital customers who receive warranties beyond one year. Such revenue is then recognized over the period of extended warranty. We provide for the estimated cost of product warranties at the time product is shipped and revenue is recognized. The costs that we estimate include material, labor, and shipping. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We believe that our recorded liability of $3.6 million at July 2, 2006 is adequate to cover future costs for the servicing of our products sold through that date and under warranty. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventory

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

Inventory on hand may exceed future demand either because the product is outdated, obsolete, or because the amount on hand is in excess of future needs. We provide for the total value of inventories that we determine to be obsolete based on criteria such as customer demand and changing technologies. We estimate excess inventory amounts by reviewing quantities on hand and comparing those quantities to sales forecasts for the next 12 months, identifying historical service usage trends, and matching that usage with the installed base quantities to estimate future needs. At July 2, 2006, our inventory was recorded at net realizable value requiring adjustments of $5.7 million, or 13.3% of our $42.8 million gross inventories.

Goodwill

At July 2, 2006, we had approximately $24 million in goodwill, primarily resulting from our acquisitions of Revivant (approximately $18 million), Infusion Dynamics (approximately $4 million), and Lifecor (approximately $2 million). In accordance with SFAS 142, Goodwill and Other Intangible Assets, we test our goodwill for impairment at least annually by comparing the fair value of our reporting units to the carrying value of those reporting units. Fair value is determined based on an estimate of the discounted future cash flows expected from the reporting units. The determination of fair value requires significant judgment on the part of management about future revenues, expenses and other assumptions that contribute to the net cash flows of the reporting units. Additionally, we periodically review our goodwill for impairment whenever events or changes in circumstances indicate that an impairment has occurred.

Investments

At July 2, 2006, we had approximately $1.3 million in investments in privately held companies focused in the medical devices industry. These investments are carried at cost. We periodically review our investments to determine if impairment has occurred. Should a significant indicator of impairment exist, we would compare the carrying value to its fair value. If we determine that the carrying value of an investment exceeds its fair value, we record an impairment charge to adjust the carrying value to estimated fair value, if the impairment is deemed other than temporary. The estimate of fair value of these investments, and the determination of whether impairment is temporary, requires that management make significant judgments that could affect the timing and amount of any impairment charge recorded.

Long-Lived Assets

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

Stock-based Compensation

The Company adopted the provisions of SFAS 123R, beginning October 2, 2005, using the modified prospective transition method. SFAS 123R requires the Company to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, compensation expense is recognized for (a) all share-based payments granted after the effective date under SFAS 123R, and (b) all awards granted under SFAS 123 to employees prior to the effective date that remain unvested on the effective date. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the vesting period.

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

Safe Harbor Statement

Certain statements contained herein constitute “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (the “Act”) and releases issued by the SEC and within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Particularly, the Company’s expectations regarding its business, operational results, future operational liquidity, contractual obligations and other commercial commitments, and capital requirements are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the actions of competitors, the acceptance of our products in their respective markets, and those other risks and uncertainties contained under the heading “Risk Factors” below.

Risk Factors

The following Risk Factors contain no material changes from the Risk Factors contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2005 and filed on December 15, 2005, and are repeated for the reader’s convenience.

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

Our principal global competitors with respect to our entire cardiac resuscitation equipment product line are Medtronic Emergency Response Systems (Medtronic ERS), Royal Philips Electronics (Philips), Medtronic ERS is a subsidiary of Medtronic, Inc., a leading medical technology company and has been the market leader in the defibrillator industry for over twenty years. As a result of Medtronic’s dominant position in this industry, many potential customers have relationships with Medtronic that could make it difficult for us to continue to penetrate the markets for our products. In addition, Medtronic and Philips and other competitors each have significantly greater resources than we do. Accordingly, Medtronic, Philips and other competitors could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. These and other competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and/or less expensive manner. In addition, although our biphasic waveform technology is unique, our competitors have devised alternative biphasic waveform technology. We have also licensed our biphasic waveform technology to GE Healthcare.

Philips recently introduced a new product called the MRx, which targets the ALS portion of the EMS and hospital market. Prior to introducing this product, they were not actively selling a fully featured product to the professional market. Although we believe the durability of this product is not as rugged as our new E Series, they have selectively used a discounting price strategy to help them sell, particularly in the EMS market. Because Medtronic’s LifePak 12 product, also targeted to the EMS market, has been on the market since 1998, we anticipate that Medtronic may introduce a new product. Although the LifePak 12 is much bigger and heavier than either the M Series or the E Series, there can be no assurance that a new product, should Medtronic decide to introduce one, will not be more competitive.

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

Additional companies may enter the market. For example, GE Healthcare has announced its intention to enter the hospital market through cooperation with Cardiac Science Corporation. Their success may impair our ability to gain market share.

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

There is significant competition in the business of developing and marketing software for data collection, billing, dispatching and management in the emergency medical system market. Our principal competitors in this business include Medusa Medical Technologies, Inc., Healthware Technologies, Inc., Safety Pad Software, ImageTrend, Inc., eCore Software Solutions, Inc., PDSI Software, Inc., Geac Computer Corporation, Ltd., DocuMed, Inc., Tritech Software Systems, Inc., Ortivus AB, RAM Software Systems, Inc., Intergraph Corporation and AmbPac, Inc., some of which have greater financial, technical, research and development and marketing resources than we do. Because the barriers to entry in this business are relatively low, additional competitors may easily enter this market in the future. It is possible that systems developed by competitors could be superior to our data management system. Consequently, our ability to sell our data management system could be materially affected and our financial results could be materially and adversely affected.

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

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

For example, Philips has selectively used a discounted price strategy to help them sell, particularly in the EMS market. If we are unable to sufficiently differentiate our product advantages, we may be forced to reduce our prices.

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

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

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

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variations in product orders;

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timing of new product introductions;

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

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changes in distribution channels;

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

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

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supply interruptions from our single-source vendors;

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temporary manufacturing disruptions;

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regulatory actions, including actions taken by the FDA or similar agencies; and

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delays in obtaining domestic or foreign regulatory approvals.

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

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

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

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

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

Two of our major competitors have entered the home market. We also sell to the home market and if our plan turns out to be less effective or efficient, we might have difficulty building market share.

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

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

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establish new marketing and sales strategies;

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identify respected health professionals and organizations to champion the products;

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

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conduct successful clinical trials; and

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achieve early success for the product in the field.

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

Our Approach to Our Backlog Might Not Be Successful

We desire to maintain a backlog in order to generate operating efficiencies. If order rates are insufficient to maintain such a backlog, we may be subject to operating inefficiencies.

We May be Required to Implement a Costly Product Recall

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

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

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

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

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

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

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

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

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

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

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

Recent Changes in American Heart Association’s Recommended Guidelines May Cause Our Customers to Delay Buying Our Products Resulting in Lower Revenues

In November 2005, the American Heart Association published revised emergency cardiovascular care guidelines. Although these recommended changes do not imply that AEDs designed to conform to earlier guidelines are either unsafe or ineffective, customers may delay implementation of AED programs until trained on the new protocols. Thus customers may delay purchasing our products, which may result in decreased revenues.

General Economic Conditions May Cause Our Customers to Delay Buying Our Products Resulting in Lower Revenues

The national economy of the United States and the global economy are both subject to economic downturns. An economic downturn in any market in which we sell our products may have a significant impact on the ability of our customers, in both the hospital and pre-hospital markets, to secure adequate funding to buy our products or might cause purchasing decisions to be delayed. Any delay in purchasing our products may result in decreased revenues and also allow our competitors additional time to develop products that may have a competitive edge, making future sales of our products more difficult.

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

The War on Terrorism and the Impact of a Bio-Terror Threat May Cause Our Customers to Stop or Delay Buying Our Products, Resulting in Lower Revenues

The current war on terrorism and a threat of a bio-terror attack may have a significant impact on our customers’ ability or willingness to buy our products, as well as our ability to timely deliver the product to the customers. Our customers may have to divert their funding earmarked for capital equipment purchases to the purchase of other medical equipment and supplies to fight any potential bio-terror attack. The war on terrorism may cause the diversion of any government funding of hospitals and EMS services for capital equipment purchases. Disruptions in the transportation industry resulting from a terrorist act could also impact our ability to attract new orders or ship orders that we have received. This could result in decreased revenues.

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

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

Recurring Sales of Electrodes to Our Customers May Decline

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

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

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

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

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

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our ability to successfully implement new product technologies;

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the market’s readiness to accept new products;

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the standardization of an automated platform for data management systems;

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

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

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

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

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

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

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

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

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

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

We are also subject to regulation in each of the foreign countries in which we sell products. Many of the regulations applicable to our products in such countries are similar to those of the FDA. However, the national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. We cannot be assured that such clearances will be obtained.

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

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

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

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issue a warning letter apprising of violating conduct;

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detain or seize products;

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mandate a recall;

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enjoin future violations; and

•

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

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

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

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

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

Fluctuations in Currency Exchange Rates May Adversely Affect Our International Sales

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

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

Our Current and Future Investments May Lose Value in the Future

For example, we hold an investment in Advanced Circulatory Systems, Inc. (formerly ResQSystems, Inc.) and may in the future invest in the securities of other companies and participate in joint venture agreements. These investments and future investments are subject to the risks that the entities in which we invest will become bankrupt or lose money.

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

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

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

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regulatory clearance previously received for our products could be revoked;

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costs of compliance could increase; or

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

Compliance With Changing Regulation of Corporate Governance, Public Disclosure and Accounting Matters May Result in Additional Expenses

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC and The NASDAQ Stock Market, as well as new accounting pronouncements, are creating uncertainty and additional complexities for companies. To maintain high standards of corporate governance and public disclosure, we continue to invest resources to comply with evolving standards.

This investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating and cost-management activities.

The provisions of Section 404 of the Sarbanes-Oxley Act of 2002 first applied to us for the fiscal year 2005. Accordingly, we completed a project to document, review, test, evaluate and conclude on our systems of internal controls. We have also completed our testing of our internal control systems and we did not identify any material weaknesses in our system of internal controls. As we move through fiscal 2006, we will continue to monitor our internal control environment and perform testing as required by Section 404 rules. There can be no guarantee that, in the future, we will not detect the existence of a material control weakness. Disclosure of a material weakness in our system of internal control may cause our stock price to fluctuate significantly.

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

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

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

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

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

Approximately 27% of our sales for the three months ended July 2, 2006 were made to foreign purchasers and we plan to increase the sale of our products to foreign purchasers in the future. As a result, a significant portion of our sales is and will continue to be subject to the risks of international business, including:

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fluctuations in foreign currencies;

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trade disputes;

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changes in regulatory requirements, tariffs and other barriers;

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

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

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timing and availability of import/export licenses;

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political and economic instability;

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higher credit risk and difficulties in accounts receivable collections;

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

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

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war on terrorism;

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disruption in the international transportation industry; and

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use of international distributors.

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

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

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

Our success will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We hold approximately 50 U.S. and foreign patents for our various inventions and technologies. Additional patent applications have been filed with the U.S. Patent and Trademark Office and outside the U.S. and are currently pending. The patents that have been granted to us are for a definitive period of time and will expire. We have filed certain corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications as appropriate. We cannot be assured as to:

•

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

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if and when patents will be issued;

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

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

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

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

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

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

•

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

•

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

•

required to pay damages.

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

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

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

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

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

We acquired Infusion Dynamics, Revivant (now ZOLL Circulation, Inc.) and Lifecor (now ZOLL Lifecor 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:

•

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

•

we may face difficulties associated with financing the acquisitions;

•

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

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

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

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

At July 2, 2006, we had approximately $49.0 million of goodwill and intangible assets on our balance sheet. These assets are subject to impairment if the cash flow that we generate from these assets specifically, or our business more broadly, are insufficient to justify the carrying value of the assets. Factors affecting our ability to generate cash flow from these assets include, but are not limited to, general market conditions, product acceptance, pricing and competition, distribution, costs of production and operations.

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

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

We have also implemented a so-called poison pill by adopting our shareholders rights agreement. This poison pill significantly increases the costs that would be incurred by an unwanted third party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding common stock. The existence of this poison pill could delay, deter or prevent a takeover of the Company.

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

We use forward contracts to reduce our exposure to foreign currency risk due to fluctuations in exchange rates underlying the value of intercompany accounts receivable denominated in foreign currencies as well as forecasted sales to subsidiaries denominated in foreign currencies. A forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These forward contracts are denominated in the same currency in which the underlying foreign currency receivables and forecasted sales are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. Unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings generally in the same period as exchange gains and losses on the underlying foreign denominated receivables and forecasted sales are recognized.

We had one forward exchange contract outstanding serving as a hedge of our Euro intercompany receivables in the notional amount of approximately 3 million Euros at July 2, 2006. The contract serves as a hedge of a substantial portion of our Euro-denominated intercompany balances. The fair value of the foreign currency derivative contract outstanding at July 2, 2006 was approximately $3.8 million, resulting in an unrealized loss of $172,000. A sensitivity analysis of a change in the fair value of the Euro derivative foreign exchange contract outstanding at July 2, 2006 indicates that, if the U.S. dollar weakened by 10% against the Euro, the fair value of this contract would decrease by $383,000 resulting in a total loss on the contract of $555,000. Conversely, if the U.S. dollar strengthened by 10% against the Euro, the fair value of this contract would increase by $349,000 resulting in a total gain on the contract of $177,000. Any gains and losses on the fair value of the derivative contract would be largely offset by losses and gains on the underlying transaction. These offsetting gains and losses are not reflected in the analysis above.

Intercompany Receivable Hedge

Exchange Rate Sensitivity: July 2, 2006

(Amounts in $)


	Expected Maturity Dates							Total		Unrealized Loss
	2006		2007	2008	2009	2010	Thereafter	Total		Unrealized Loss
Forward Exchange Agreements (Receive $/Pay Euro) Contract Amount	$	3,662,000						$	3,662,000	$	172,000
Average Contract Exchange Rate		1.2205	—	—	—	—	—		1.2205

We had no forward exchange contracts outstanding serving as a hedge of a portion our forecasted sales to our subsidiaries at July 2, 2006.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of July 2, 2006, the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls Over Financial Reporting

There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the quarter ended July 2, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

There have been no material changes from the Risk Factors previously disclosed in the Company’s Annual Report on form 10-K for the fiscal year ended October 2, 2005, filed on December 15, 2005 and which are repeated for the readers convenience in Part I, “Management’s Discussion and Analyses of Financial Condition and Results of Operations – Risk Factors”.

Item 5. Other Information

(a)	Not applicable.

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

Item 6. Exhibits

1. Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

2. Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

3. Exhibit 32.1* – Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4. Exhibit 32.2* – Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 11, 2006.


	ZOLL MEDICAL CORPORATION

Date: August 11, 2006	By:	/s/ Richard A. Packer
		Richard A. Packer,
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: August 11, 2006	By:	/s/ A. Ernest Whiton
		A. Ernest Whiton,
		Vice President of Administration and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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