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Executives

Jenifer Kirtland - EVC Group, Inc.

John R. Hinson - President, Chief Executive Officer, Director

Michael K. Matysik - Chief Financial Officer, Senior Vice President, Secretary

David L. Marver – Chief Operating Officer

Analysts

Jonathan Block - Suntrust Robinson Humphrey

Larry Haimovitch - HMTC

J.D. Delafield - Delafield Hambrecht, Inc.

Stephen Simpson - Northland Securities Group LLC.

Julian Allen - Spitfire Capital LLC.

Cardiac Science Corporation (CSCX) F4Q08 Earnings Call March 12, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to the Cardiac Science Fourth Quarter 2008 Earnings Results Conference Call. (Operator Instructions) I will now turn the conference over to Miss Jenifer Kirtland of the EVC Group. Please go ahead.

Jenifer Kirtland

Thank you, operator, good afternoon everyone. Thank you for joining us for the Cardiac Science Conference Call and Web Cast to review financial results for the fourth quarter of 2008.

During the course of this conference call, the Company will make projections and other forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. A detailed discussion of the risks and uncertainties that affect the company's business and qualify the forward-looking statements made in this call is contained in Cardiac Science's SEC filings, particularly under the heading Risk Factors described in the Company's annual report on Form 10-K. Copies of Cardiac Science's SEC filings are available online from the SEC or by clicking on Investor Relations on the Cardiac Science website.

The Company's projections and forward-looking statements are based on factors that are subject to change and, therefore, these statements speak only as of the date they are given. The Company does not undertake any duty to update any projections or forward-looking statements.

In addition, during today's discussion, management will comment on both actual results and certain non-GAAP results. Reconciliations between GAAP results and these non-GAAP results are provided in today's earnings release which will be available on our website at www.cardiacscience.com.

Now, I would like to turn the call over to John Hinson, President, and Chief Executive Officer of Cardiac Science.

John Hinson

Thanks Jenifer and good afternoon everyone. We appreciate you joining us for our fourth quarter 2008 earnings call. With me today are Mike Matysik our Chief Financial Officer, Dave Marver our Chief Operating Officer.

You have undoubtedly noticed that we issued two press releases today. I will start with just a few words on the personal news. For some time I have been thinking about making a transition in my role and pursuing other interests. After discussions with the board we collectively feel that now is an opportune time to pass the leadership baton to Dave Marver. I am personally very comfortable with making this move now, because I am confident that Dave and our extraordinary leadership team will be able to take this company to the next level.

The decision to resign my position was driven by my need for a professional break, as well as the desire to spend more time with my family following a full decade of intense effort on behalf of Cardiac Science and its predecessors. Because I believe this is the right decision for me personally I also believe it is right for Cardiac Science.

The last ten years have been both challenging and rewarding as this company has evolved from a niche player to a global leader. I am extremely grateful to the Board of Directors for allowing me the opportunity to play a significant role in the transformation of Cardiac Science. I also sincerely appreciate the support of the executive team and all our stakeholders, especially our employees and our investors, during my tenure.

Finally, I want to personally congratulate Dave on his soon to be new role and wish him and the team all the best going forward.

Now I will move on to the business news.

For the full year 2008 revenue was $206.2 million, another record for the Company which took us across the $200 million milestone for the first time. Excluding the non-cash goodwill impairment charge, which Mike will discuss later in this call, our pro forma net income was $2.2 million in the fourth quarter and $9 million for 2008. So the 2008, at least on a pro forma basis, represents another record for the Company.

Some other highlights for the Company during 2008 included achieving record operating cash flow, being selected for inclusion in the Russell 3000 Index, appointing Dave Marver as the Company’s Chief Operating Officer, adding strategic depth and talent to the executive management team, completing a comprehensive rebranding program to align the Burdick, HeartCentrix, Powerheart and Quinton brands squarely behind the Cardiac Science master brand; announcing agreements to provide AEDs to such notable organizations as the Los Angeles County Fire Department, the Boy Scouts of America, American Electric Power, CH2M Hill, Cummins Engine and the Australian, Defence Force; Releasing additional languages on the Company's electrocardiographs; launching new Stress product versions with enhanced connectivity, workflow and reporting capabilities, as well as certain additional features for echocardiography and nuclear systems applications; releasing an updated Q-Tel RMS system, providing enhanced connectivity and workflow capabilities in the Company's cardiac rehabilitation monitoring systems; creating updated versions of the HeartCentrix informatics platform, providing greater connectivity between cardiology devices and EMR systems in physician offices as well as remote network access in the Hospital market; announcing the certification of our HeartCentrix informatics software with the Allscripts Electronic Health Record and NextGen Healthcare Information Systems; and finally increasing our R&D capacity and flexibility through an alliance with Syncroness.

These achievements represent significant strategic and operational progress for Cardiac Science. I want to publicly thank all of our employees for all of their hard work during the year to make it all happen.

With respect to the fourth quarter, our revenue results were in line with our earlier announcement in January and demonstrated the strength of our business during the quarter despite the challenges presented by the economy. The total revenue was $51.1 million, up a modest 1% but still up compared to $50.4 million last year. Total defibrillation revenue was $29.6 million up 10.2% from Q4 of last year.

As we saw all year in 2008 International markets continued to drive our overall growth in defibrillation sales as we experienced a 51% increase compared to Q4 of last year.

In North America AED sales decreased 26% from the prior year quarter and also softened sequentially over the last two quarters of this year as the economy has worsened.

As we began to see in Q3 the uncertainty in the economy is continuing to have some impact on the speed of existing AED deployments. We are experiencing lengthening of selling cycles for public access markets, especially for governmentally funded customers, and corporate purchases appear to be more concerned about capital purchases than in the past. This has been felt most significantly with our direct sales in national accounts areas. Our distribution business, however, has fortunately continued to make good progress and is accounting for a greater proportion of our sales in recent quarters.

Sales in Japan were up a remarkable 80% compared to Q4 last year, however in the fourth quarter we experienced some slowing compared to the second and third quarters of this year, which accelerated dramatically as the quarter progresses. We believe this is driven primarily by the economic contraction in that country which became more significantly pronounced during the fourth quarter.

The economy in Japan is reportedly experiencing some of the worst conditions seen there in the last half century. While our partners in Japan have indicated in their forecast that the second half of this year looks more positive for sales of our AEDs than the first half, we’ll have to see how the economic situation develops in the coming quarters. In addition, they have also shared with us their desire going forward to ultimately market a lower end AED offering to compliment the more fully featured Cardiac Science products; however, they have also indicated that they desire to continue selling our current AED platform, as well as our new AED platform, which is currently in development.

So, while Nihon Kohden will in all likelihood remain an important and successful relationship for us, we will be considering additional go to market options in Japan going forward to ensure adequate support for our complete line of products.

A more comprehensive distribution network would be more similar to how we operate in other parts of the world and may prove useful, especially as we bring to market new versions of our AED technology.

The bottom line is we believe the long-term opportunity in Japan remains substantial, but we also expect that the current economic conditions will cause a short-term opportunity to be more limited and our sales in 2009 will be significantly less than in 2008.

Most other areas outside the US, particularly Europe, continued their growth and were up during the quarter, especially in France and Germany where we have established direct sales operations. We believe the opportunity for growth in markets outside the US, with the exception of Japan, remains for 2009.

Despite these variations and the cautious outlook for 2009, we would encourage investors to stay focused on the strong opportunities that AEDs continue to represent. We believe that the AED market remains a good long-term growth market which has not reached and will not reach maturity for some time.

Our shipments of the R2K products sold through GE were essentially flat compared to Q4 of last year; however, on a sequential basis saw a material drop in revenue. We believe the challenges in the worldwide hospital market right now have also been affecting this part of our business.

We saw some improvement in our cardiac monitoring business in the fourth quarter compared to the second and third quarters especially in the primary care channel. Unfortunately, compared to last year overall worldwide monitoring revenue for the quarter is down approximately 13%. As we mentioned earlier the slowdown in capital spending, particularly in hospitals, has challenged us all year. We are continuing to see this manifest itself in delays and deferments in both hospitals and clinics. The good news is that we believe that we will continue to experience less volatility in this portion of our business than in our defibrillation markets.

As we have shared on pervious calls this year, we have made a concerted effort to focus on our service offerings. We’ve seen growth over the last year in particular from our AED training and maintenance program, which is up more than 53% versus a year ago. Our focused effort here is clearly paying off and we are pleased with the incremental revenue as well as the favorable impact on gross margin.

Finally, the challenging global economy with its prospects for potentially slower demand, particularly in our major AED markets like the US and Japan, drove our decision to proactively modify our cost structure. As we announced on January 14, we reduced our staff by 12% to better position ourselves to operate profitably under several scenarios. The reductions were across the board and included sales in marketing, operations, R&D, and administrative positions. As a result, we took a $1.2 million non-cash charge in the fourth quarter. We expect these reductions and other actions to result in approximately $10 million in annual cost savings in 2009.

With that, here is Mike to discuss some of the details of our fourth quarter financial performance and to provide some guidance for our upcoming fourth quarter of the fiscal year 2009.

Mike Matysik

Thanks, John. Despite the increasing economic uncertainty, we had another strong quarter with revenue of $51.1 million, an increase of 1% compared with the same quarter of last year.

Defibrillation sales increased 10% over the prior year to $29.6 million with International defibrillation revenue a key contributing factor. We saw continued substantial sales in Japan and further growth in France and Germany in particular. In North America AED sales decreased 26% from the prior year and have also softened sequentially over the last two quarters of this year as the economy has worsened.

Revenue from cardiac monitoring products was $16.9 million in the fourth quarter, a decline of 13% from $19.6 million in the fourth quarter of last year. However, Q4 revenue up $16.9 million represents a sequential improvement over both Q2 and Q3 of this year.

Gross margin for the quarter was 50.9% compared to 48.85 in the fourth quarter of 2007. This increase in gross margin was due largely to favorable product mix, improved service gross margin, and continued cost reduction.

During the fourth quarter of 2008 the Company recorded a non-cash charge of $107.7 million related to the impairment of goodwill. Similar to the experience of many companies, Cardiac Science’s market capitalization had eroded significantly below book value due in large part to the depressed macro economic environment and volatility in the equity markets. As a result of this erosion and our related impairment tests and analysis, we recorded a charge in the fourth quarter to write off all of the goodwill on our balance sheet. Even with this write off, though, our shareholders equity still remained at $131.7 million at year-end representing $5.74 per primary share outstanding.

Operating expenses were $131.7 million this quarter including the goodwill impairment charge. In addition, we recorded a charge in Q4 of $1.2 million relating to the reduction in force that was announced in early January of this year. This charge is spread among all of the departmental line items in our income statement. We expect this reduction in force, along with other actions we have taken, to result in $10 million in cost reductions in 2009, not withstanding any decisions we might make to reinvest in areas that will provide future growth.

During the fourth quarter we also experienced higher costs associated with a legal settlement and an increase in our bad debt provision due to the weakened economic environment. Together the legal costs and added bad debt provision added approximately $1 million to operating expense in Q4.

Our Q4 R&D expense increased 23% from last year as we stepped up our efforts to bring new products to market faster. Based on the restructuring at year-end we have streamlined our internal organization and we utilized outside resources, namely our partner Syncroness, for certain of our R&D activities going forward. With this reorganization we expect to not only incur less than total costs going forward, but we expect to be more flexible in our structure and to be able to bring products to market more efficiently in the future.

We reported a GAAP operating loss in the fourth quarter of $105.7 million inclusive of the goodwill write down. Excluding this charge our pro forma operating income would have been $1.9 million. This pro forma income includes the rift charge and the legal and bad debt items I referred to a moment ago. Excluding these items our operating profit in Q4 of this year would have been comparable to that of Q4 2007.

We had a small net income tax benefit in the fourth quarter of $152,000.00. Our net income taxes for the quarter included a benefit of $0.4 million to recognize the reinstatement of the R&D tax credit that was passed by Congress in late 2008; a benefit of $0.3 million related to tax-deductible goodwill that was part of the impairment charge; and a small benefit from the reduction of estimated state income taxes.

Our full year tax rate on income, excluding the goodwill impairment, would have been approximately 31%.

We reported a GAAP net loss for the quarter of $105.2 million or $4.58 per share. Excluding the goodwill impairment charge our pro forma net income for the quarter would have been $2.2 million or $0.09 per share.

We generated $2.6 million in cash from operations during the quarter and our cash balance was nearly $35 million at year-end.

Our strong cash flow and cash balance continue to provide us with strategic flexibility, especially in the current environment.

For the full year 2008 our total revenue was $206.2 million, an increase over last year of 13%. This growth was predominantly driven by our defibrillation business overseas.

Our pro forma operating income for all of 2008, excluding the goodwill impairment charge, was $12.7 million or 6.2% of revenue. This is up 27% compared to pro forma operating income of $10 million for 2007.

Our GAAP net loss for the year, including the non-cash goodwill impairment was $98.4 million or $4.30 per share.

Pro forma net income for 2008 was $9 million or $0.39 per fully diluted share. This represents an increase of over 27% versus pro forma net income of $7.1 million or $0.31 per fully diluted share for 2007.

Finally, cash from operations for 2008 was $17.7 million, an increase of nearly $4.5 million, or 33% compared to last year.

Now I would like to turn to our outlook.

In light of the challenging economy and our lack of visibility into later periods, we are providing guidance for only the first quarter of fiscal year 2009 at this time.

In the first quarter and likely beyond, we expect some continued softness in our domestic sales channels and even more pronounced weakness in our sales in Japan. We expect this will be partially offset by continued growth in our other International channels, but the net result will be a decline in overall revenue.

So, for the first quarter we expect revenue to be in a range between $39 and $40 million and we expect net income to be positive with earnings per share in a range around $0.01 per share.

Despite higher seasonal cash expenditure requirements, we currently expect to report positive operating cash flow for the quarter.

In summary, 2008 was a great year for us with record revenue, record pro forma profitability, and record operating cash flow. Given the state of the global economy, we expect a tougher year in 2009, but we positioned ourselves to make the best of the situation that faces us and we remain confident about the longer-term prospects for our business.

With that, I would like to turn the call over to Dave Marver, who will become our Chief Executive Officer at the end of this month.

Dave Marver

Thank you, Mike. I want to first thank John for his kind introduction and start by recognizing him for all of his achievements as CEO of Cardiac Science and for his many contributions to the company over the last ten years. John grew the Company 5 xs during his tenure and in his final year as CEO 2008 delivered record revenue and record cash flow. This company has replacement demand, recurring revenue streams, and is capable of cash and profitability, even with lower revenue, which is a very fortunate situation to have in today’s environment. More importantly, and what I’m excited about, John’s leaving the Company with a very strong balance sheet which gives me a terrific platform from which to grow the company.

Now Mike already provided some guidance for 2009, but I’m going to add some color to those numbers in terms of activities.

First, we can’t do much about the economy, but we can certainly focus on improving our company and to that end we’ll be doing what’s required to transform and otherwise position the Company for success so we can optimize performance during the downturn and be a coiled spring coming out of it.

We will continue to execute on the engineering restructuring we started last quarter with the outsourcing of standing work to our partners at Syncroness, which is a leading medical design and engineering firm. This move allows us to focus our internal engineering resources not on sustaining work but on innovation, with the expectation that our efficiency will improve and our cadence of new product introductions will increase.

We will also devote a lot of energy toward improving our commercial execution. Our sales and distribution organization is a critical strategic asset for us and we’ll be taking steps to improve tools, processes, and overall performance with the expectation that we’ll create more headroom to grow revenue within our existing franchises.

Finally, we will be investing in IT systems and related infrastructure that will improve the customer experience and bolster our overall operating efficiency. An important by-product of this work is the reinforcement of our company as an acquisition platform. The idea is its stronger systems give us a more solid foundation on which we can stack future acquisitions.

Speaking of acquisitions, I want to reiterate we have a strong cash position and we will be actively looking for companies that add capabilities or are otherwise aligned with our go forward strategy. Just a teaser here, we are optimistic that we will announce a new alliance sometime in the next 45 days.

That is all for now. I look forward to sharing more specific thoughts on our future plans at a later date. With that I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Block with Suntrust Robinson Humphrey.

Jonathan Block - Suntrust Robinson Humphrey

My first question has to do with Japan. You had some commentary around a relationship with Nihon and I was just a little confused. So, they are looking for a low end option. Are they turning to you guys for that or are they turning to someone else to fill that need?

Dave Marver

They are actually creating and manufacturing their own low-end option that doesn’t incorporate any of our components, so as a result we will see some revenue decline next year.

Jonathan Block - Suntrust Robinson Humphrey

Okay, so they had strong orders in 2008, they’re going internal on the low end, so some of that is the end-user softness, but some of it is also the fact that they’ve probably got to burn through some of the inventory that they’ve accumulated?

Dave Marver

Yes and really what we’re seeing in Japan is we had a great year last year. The market is really contracted; it’s down 30% to 40%. That combined with the fact that they’re introducing their own AED that might cannibalize some of the business for the AED that we supply on their behalf leads us to expect that our sales through NK will be down significantly.

John Hinson

Yes, but one thing I would add to that, Jonathan, is that they have not launched that product yet. They’ve just given us an indication that they intend to launch it. It has not been approved. We have seen a prototype recently. They’ve been open about that and I would say that the short-term impact that is occurring in Japan is driven by the economic conditions.

Dave Marver

And if I may, Japan remains a great market. It is the # 2 market in world and we are definitely committed to our long-term success there. We’ve applied for registration of a GE branded version of our AED and manual defibrillator and we are going to continue to pursue a number of different go-to-market strategies there that are going to enhance our long-term position; so you’re going to see those numbers come back over time.

Jonathan Block - Suntrust Robinson Humphrey

Okay great and just moving on to the R2K product. I think you said flat sequential revenues. I’m just a little confused there as well. I thought there were minimums built into that contract, so it took you awhile to finally get it out there. I think you got it out there about a year ago and then there was always, maybe, the speculation that it was worth $4 or $5 million on minimums per year. Did they fill their quota on minimums? Are there still minimums there?

Mike Matysik

First of all they were sequentially down in Q4 versus the earlier quarters and there is an annual minimum and that is measured annually, not quarterly, and it is from the official beginning date which happened in late Q2 of 2008. So, the full year cycle won’t come up until mid way through this year and those minimums are around $5 million a year.

Jonathan Block - Suntrust Robinson Humphrey

Where are they so far in terms of what they filled out of the $5 million?

Mike Matysik

Well they’re making progress. They are ratably where you would expect them to be this far through the year, maybe even slightly ahead of that.

Jonathan Block - Suntrust Robinson Humphrey

Okay and just a couple more. Clearly your guidance on 1Q gives us a feel for trends, but maybe if you could help us out. I mean, here you are reporting into the second week of March. Can you give us a feel for what you’ve seen throughout the quarter? Has it worsened from January to March? Is it the same? Is it getting incrementally better? Then maybe could you break that out here in the US versus OUS?

Mike Matysik

Yes, so we’re in a market contraction and it’s very pronounced here in the US and in Japan. So, we have seen that erode somewhat; obviously if we’re talking about a $39 to $40 million first quarter that’s down sequentially and down versus last year. We saw that really start to happen towards the later part of Q4, both in Japan and in the US.

What we see in other places in the world is that they’ve remained strong; particularly, as we mentioned, in Germany and in France, but also in a variety of other countries as well. So, unfortunately our crystal ball doesn’t go out that far. We aren’t sure how long this contraction is going to last or if it’s going to get worse or really even what the full impact of that will be in our business. We will provide updates as we get them and as the situation becomes clearer.

We also have, a little bit of upside towards the end of the year. I think our partners Nihon Kohden in Japan have told us that they expect the second half of the year to be stronger. As Dave said with his little teaser, that we may have some alliance activity that could add some revenue towards the end of the year as well. So there is a little bit of upside that we’re working on as well.

Jonathan Block - Suntrust Robinson Humphrey

Okay great and my last question sort of ties into the comments on the alliance. Is it the alliance and then you’re done for awhile? I know, John, you had been looking at a bunch of different technologies for a while. You certainly have the balance sheet. I would think a lot of those opportunities are probably cheaper than they’ve ever been before. So, how many things do you want to do with the pipeline and then how do you weight that against buying back stock at $3.00?

Dave Marver

This is Dave, I will take that question. At this point we have no intention of doing a stock buy back. We’re in a great position, as you said, because of our balance sheet to add capabilities and growth through acquisition and we want to preserve the entirety of our capital for that purpose. We’ve got a lot going on there and the alliance that we’ve hinted at here will be the first of, I think, several important developments going forward; so we won’t be won and done. That I can say for certainty.

John Hinson

That is on both the alliance and the acquisition front.

Jonathan Block - Suntrust Robinson Humphrey

Okay great. Thanks gentlemen.

Operator

Your next question comes from Larry Haimovitch - HMTC.

Larry Haimovitch - HMTC

John I want to wish you all the best in whatever you do. I will probably call you later just to do that personally, but I wanted to tell you how much I’ve really enjoyed working with you over the last several years.

John Hinson

I appreciate that and the feeling is mutual Larry. Thank you so much.

Larry Haimovitch - HMTC

I haven’t met Dave Marver yet, but the book on him is very positive, so I look forward to meeting him.

Dave Marver

Oh well thank you. I need a copy of that.

Larry Haimovitch - HMTC

Mike I have a question for you. I realize you are not providing full year guidance and certainly that is very understandable, as much as we like it, but certainly given the environment it is going to be tough to do that. You’ve done very well over the last several years balance sheets. One of the things I’ve liked about the company is the cash generation. Would you say that a cash positive for the year is a reasonable expectation based on what you know today?

Mike Matysik

Yes, I mean obviously there are a wide variety of scenarios, but absolutely, based on what we know today we would expect to be operating cash flow positive. Barring any acquisition activity or something like that, which would be incremental to that.

Dave Marver

That is one of the reasons we resized the company in January so that we can continue to be cash flow positive even under a pretty negative scenario.

Larry Haimovitch - HMTC

That leads to my next question, which is what level of sales do you think you need to break even based on the way you’ve sized the Company and what level of sales, same type of question, do you think cash flow positive would occur?

Mike Matysik

Yes, Larry I’m going to dodge that one just a little bit. There is a variety of levels at which we could operate and we have the ability to do additional things with costs. We may add cost to increase in growth opportunities going down stream, or if the situation became direr we would have to look at reducing costs further. So, I think there is a range of scenarios under which we could continue to be cash flow positive. It depends on some choices that we make and some of the market influences that we experience as we go through the year.

Larry Haimovitch - HMTC

Okay, thanks guys.

Operator

Your next question comes from J.D. Delafield with Delafield Hambrecht, Inc.

J.D. Delafield - Delafield Hambrecht, Inc.

John I wanted to say congratulations and thank you for everything you’ve done for the Company. I doubt there is anyone on the call who has been involved with this company as long as I have. As I said to you once, I don’t know that you’ll ever get full credit for the things that you did, but for those of us who have been involved you’ve been the center of it. So, good luck and thank you.

John Hinson

Thank you. I appreciate that very much J.D.

Operator

Your next question comes from Stephen Simpson with Northland Securities.

Stephen Simpson - Northland Securities Group LLC.

I want to follow up on a question that Jonathon asked earlier in the call regarding how this quarter is progressing. I’m curious if you’re seeing any difference between ordering habits from say the EMS, fire rescue, government section as opposed corporations, institutions and the like.

Dave Marver

I think it’s fair to say that all sectors are down somewhat. We don’t really play all that much in the hospital and EMS verticals, so I can’t necessarily comment on those. Everyone is suffering, I would say, from the economic downturn here. We’re trying to focus our efforts on those verticals that do in fact have access to money, either through the government, or through the grant process. If anything, I would say corporations have probably suffered the most, but we have a lot of strength across the board because of our distribution organization. We have sort of diversified our risk there.

Stephen Simpson - Northland Securities Group LLC.

All right, I thank you.

Operator

Your next question comes from Julian Allen with Spitfire Capital LLC.

Julian Allen - Spitfire Capital LLC.

Can you guys give us a sense of how your gross margins may or may not flex with your expected revenue decline this year? Obviously you have some sort of expectations given your first quarter guidance, but perhaps you can give us some guidelines for thinking about gross margins in light of the anticipated volume declines.

Mike Matysik

Sure, that’s a great question, Julian. As you know, there are a number of things that affect gross margin including our sales volume, our sales mix, and pricing and then cost. Fortunately we’ve seen pricing hold up on a relative basis over the last couple years really. What’s been driving our margin is changes in mix, where we’re selling more AEDs proportionately and more of those in markets that happen to carry higher gross margins. We are also seeing the impact of some cost reductions.

We have a history and a legacy of reducing costs on our product. As part of the cost reduction that we did in early January, some of those costs were in our manufacturing space as well and so we brought down the overhead a little bit, somewhat in proportion to the expected volumes.

What you have seen is a steady progression over time of increases in our gross margin as a result of all of those factors. We expect, in the longer run, to have a continuation of that progression. What we can expect in the short run is some fluctuation based on mix, based on pricing, and based on volumes, but in general I think we can expect to see slightly increasing gross margins over time.

I hope that answered your question?

Julian Allen - Spitfire Capital LLC.

Yes, thank you.

Operator

I am not registering any additional questions. Please continue with any closing comments you may have.

Dave Marver

Thank you everyone for joining us today. We look forward to hosting you on next quarter’s call.

Operator

Thank you ladies and gentlemen; this does conclude the Cardiac Science Fourth Quarter 2008 Earnings Conference Call. If you would like to listen to a replay of today’s conference you can do so by dialing 1-800-405-2236 or 303-590-3000, input the access code 11125955. SG would like to thank you very much for your participation today. Have a very pleasant rest of your day.

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