ZOLL MEDICAL CORP

The terms of the October 2010 acquisition of the assets of Road Safety International, Inc. (“Road Safety”) provided for consideration to be paid in the form of possible annual earn-out payments based on revenues through calendar 2012. If both earn-outs are achieved, total consideration (including liabilities assumed) could approximate $550,000. The contingent consideration is recorded in “accrued expenses and other liabilities” and “other long-term liabilities” on the Company’s condensed, consolidated balance sheet and no adjustments have been made to this accrual since it was originally recorded. For calendar 2011, Road Safety earned the 2011 earn-out and was paid $250,000 in cash during the second quarter of the Company’s fiscal 2012.

Our sales for the three months ended January 1, 2012 increased 18% to $133.7 million, as compared to the same period in the prior year. The increase in sales was driven primarily by the LifeVest and the North American core defibrillator businesses. LifeVest revenue grew 45% in the three months ended January 1, 2012 compared to the same period in fiscal 2011. In December 2011, Centers for Medicare & Medicaid Services (CMS) reaffirmed the existing Local Coverage Determination for coverage for the LifeVest, which also garnered strong support from the clinical and professional societies. We believe our core North American hospital business, particularly with respect to professional defibrillator equipment, benefitted from market share gains and pent up demand. Revenues from the North American core hospital business, excluding U.S. military, grew 38% in the three months ended January 1, 2012 to $30.5 million, compared to revenues of $22.1 million from this business in the prior-year quarter. Sales to the U.S. military decreased approximately $4.9 million, or 57%, to $3.7 million for the three months ended January 1, 2012, compared to sales of $8.6 million in the same period in the prior year, as business with the U.S. military can be subject to irregular and unpredictable ordering patterns. Our gross margin reflected an improvement in product mix, lower factory costs, and improved North American capital equipment related pricing.

Our effective tax rate for the three months ended January 1, 2012 and January 2, 2011 was 38% and 31%, respectively. The difference between the effective rates is primarily due to the impact the U.S. research and development tax credit had on the respective periods. Our 2012 effective rate includes just one quarter of a full year’s credit in the annual rate calculation due to the expiration of the U.S. research and development credit on December 31, 2011. Our 2011 effective rate not only reflected a full year’s research and development credit, but it also included the impact of the retroactive extension of the credit back to January 1, 2010, when the credit had previously expired. This retroactive reinstatement occurred in our first quarter of 2011, resulting in a total of seven quarters of credits benefitting the 2011 effective tax rate.

We believe that our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at January 1, 2012 totaled $77.9 million compared with $75.5 million at October 2, 2011. We continue to have no long-term debt. We used $10.8 million in October 2011 to purchase the building where we manufacture our LifeVest product in Pittsburgh, Pennsylvania. Additionally, in November 2011, we announced a stock repurchase program of up to $50 million, which was authorized by our Board of Directors. Repurchases will take place on the open market or in privately negotiated transactions from time to time based on market and other conditions. The timing and number of any shares repurchased will be determined by the Company’s management, based on their evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan. The repurchase program may be modified, suspended or discontinued at any time. The repurchase program will be funded using the Company’s available cash and cash equivalents, borrowings available under its current line of credit, and supplementary borrowings if necessary. During the quarter ended January 1, 2012, we repurchased 27,546 shares for approximately $1.3 million.

As of January 1, 2012 we had two foreign currency forward contracts designated as cash flow hedges in the amount of approximately $5.5 million, each of which matures in less than twelve months. The net settlement amount of these contracts on January 1, 2012 was an unrealized gain of approximately $311,000, which is included within “Accumulated other comprehensive income” on our condensed consolidated balance sheet. We had a net realized gain of approximately $167,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 1, 2012, which was included in earnings within “Product sales” in the condensed consolidated statement of income. As of January 2, 2011 we had three foreign currency forward contracts designated as cash flow hedges in the amount of approximately $8 million, all maturing in less than twelve months. The net settlement amount of these contracts on January 2, 2011 was an unrealized gain of approximately $10,000, which is included within “Accumulated other comprehensive income” on our condensed consolidated balance sheet. We had a net realized gain of approximately $4,000 from foreign currency forward contracts designated as cash flow hedges during the quarter ended January 2, 2011, which was included in earnings within “Investment and other income (expense), net” in the condensed consolidated statement of income.