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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

Quinton Cardiology Systems, Inc.

      Securities Registered Pursuant to Section 12(b) of the Act: None.

      Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value.

      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.     þ     Yes          o No

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     o     Yes          þ No

      The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the closing price of the registrant’s Common Stock on June 28, 2002 as reported on the Nasdaq National market, was approximately $45,041,056. Shares of Common Stock held by each executive officer and director and by each shareholder whose beneficial ownership exceeded 5% of the outstanding Common Stock at June 28, 2002 have been excluded in that such persons may be deemed to be affiliates. This determination of status is not necessarily conclusive for determination for other purposes.

      The number of shares of the registrant’s Common Stock outstanding at March 11, 2003 was 12,111,603.

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QUINTON CARDIOLOGY SYSTEMS, INC.

2002 FORM 10-K ANNUAL REPORT

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DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference to the Registrant’s definitive Proxy Statement relating to the annual meeting of shareholders to be held on May 16, 2003, which definitive Proxy Statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

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PART 1

      This annual report contains forward-looking statements relating to Quinton Cardiology Systems, Inc. These are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Actual results may vary significantly from the results expressed or implied in these statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. These forward-looking statements reflect management’s current expectations and involve risks and uncertainties. Our actual results could differ materially from results that may be anticipated by such forward-looking statements. The principal factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Certain Factors That May Affect Future Results,” those discussed elsewhere in this report and those discussed in our registration statement on Form S-1 (Registration No. 333-83272) filed on February 22, 2002, as amended. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements to reflect events or circumstances that may subsequently arise. Readers are urged to review and consider carefully the various disclosures made in this report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. The terms “us,” “we” and “our” refer to Quinton Cardiology Systems, Inc. and our wholly owned subsidiaries Quinton Inc. and Burdick, Inc.

Item 1.     Business

     Overview

      We develop, manufacture, market and service a family of diagnostic cardiology systems used in the diagnosis, treatment, and rehabilitation of patients with heart disease. Our products include electrocardiographs (ECGs), stress test systems, Holter monitoring systems, cardiac catheterization management systems, cardiac rehabilitation telemetry systems, ECG management systems, medical treadmills and patented electrodes. We also sell other consumables related to our products.

      Quinton Cardiology Systems, Inc. is a California corporation formed in April 1998 to acquire Quinton Inc., a leading supplier of ECGs, stress test systems, medical treadmills and other cardiology diagnostic products. Quinton Inc. was originally incorporated in 1966. At December 31, 2002, Quinton Inc. was our principal operating subsidiary. In January 2003, we acquired Spacelabs Burdick, Inc, at which time we changed its name to Burdick, Inc. Burdick, which was founded in 1913, is a leading supplier of ECGs, Holter monitors and cardiology information systems to U.S. physicians’ offices.

     Industry Background

      The American Heart Association reports there are over 60 million patients in the U.S. with active or developing heart disease. Heart disease is the leading cause of death in the U.S. The American Heart Association also estimates the direct cost of treating heart disease and stroke at nearly $200 billion annually, representing 13% of all domestic healthcare spending. Our products compete in three medical equipment market sectors: cardiovascular monitoring equipment, ambulatory telemetry equipment, and cardiac catheterization monitoring equipment. Based upon reports of Frost & Sullivan, a leading independent research firm, we estimate combined 2002 sales in these market sectors in excess of $770 million.

      Cardiovascular care facilities provide patients with a variety of diagnostic and treatment techniques ranging from risk assessment and stress testing to complex surgeries and rehabilitation services. Diagnostic cardiology systems are crucial to cardiovascular care. The core of diagnostic cardiology is the electrocardiogram, or ECG waveform, a representation of the electrical activity of the heart. Clinicians use ECG waveform recordings and analyses to assess the presence and severity of cardiac disease, and to monitor the efficacy of treatments such as drugs, interventions, operations, and device implants. Effective use of the ECG waveform in patient management and the delivery of cardiovascular care requires that the entire process of recording, storing, analyzing, retrieving and distributing ECG waveform data be as rapid and cost effective as possible.

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      Despite the technological and clinical advances in cardiology, healthcare providers face significant challenges in delivering consistent and high quality cardiovascular care. Healthcare reform continues to place increasing pressure on providers of cardiovascular care to see and treat more patients faster. In addition, the need to control costs, increase efficiencies and manage data has introduced new layers into the decision making process for technology utilization. This changing healthcare environment has resulted in the following critical needs:

	•	systems and services tailored to the workflow needs of clinicians, to improve efficiencies and reduce training times;
	•	technologies that can effectively manage data from a variety of sources and be scaled from single offices to wide area networks;
	•	products that are implemented using standards such as DICOM and HL-7 for connectivity, to minimize the effort and expense required to integrate data across multiple sources;
	•	tools to improve the management of resources by tracking and trending cost efficiencies in healthcare delivery systems, thus providing data to payors which differentiate among competitive providers;
	•	methods for preserving and propagating healthcare data from legacy systems; and
	•	progressive migration to network and Internet technologies within a security structure that meets HIPAA requirements.

      Diagnostic cardiology systems that meet these needs and challenges will have a significant opportunity and advantage in the marketplace.

     Quinton Solution

      We provide a family of diagnostic cardiology systems that deliver reliable, cost effective solutions for cardiologists and other healthcare providers. Our systems are easy to use, with simple, intuitive user interfaces. Most of our diagnostic cardiology systems are based on a Microsoft Windows-based software architecture designed to integrate critical data capture, provide enterprise level access to data, and scale to meet the requirements of a variety of cardiovascular care facility environments. We believe our diagnostic cardiology systems provide our customers solutions for overcoming many of the challenges they face, including the following key benefits:

      Ease of use. Our systems feature intuitive user interfaces that are designed with significant input from clinicians and technologists to address the needs of providers and patients. Our systems automate many of the data collection functions by uploading patient information to a database for easy retrieval. Our systems use standard computer components and require minimal configuration. Our user interface has been designed to conform to the particular clinical procedure rather than adapting the procedure to the device. Additionally, users can customize the interface to meet their unique requirements. We believe this functionality enhances clinical success by allowing the user to concentrate on the patient and procedure. Conversely, some products offered by our competitors require significantly more interaction with the device. In addition, we believe the ease of use features of our products enable our customers to use our systems with significantly lower training requirements and higher productivity than competing systems that do not offer customizable user interfaces.

      Network compatibility. Many of our systems are designed to support a clinical network environment, enabling cardiologists to assimilate, collate and interpret data and disseminate results of diagnosis, treatment and rehabilitation. These systems collect data that may be stored in a local or network server database. Many of our systems connect to larger enterprise networks that allow data to be shared with other users, both within the facility and remotely via secure networks. To facilitate these connections, we have chosen to implement commonly used formats and protocols. These formats, such as portable document format and extensible markup language, facilitate the storage and dissemination of clinical information. In contrast, some of our competitors use proprietary formats to store and disseminate clinical information. We believe that standardized and efficient data handling are key to addressing the user requirements.

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      Effective data capture. Many of our systems automate and assist in the collection, interpretation and retrieval of data and can effectively display, for side-by-side comparison, the results of tests performed over an extended period. These systems improve clinical productivity and throughput, which is the number of reimbursable procedures completed per hour of system use. For our customers, greater throughput translates into greater return on investment from our systems. Unlike many competing systems, which require more intensive manual work, our systems automate the capture of clinical data and provide computer assisted interpretation where appropriate.

      Improved diagnostic speed and accuracy. As a result of easy to use controls, effective data capture, and computer assisted diagnosis, we believe our systems allow for improved diagnostic accuracy. The availability of historical results for comparison allows for a greater understanding of changes in the patient’s physical condition. In addition, by enabling the review and assessment of test results remotely our systems can greatly speed the time of diagnosis, which allows more rapid institution of appropriate therapy for the patient.

      Open technology architecture. Our Microsoft Windows-based technology adheres to established standards for image, waveform, data and report generation and dissemination, enabling healthcare providers to share data across a private network or via the Internet. This Windows-based technology platform was designed to support data integration activities with other third-party clinical systems. Unlike certain competitors that utilize proprietary architecture or protocols, we believe this technology will permit our customers to easily integrate our products and systems with their existing infrastructure, and scale to meet the needs of larger healthcare organizations.

     Our Advantages

      We believe our business has several advantages:

      Industry leading brands. Quinton’s founder, Wayne Quinton, developed the first treadmill designed for cardiac stress testing in 1953. Since 1966, Quinton has manufactured and sold high quality, reliable diagnostic cardiology systems. Burdick has been an innovator in medical devices since 1913 and in diagnostic cardiology since 1949. We believe Quinton and Burdick are among the most respected names in the field of cardiology. We believe we have enjoyed recognition in ECG, stress test systems, Holter monitors, cardiac catheterization management systems, and rehabilitation telemetry systems and are known for a high level of service, which drives customer loyalty and strong relationships with healthcare providers.

      Large installed base. We believe we have the leading U.S. installed base of stress test systems and rehabilitation telemetry systems. In addition, we have a large installed base of Holter monitors and cardiac catheterization management systems. Through the acquisition of Burdick, we have added a substantial installed base of electrocardiographs and ECG management systems and we have increased our stress systems and Holter systems installed base. Our combined installed base presents a substantial target market for future sales of products, systems, and software upgrades, as well as related service and consumables.

      National sales and service organizations. Our national sales organization, consisting of both Quinton’s direct sales force and Burdick’s independent distributor network, which is supported by a team of internal sales representatives, possesses extensive experience and expertise in diagnostic cardiology systems. In addition, we have a national service organization whose work enhances customer satisfaction and retention and supports our sales force with cross-selling capabilities. We believe we can rely on our national sales and service organizations to support the sale of our products, whether developed internally or acquired.

      Commitment to research and development. We have invested on average 12.9% of our revenues over the last three years in product development efforts (excluding Burdick, which was acquired in January 2003). Our research and development efforts contributed to the release of new versions of products in most of our major product categories in 2002.

     Growth Strategy

      Our growth strategy is to expand our domestic installed base through sales of new versions of our products and systems, increase our penetration of international markets through partnerships and acquisitions, develop

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      Domestic sales. We target our installed base for future sales of products, systems and software upgrades, as well as service and consumables to support new and existing products. We plan to continue to utilize Quinton’s direct sales force to focus on the acute care market. We plan to complement this sales effort through Burdick’s well established distributor network, which is focused on the primary care market. We plan to expand domestic sales by offering products and systems that address customer needs, from office practices through larger hospitals. We believe these customer segments will be increasingly receptive to our new technologies.

      International sales. We have generated approximately 8.3% of our revenues from international sales over the last three years (excluding Burdick, which was acquired in January 2003). We believe that international markets, particularly in Europe and Asia, represent a significant opportunity to increase our sales. We have developed products and systems to be compatible with regulatory and compliance standards in international markets. We plan to address this opportunity further through partnerships with, and acquisitions of, diagnostic cardiology system providers. For example, we have recently formed a strategic alliance with one of the leading diagnostic cardiology system providers in Japan to distribute our Q-Stress system in that country. We believe that we will be able to expand our international business further through Burdick’s international distributor network.

      Connectivity. We offer and continue to develop systems that enable customers to extract electrocardiographic and other data from stand-alone devices, link together disparate diagnostic and monitoring devices, and automate the storage, retrieval and processing of electrocardiographic data. These connectivity features address significant unmet needs in the diagnostic cardiology systems market, which should increase demand for, and lead to incremental sales of our other products and services.

      Acquisitions. We plan to pursue acquisitions of businesses, product lines, assets, or technologies that are complementary to our business or offer us other strategic benefits, such as enhanced clinical or technological value, expanded geographical reach, and additional sales or research and development capabilities. The fragmentation of the cardiology industry offers us a unique opportunity for growth and consolidation through selective acquisitions. We believe our brand and history in the cardiology industry, and the acquisition and integration experience of our management team, puts us in a position to take advantage of this opportunity. Funding for potential acquisitions could be in the form of our stock or, alternatively, from outside financing sources. Because of the uncertainties related to either of these funding alternatives, there can be no assurance that we will be successful in making future acquisitions.

     Our Products

      Revenues from sales of our systems and related consumable products were $41.3 million, $33.8 million and $37.4 million for each of the fiscal years ended December 31, 2000, 2001 and 2002, respectively. Revenues from sales of systems and related consumable products for these fiscal years do not include historical revenues of Burdick, which was acquired in January 2003. A description of the various systems and consumable products we offer include:

      Electrocardiographs. We offer a variety of electrocardiographs at various price points and in various configurations. These products cover the spectrum of market needs, ranging from low-cost units targeted for physicians’ offices to fully featured units that are designed for the most rigorous clinical and hospital settings.

      Stress test systems. Our integrated stress test systems allow cardiologists and other healthcare providers to monitor and analyze the performance of the heart under stress. Our stress systems record a patient’s heart rate, heart rhythm, blood pressure, and other vital signs during induced stress. Quinton treadmills, specifically designed for cardiac monitoring procedures, provide precise and replicable levels of exertion. Our system provides real time analysis, charting, and reporting, enabling cardiologists and other healthcare providers to diagnose patients’ heart disease more accurately and efficiently.

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      Holter monitoring systems. Our integrated Holter monitoring products and systems record and assess the performance of a patient’s heart during various activities over extended periods of time. The Holter recorder, which is typically worn for a period of 24 hours, records the patient’s heart rate, heart rhythm, and ECG waveform data. Our Holter offering includes both 3 lead and true 12 lead ECG waveform diagnostic capabilities.

      Cardiac catheterization management systems. Our Q-Cath monitors and systems allow cardiologists and other healthcare providers to monitor and analyze cardiovascular performance, vital signs, and coronary artery blockage during cardiac catheterization procedures. Cardiac catheterization is a minimally invasive diagnostic or therapeutic procedure involving the insertion of a small, sterile tube through a large blood vessel and into a patient’s heart. Q-Cath can be deployed as a standalone or networked system. In the network configuration, patient data from multiple labs can be reviewed and edited from a separate network workstation.

      Rehabilitation telemetry systems. Our integrated Q-Tel telemetry devices, database products and treadmills monitor the patient’s heart rate, heart rhythm, and ECG waveform data during rehabilitation exercises. Our Outcomes rehabilitation database provides real time clinical data and trend analysis to enable cardiologists and other healthcare providers to track and assess improvements in cardiovascular function.

      ECG management systems. We provide an ECG management system that automates the processing, storage, retrieval and editing of electrocardiographic data. Our Pyramis system extracts the ECG waveforms and arrhythmia data from ECGs via diskette, direct serial interface, telephone modem, or network connections.

      Consumable products and accessories. Diagnostic cardiology systems require lead wires and electrodes to be attached to the patient to retrieve and process cardiac electrical activity and chart paper to generate reports. We sell all of these items, including our patented Quik-Prep electrodes.

      In 2002, we introduced new versions of products in most of our product lines, and we are currently developing additional new versions of products in each of these product lines.

     Product Support and Maintenance Services

      Revenues from our support and maintenance services were $9.4 million, $9.0 million and $9.1 million for each of the fiscal years ended December 31, 2000, 2001 and 2002, respectively. Revenues from support and maintenance services do not include historical revenues of Burdick, which was acquired in January 2003. Our product support and maintenance organization supports our installed base. We provide product installation, repair and scheduled maintenance services, as well as software and hardware upgrades.

     Sales and Marketing

      Within the U.S. we market and sell our products, systems and services to hospitals and cardiology clinics through a dedicated national sales force that has broad experience in selling diagnostic cardiology systems. Each of our sales representatives sells our entire product line and is responsible for a region and a personal sales quota. At December 31, 2002, Quinton’s domestic sales force consisted of 30 sales representatives, including 28 direct sales representatives and two independent manufacturer’s representatives, managed by three regional managers. To complement our domestic sales force and increase our sales to existing customers, we encourage our service personnel to actively seek cross-selling opportunities. With the acquisition of Burdick, we have expanded our sales reach to include sales to primary care physicians through a well established independent distributor network, supported by a team of internal sales representatives. At December 31, 2002, Burdick had 23 sales representatives managed by 3 regional managers.

      Outside the U.S. we rely on indirect sales channels, using distributors to offer our products. Our arrangements with distributors are typically territory specific and cover several of our products. We provide our distributors with discounts based on a variety of factors including the annual volume of its orders.

      Our sales efforts increasingly target system sales opportunities. Our sales efforts historically promoted stand alone product sales, and were most successful in small and midsize hospitals, rehabilitation clinics and

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      Our marketing activity consists primarily of product marketing through product demonstrations, major cardiology meetings, publications in professional journals, telemarketing and website marketing. Our marketing efforts emphasize our products’ ease of use, connectivity, quality, and reliability. We organize our marketing function on a product line basis and we have product managers for each of our major product lines. In addition, we support the sales efforts of Burdick’s distributors by providing funding and other support for certain promotional activities.

      Quinton’s domestic and international sales and marketing staff consisted of 60 persons as of December 31, 2002, which includes our team of experienced sales support and application specialists who are responsible for providing pre-sale technical support and technical training for the sales team and for our distributors. Burdick’s total domestic and international sales and marketing staff consisted of approximately 34 persons as of December 31, 2002.

      We do not generally have significant sales order backlog. At both December 31, 2002 and 2001, total sales order backlog represented less than 30 days of anticipated sales volume.

     Customer Service and Support

      We believe that a broad range of support services is essential to the successful installation and utilization of our diagnostic cardiology systems. We offer a combination of online, telephone and on-site technical assistance services, including the ability to have assistance 24 hours a day, seven days a week. We also provide professional services for network analysis, design and implementation, and training and education. Our multiple support programs include basic and extended systems maintenance and parts replacement.

      At December 31, 2002, Quinton’s domestic service organization included 50 employees, 32 in domestic field service locations and the remainder in call-center operations and factory-based repair. Our large installed base facilitates the sale of service contracts and warranties, and presents a cross-selling opportunity for products that are complementary to our customers’ existing installations. In international markets our distributors provide support and other services. At December 31, 2002, Burdick’s service organization consisted of approximately 16 persons.

     Research and Development

      We believe that strong product development capabilities are essential to our strategy of enhancing, developing and incorporating improved functionality, and maintaining the competitiveness of our products in our core markets. We have assembled a team of engineers with experience in user interface design, SQL database management, COM and C++ tools, network computing, clinical algorithms, electrical engineering, and product verification and validation in clinical settings. Our research and development process is dependent on assessment of customer needs, identification and evaluation of new technologies, and monitoring market acceptance and demand. We have a structured process for undertaking product development projects that involves all functional groups at all levels within our company. This process is designed to provide a framework for defining and addressing the steps, tasks, and activities required to bring product concepts and development projects to market.

      Our research and development expenses were $7.5 million in 2000, $5.5 million in 2001, and $5.1 million in 2002. This represents approximately 12.9% of our revenues over that three-year period. Research and development expenses in total dollars and as a percentage of revenues for these fiscal years do not reflect research and development expenses nor revenues of Burdick. During this period, our research and develop-

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     Technology

      We use object-oriented design based on Microsoft technologies to create the software for many of our systems. We develop our systems’ user interfaces for many of our products using Microsoft Visual Basic and C++ tools. In addition, in many cases, the data storage layer has been developed on Microsoft SQL Server. Many of our systems have been designed for network operation and deployment using industry standard TCP/ IP network protocol. Many of our software modules have been developed as objects that can be reused in our other products as needed.

      We are designing many of our systems to meet emerging industry standards for data sharing. Final clinical reports from certain of our products can now be rendered in Adobe PDF format for easy transmission and viewing in standard browsers. Extensible markup language, or XML, is also used in certain of our products to communicate complex information with third-party systems, and the HL7 messaging standard will be supported to enable communications with leading hospital information systems. ECG waveform data can be transmitted in medical industry standard Serial Communication Protocol format through many of our products.

      Most of our systems include hardware components that connect to the patient and digitize ECG waveform signals, blood pressure, and other vital signs. These hardware components connect to the computer operating system via special software drivers. The digitized patient information is a continuous stream of data that is analyzed in real-time and communicated to the user interface components for display. Real-time analysis is a critical function that typically runs at a high priority within Microsoft Windows. Applications that require the storage of all real-time patient data collect this information as a part of the processing subsystem. Patient data and clinical results are stored and managed via Microsoft’s SQL Server.

     Manufacturing and Supply

      At Quinton’s Bothell, Washington facilities, we primarily manufacture, assemble, and test stress test systems, Holter monitoring systems, cardiac catheterization management systems, rehabilitation telemetry systems, medical treadmills and electrodes. As of December 31, 2002, Quinton had 49 employees in manufacturing and supply functions. At Burdick’s Deerfield, Wisconsin facilities, we manufacture and assemble ECG cardiographs, stress systems, Holter monitoring systems, and a variety of other products. As of December 31, 2002, Burdick had 53 employees in manufacturing and supply functions. In addition, limited manufacturing activities are performed at the facilities of our majority owned joint venture operation in Shanghai, China.

      We also rely upon other third-party suppliers to provide us with various materials used in the production and assembly of our devices and systems. We have long-standing supply relationships for essentially all our outsourced product components. We maintain a comprehensive quality assurance and quality control program that includes documentation of all material specifications, operating procedures, equipment maintenance and quality control methods. Our quality systems are based on and in compliance with the requirements of ISO 9001/ EN 46001 and the applicable regulations imposed by the FDA on medical device manufacturers.

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     Targeted Acquisition Opportunities

      We plan to pursue acquisition of businesses, product lines, assets or technologies that are complementary to our business or offer us other strategic benefits. We plan to actively evaluate potential acquisition opportunities in the following areas:

	•	arrhythmia and ischemia diagnostics;
	•	cardiac monitoring and telemetry;
	•	non-invasive cardiovascular imaging and stress testing;
	•	ECG management; and
	•	cardiology information management.

      Many single-product diagnostic cardiology system companies in these categories either address markets that are too small to justify national sales and service organizations or lack the capital to build such a distribution and service network. Without a strong distribution channel, industry-leading products can fail to successfully penetrate existing markets. We plan to expand our product lines, leverage the capabilities of our existing sales force and increase sales of our existing and new product lines by selectively acquiring those companies, or assets of companies, with strong differentiated technologies or product lines that complement ours. We believe that our national sales force, our large installed customer base, our technology and experienced management provide us with a suitable platform for acquisitions. Funding for potential acquisitions could be in the form of our stock or, alternatively, from outside financing sources. Because of the uncertainties related to either of these funding alternatives, there can be no assurance that we will be successful in making future acquisitions.

     Our Competition

      The following chart indicates the most significant competitors for each of our product lines:

      We believe that cardiologists and other healthcare providers consider the following factors in determining which products to purchase:

	•	quality, accuracy, and reliability;
	•	reputation of the provider;
	•	relative ease of use;
	•	depth and breadth of features;
	•	quality of customer support;
	•	frequency of updates;
	•	availability of third-party reimbursement;
	•	conformity to standards of care; and
	•	price.

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      We believe our products compete favorably on these factors. However, products offered by some of our competitors offer features that may compete favorably on these factors as well. The market for diagnostic cardiology systems is highly competitive and we expect competition to intensify. Many of our competitors enjoy substantial advantages, including greater resources that can be devoted to the development, promotion and sale of their products. In addition, many of our competitors may have more established sales channels, greater product development experience or greater name recognition.

     Third-Party Reimbursement

      In the U.S., as well as in foreign countries, government-funded or private insurance programs, commonly known as third-party payors, pay a significant portion of the cost of a patient’s medical expenses. A uniform policy of reimbursement does not exist among all these payors. We believe that reimbursement is an important factor in the success of any medical device.

      All U.S. and foreign third-party reimbursement programs, whether government funded or commercially insured, are developing increasingly sophisticated methods of controlling healthcare costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, second opinions required prior to major surgery, careful review of bills, encouraging healthier lifestyles and exploring more cost-effective methods of delivering healthcare. These types of programs can potentially limit the amount which healthcare providers may be willing to pay for medical devices.

      The federal Centers for Medicare & Medicaid Services issued a Final Rule on its Prospective Payment System For Outpatient Services on April 7, 2000. This rule provides for a new system to reimburse Medicare outpatient surgical services provided in a hospital, and currently authorizes reimbursement for procedures performed using our current products.

     Government Regulation

      Our products are medical devices subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, and other regulatory agencies. FDA regulations govern, among other things, the following activities that we perform and will continue to perform in connection with medical devices:

	•	product design and development;
	•	product testing;
	•	product manufacturing;
	•	product labeling and packaging;
	•	product handling, storage, and installation;
	•	premarket clearance or approval;
	•	advertising and promotion; and
	•	product sales, distribution, and servicing.

      FDA’s premarket clearance and approval requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the U.S. must first receive 510(k) clearance or premarket approval from the FDA. The FDA classifies all medical devices into one of three classes. Devices deemed to pose lower risk are placed in either class I or II, which requires the manufacturer to submit to the FDA a 510(k) premarket notification, requesting clearance of the device for commercial distribution in the U.S. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device are placed in class III requiring premarket approval.

      510(k) clearance process. The 510(k) clearance process is the process applicable to our current products. To obtain 510(k) clearance, we must submit a premarket notification to the FDA demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device, a device that was in

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      After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance or could require premarket approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. We have modified aspects of some of our devices since receiving regulatory clearance. Some of those modifications we believe are not significant, and therefore, new 510(k) clearances or premarket approvals are not required. Other modifications we believe are significant and we have obtained new 510(k) clearances from the FDA for these modifications. In the future, we may make additional modifications to our products after they have received FDA clearance or approval, and in appropriate circumstances, determine that new clearance or approval is unnecessary. However, the FDA may disagree with our determination and if the FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain the required clearance or approval. Under these circumstances, we may also be subject to significant regulatory fines or other penalties.

      Premarket approval process. A premarket approval application must be submitted if the medical device is in class III (although the FDA has the discretion to continue to allow certain pre-amendment class III devices to use the 510(k) process) or cannot be cleared through the 510(k) process. A premarket approval application must be supported by, among other things, extensive technical, preclinical, clinical trials, manufacturing and labeling data to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.

      After a premarket approval application is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA will be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with Quality System regulations. New premarket approval applications or premarket approval application supplements are required for significant modifications to the manufacturing process, labeling and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and may not require as extensive clinical data or the convening of an advisory panel.

      Certain of our devices have been classified as class III pre-amendment devices. Although we currently have 510(k) clearance for these devices, the FDA has the discretion at any time to request premarket approval applications from us and all manufacturers of similar devices. If the FDA calls for premarket approval applications, we will be required to submit and obtain approvals for such devices within a specified period of time. If we fail to do so, we will not be allowed to continue marketing these products.

      Clinical trials. A clinical trial is almost always required to support a premarket approval application and is sometimes required for a 510(k) premarket notification. Clinical trials generally require submission of an application for an investigational device exemption to the FDA. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the investigational protocol is scientifically sound. The investigational device exemption application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated

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      Pervasive and continuing FDA regulation. After a medical device is placed on the market, numerous FDA regulatory requirements apply, including, but not limited to the following:

	•	Quality System regulation which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;
	•	Establishment Registration, which requires establishments involved in the production and distribution of medical devices, intended for commercial distribution in the U.S. to register with the FDA;
	•	Medical Device Listing which requires manufacturers to list the devices they have in commercial distribution with the FDA;
	•	Labeling regulations, which prohibit “misbranded” devices from entering the market, as well as prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and
	•	Medical Device Reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.

      Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include one or more of the following sanctions:

	•	fines, injunctions, and civil penalties;
	•	mandatory recall or seizure of our products;
	•	administrative detention or banning of our products;
	•	operating restrictions, partial suspension or total shutdown of production;
	•	refusing our request for 510(k) clearance or premarket approval of new product versions;
	•	revocation of 510(k) clearance or premarket approvals previously granted; and
	•	criminal penalties.

      International Regulation. International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ significantly.

      The European Union (currently consisting of the following 15 countries or member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the United Kingdom) has adopted legislation, in the form of directives to be implemented in each member state, concerning the regulation of medical devices within the European Union. The directives include, among others, the Medical Device Directive that establishes standards for regulating the design, manufacture, clinical trials, labeling, and vigilance reporting for medical devices. Under the European Union Medical Device Directive, medical devices are classified into four classes, I, IIa, IIb, and III, with class I being the lowest risk and class III being the highest risk. Under the Medical Device Directive, a competent authority is nominated by the government of each member state to monitor and ensure compliance with the Directive. The competent authority of each member state then designates a notified body to oversee the conformity assessment procedures set forth in the Directive, whereby manufacturers demonstrate that their devices comply with the requirements of the Directive and are entitled to bear the CE marking. CE is an abbreviation for Conformité Européene (or European Conformity) and the CE marking, when placed on a product, indicates compliance with the requirements of the applicable directive. Medical devices properly

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      Under the Medical Devices Regulations of Canada, all medical devices are classified into four classes, class I being the lowest risk class and class IV being the highest risk. Class I devices include among others, devices that make only non-invasive contact with the patient. Classes II, III and IV include devices of increasingly higher risk as determined by such factors as degree of invasiveness and the potential consequences to the patient if the device fails or malfunctions. Our current products sold in Canada generally fall into classes II and III. All class II, III and IV medical devices must have a valid Medical Device License issued by the Therapeutic Products Directorate of Health Canada before they may be sold in Canada (class I devices do not require such a license). We have obtained applicable Medical Device Licenses for many of our products. Failure to maintain required Medical Device Licenses in Canada or to meet other requirements of the Canadian Medical Devices Regulations (such as quality system standards and labeling requirements) for our products will preclude us from selling our products in Canada. We may not be successful in continuing to meet the medical device licensing requirements necessary for distribution of our products in Canada.

     Intellectual Property

      The success of our products depends in part on our internally developed intellectual property and other proprietary rights. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property and other proprietary rights. We also generally enter into confidentiality agreements with our employees and technical consultants.

      As of December 31, 2002, Quinton holds various U.S. and foreign patents, which expire at various times between 2004 and 2018. Quinton also has certain patent applications pending before foreign governmental bodies. Our patents and patent applications protect various aspects of our business including: filters for filtering ECG signals, monitoring electrodes and methods of interfacing the monitoring electrodes to a patient, and devices and methods for obtaining, analyzing, and presenting physiological data, such as various cardiology information. We also have perpetual rights to certain patented technology relating to Quinton’s medical treadmills. In addition, we have registered or applied to register certain trademarks with domestic and certain foreign trademark authorities.

      Our business also depends in part on licenses to use third parties’ software in our product offerings. We believe that the agreements we have in place with these third parties generally provide for such software at fair market value and that, if any such agreements expire or terminate, we would be able to obtain alternative software at comparable prices.

     Employees

      As of December 31, 2002, we had 228 full time employees, including 43 in research and development, 60 in sales and marketing, 50 in technical support services, 49 in manufacturing and supplies operations, and 26 in finance and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. With the Burdick acquisition in January 2003, we added an additional 150 employees, including 33 in research and development, 34 in sales and marketing, 16 in service, 53 in manufacturing operations and 14 in finance and administration.

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     Foreign Operations

      Prior to the acquisition of Burdick, we conducted no manufacturing operations nor did we operate any facilities outside of the United States. Sales to customers located outside the United States were approximately $5.6 million, $3.3 million, and $2.8 million in the years ended December 31, 2000, 2001 and 2002, respectively. These sales amounts do not include historical international sales of Burdick. Burdick performs certain limited sales and manufacturing activities through a majority owned joint venture operation located in Shanghai, China.

     Certain Factors That May Affect Future Results

      In addition to the other information contained in this report, the following risk factors could affect our actual results and could cause our actual results to differ materially from those achieved in the past or expressed in our forward-looking statements. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

The unpredictability of our quarterly revenues and operating results may cause the trading price of our stock to decrease.

      Our quarterly revenues and operating results have varied in the past and may continue to vary in the future due to a number of factors, many of which are outside of our control. Factors contributing to these fluctuations include:

	•	changes in our ability to obtain products and product components that are manufactured for us by third parties, such as Holter monitors, as well as variations in prices of these products and product components;
	•	delays in the development or commercial introduction of new versions of products and systems;
	•	our ability to attain and maintain production volumes and quality levels for our products and product components;
	•	the impact of acquisitions, divestitures and other significant corporate events;
	•	effects of domestic and foreign economic conditions on our industry and/or customers;
	•	adoption of our system-oriented sales approach;
	•	changes in the demand for our products and systems;
	•	varying sales cycles that can take up to a year or more;
	•	changes in the mix of products and systems we sell;
	•	unpredictable budgeting cycles of our customers;
	•	delays in obtaining regulatory clearance for new versions of our products and systems;
	•	increased product and price competition;
	•	the impact of regulatory changes on the availability of third-party reimbursement to customers of our products and systems;
	•	the loss of key sales personnel or distributors; and
	•	seasonality in the sales of our products and systems.

      Due to the factors summarized above, we believe that period-to-period comparisons of our operating results are not a good indication of our future performance and should not be relied on to predict future operating results. Also, it is possible that, in future periods, our operating results will not meet the expectations of public market analysts or investors. In that event, the price of our common stock may decrease.

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Failure to keep pace with changes in the marketplace may cause us to lose market share and our revenues may decrease.

      The marketplace for diagnostic cardiology systems is characterized by rapid change and technological innovation, requiring suppliers in the market to regularly update product features and incorporate new technologies in order to remain competitive. In developing and enhancing our products we have made, and will continue to make, assumptions about which features, technology standards and performance criteria will be attractive to, or demanded by, our customers. If we implement features, standards and performance criteria that are different from those required by our customers or if our competitors introduce products and systems that better address these needs, market acceptance of our offerings may suffer or may become obsolete. In that event, our market share and revenues would likely decrease.

Failure to develop and commercialize new versions of our products would cause our operating results to suffer.

      To be successful, we must develop and commercialize new versions of our products. Our products are technologically complex and must keep pace with rapid and significant technological change, comply with rapidly evolving industry standards and government regulations, and compete effectively with new product introductions of our competitors. Accordingly, many of our products require significant planning, design, development and testing at the technological, product and manufacturing process levels. Our success in developing and commercializing new versions of our products is affected by our ability to:

	•	accurately assess customer needs;
	•	develop products that are easy to use;
	•	minimize the time required to obtain, as well as the costs of, required regulatory clearance or approval;
	•	price competitively;
	•	manufacture and deliver on time;
	•	accurately predict and control costs associated with manufacturing, installation, warranty and maintenance;
	•	manage customer acceptance and payment;
	•	limit demands by our customers for retrofits; and
	•	anticipate and compete effectively with our competitors’ efforts.

      The rate of market acceptance of our current or future products and systems using our recently introduced Microsoft Windows-based software platform may impact our operating results. In addition, we may experience design, manufacturing, marketing or other difficulties that could delay or prevent our development, introduction or marketing of new versions of our products. Such difficulties and delays could cause our development expenses to increase and harm our operating results.

If market conditions cause us to reduce the selling price of our products and systems, or our market share is negatively affected by the activities of our competitors, our margins and operating results will decrease.

      The selling price of our products and systems and the extent of our market share are subject to market conditions. Market conditions that could impact these aspects of our operations include:

	•	delays in product launches;
	•	lengthening of buying or selling cycles;
	•	the introduction of competing products;
	•	price reductions by our competitors;

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	•	development of more effective products by our competitors;
	•	hospital budgetary constraints; and
	•	changes in the reimbursement policies of government and third-party payors.

      If such conditions force us to sell our products and systems at lower prices, or if we are unable to effectively develop and market competitive products, our market share, margins and operating results will likely decrease.

If we fail to successfully integrate acquired businesses, including Burdick and the treadmill manufacturing business, product lines, assets or technologies, our operating results may suffer.

      As part of our growth strategy, we acquired the treadmill manufacturing business in October 2002 and Burdick in January 2003. As a result of these acquisitions, we increased our headcount significantly and added additional products, technology and manufacturing operations. Integrating these acquisitions with our business will require a substantial amount of time and effort from our management team. This diversion of management’s attention, as well as any difficulties encountered in the integration process, could have an adverse impact on our business and our future operating results. Moreover, our failure to successfully integrate these acquisitions, particularly Burdick, may result in the loss of sales and customers of Burdick. We intend to selectively acquire other businesses, product lines, assets, or technologies. Integration of future acquisitions will require significant management attention and, if not accomplished successfully, could harm our business, our acquired entity’s business and our future operating results.

If we fail to maintain our distributor relationships our sales and operating results may suffer.

      Burdick sells its products, both domestically and internationally, principally through third party distributors, and Quinton sells its products internationally through third party distributors. While both Burdick and Quinton have well established relationships with these distributors, the underlying agreements are generally for periods of one year or less. If these agreements are cancelled or if we are unable to renew them as they expire, our sales and operating results may suffer materially.

We may need additional capital to continue our acquisition growth strategy.

      Successful continued execution of our acquisition strategy depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and, if necessary, to obtain satisfactory debt or equity financing. We are likely to require additional debt or equity financing to make any further significant acquisitions. Such financing may not be available on terms that are acceptable to us or at all. If we are required to incur additional indebtedness to fund acquisitions in the future, our cash flow may be negatively affected by additional debt servicing requirements and the terms of such indebtedness may impose covenants and restrictions that provide us less flexibility in how we operate our business. Recent performance of our stock price may make it difficult to make acquisitions using our stock as consideration. Moreover, use of our stock to fund acquisitions may have a significant dilutive effect on existing shareholders.

Our lack of customer purchase contracts and our limited order backlog make it difficult to predict sales and plan manufacturing requirements, which can lead to lower revenues, higher expenses and reduced margins.

      We do not generally have long-term purchase contracts with customers who order products on a purchase order basis. In limited circumstances, customer orders may be cancelled, changed or delayed on short notice. Lack of significant order backlog makes it difficult for us to forecast future sales with certainty. Long and varying sales cycles with our customers make it difficult to accurately forecast component and product requirements. These factors expose us to a number of risks:

	•	if we overestimate our requirements we may be obligated to purchase more components or third-party products than is required;

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	•	if we underestimate our requirements, our third-party manufacturers and suppliers may have an inadequate product or product component inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenues;
	•	we may also experience shortages of product components from time to time, which also could delay the manufacturing of our products; and
	•	over or under production can lead to higher expense, lower than anticipated revenues, and reduced margins.

If we do not develop or maintain successful relationships with international distributors, our growth may be limited, sales of our products and systems may decrease and our operating results may suffer.

      During 2000, 2001, and 2002, we generated approximately 8% of our revenues from international sales and our growth strategy contemplates expanded efforts to increase international sales. All of our international sales in recent periods were attributable to third-party distributors, and our success in expanding international sales in the future will depend on our ability to develop and manage a network of international distributors and the performance of our distributors. Because we do not generally have long-term contracts with our distributors, our distribution relationships may be terminated on little or no notice. If we lose any significant international distributors, or if any of our distributors devote more effort to selling competing products and systems, our international sales and operating results may suffer and our growth may be limited. Consequently, our success in expanding international sales may be limited if our distributors lack, or are unable to develop, relationships with important target customers in international markets.

Undetected product errors or defects could result in increased warranty costs, loss of revenues, product recalls, delayed market acceptance and claims against us.

      Any errors or defects in our products discovered after commercial release could result in:

	•	failure to achieve market acceptance;
	•	loss of customers, revenues and market share;
	•	diversion of development resources;
	•	increased service and warranty costs;
	•	legal actions by our customers; and
	•	increased insurance costs.

Inadequate levels of reimbursement from governmental or other third-party payors for procedures using our products and systems may cause our revenues to decrease.

      Significant changes in the healthcare systems in the U.S. or elsewhere could have a significant impact on the demand for our products and services as well as the way we conduct business. Federal, state and local governments have adopted a number of healthcare policies intended to curb rising healthcare costs. In the U.S., healthcare providers that purchase our products and systems generally rely on governmental and other third-party payors, such as federal Medicare, state Medicaid, and private health insurance plans, to pay for all or a portion of the cost of heart-monitoring procedures and consumable products utilized in those procedures. The availability of such reimbursement affects our customers’ decisions to purchase capital equipment. Denial of coverage or reductions in levels of reimbursement for procedures performed using our products and systems by governmental or other third-party payors would cause our revenues to decrease. We are unable to predict whether federal, state or local healthcare reform legislation or regulation affecting our business may be proposed or enacted in the future, or what effect any such legislation or regulation would have on our business.

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If we fail to obtain or maintain applicable regulatory clearances or approvals for our products, or if clearances or approvals are delayed, we will be unable to commercially distribute and market our products in the U.S. and other jurisdictions.

      Our products are medical devices that are subject to significant regulation in the U.S. and in foreign countries where we do business. The processes for obtaining regulatory approval can be lengthy and expensive, and the results are unpredictable. If we are unable to obtain clearances or approvals needed to market existing or new products, or obtain such clearances or approvals in a timely fashion, it could adversely affect our revenues and profitability.

     Where You Can Get Information We File With the SEC

      We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. The address of the SEC’s Internet site is http://www.sec.gov.

      We also maintain an Internet site at http://www.quinton.com. We make available free of charge on or through our Internet site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We will voluntarily provide electronic or paper copies of our filings free of charge upon request.

Item 2.     Properties

      We have facilities located in a building complex in Bothell, Washington which house our corporate offices and certain of our manufacturing, research and development and related customer support services operations, as well as the marketing, administration and finance and administration departments. We occupy approximately 147,000 square feet in this complex. Our lease of the Bothell facility expires in December 2003. We are currently negotiating for a possible renewal of this lease beyond 2003 and also exploring other alternatives.

      We also have a facility in Deerfield, Wisconsin, which houses additional manufacturing, research and development, customer support services, marketing and finance and administrative functions. This is a 100,000 square foot leased facility. The lease expires in 2008.

Item 3. Legal Proceedings

      In November 2000, we disputed the notice of termination from a former supplier, Zymed, Inc., and initiated a lawsuit in the federal district court for the Western District of Washington against the supplier. We incurred significant costs in prosecuting this lawsuit in 2001 and in 2002. The case went to trial and concluded in January 2003. The jury found in favor of the supplier and, consequently, we did not obtain any award for damages. The Company does not expect to incur any significant additional expenses in connection with this lawsuit.

      We are not currently a party to any material legal proceedings.

Item 4.     Submission of Matters to a Vote of Shareholders

      No matters were submitted to a vote of the shareholders during the fourth quarter of the fiscal year ended December 31, 2002.

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PART II

      Our Common Stock is traded on the Nasdaq National Market (symbol “QUIN”). The number of shareholders of record of our Common Stock at March 11, 2003, was 152.

      High and low bid quotations for our Common Stock as quoted on the Nasdaq National Market for the periods indicated, since May 6, 2002, the date our common stock began trading, are as follows.