UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One) |                                                                                         
|---------- | ----------------------------------------------------------------------------------------
|ý          | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXHANGE ACT OF 1934     
|           | For the fiscal year ended December 31, 2005                                             
|o          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           | For the transition period from            to            .                               

Commission file number 001-16121

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VIASYS HEALTHCARE INC.(Exact Name of Registrant as Specified in Its Charter)

|Delaware                                                       |  | 04-3505871                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|227 Washington Street, Suite 200
Conshohocken, Pennsylvania    |  | 19428                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrant's telephone number, including area code:(610) 862-0800

Securities registered pursuant to Section 12(b) of the Act:

|Title of Each Class                                                                        |  | Name of Each Exchange on Which Registered      
|------------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Common Stock, $.01 par value
Series A Junior Participating Preferred Stock
Purchase Rights |  | New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:None

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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No ý

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 the filing requirements for at least
the past 90 days. Yes ý No o

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 into Part III of this Form 10-K or any amendment
to this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange
Act Rule 12b-2).

Large
accelerated filer o    Accelerated
filer ý    Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No ý

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 2, 2005 (the last business day of the
Registrant's most recently completed second fiscal quarter), computed by reference to $22.37, the price at which the stock was last sold, was approximately $543,128,321. For purposes of making this
calculation only, the Registrant has defined "affiliates" as including all executive officers, directors beneficial owners of at least ten percent of the Registrant's outstanding Common Stock.

As
of March 10, 2006, the Registrant had 32,245,030 shares of Common Stock outstanding. This number excludes 5,597 shares held by the Registrant as treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be filed no later than April 30, 2006, in connection with the 2006 Annual Meeting of Stockholders
to be held on May 11, 2006, are incorporated by reference into Part III of this Annual Report on Form 10-K.



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Information Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by us or on our behalf. We and our
representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange
Commission, reports to our shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act.
In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in or suggested by such forward-looking statements. The forward-looking statements contained in this report include but are not limited to statements regarding our belief
relating to the market positions with respect to our products, the growth opportunities for our business, our plan to develop new products, our ability to obtain raw materials for our significant
products, FDA regulations and process, our compliance with government regulations, competition, the impact of litigation on our business, the potential litigation that we may face as a result of our
entry into new markets, our expectation to continue to be in compliance with the financial covenants in our credit facilities, our dividend policy, the impact of recent accounting pronouncements, our
estimated capital expenditure for 2006, our belief regarding the long-term benefit of the restructuring plan, and our belief that we have sufficient liquidity and capital resources to
finance our operations and commitments for the foreseeable future.We undertake no obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.

A
wide range of factors could materially affect our future performance and financial and competitive position, including the following:



This
above list of factors is not exhaustive but merely illustrative of the many factors that may affect our future performance, financial and competitive position and the accuracy of
our forward-looking statements. Accordingly, all forward-looking statements must be evaluated with the understanding of their inherent uncertainty.

Item 1.Business

Overview

We are a healthcare technology company engaged in developing, manufacturing, marketing and servicing a variety of medical devices, instruments and medical and
surgical products for use in the respiratory diagnostics, neurocare, homecare, medical and surgical products markets. We were incorporated in Delaware in August 1995 as a wholly-owned
subsidiary of Thermo Electron Corporation ("Thermo Electron" or "former parent company"). Our business was formed from the combination of a number of enterprises separately acquired or originated by
Thermo Electron,

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including
Bird Medical Technologies, Inc., Bear Medical Systems, Inc., SensorMedics Corporation, Erich Jaeger GmbH, Nicolet Biomedical, Inc., and Tecomet, Inc. On
November 15, 2001 ("Spin-off Date"), as part of its reorganization plan, Thermo Electron spun-off its equity interest in our Company by distribution of a dividend to its
stockholders of record as of November 7, 2001. References to our Company for periods before the Spin-off Date are to the combined businesses of our former parent company from which
we were formed.

Previously,
our business was organized and operated through the following four reportable segments: Respiratory Technologies, Critical Care, NeuroCare and Medical and Surgical Products.
During the first quarter of 2005, we changed our reportable segments to reflect how we now manage our business. As a result, Respiratory Technologies and Critical Care operating segments were combined
into one operating segment called Respiratory Care. We also split our Medical and Surgical Products operating segment into two separate segments: MedSystems and Orthopedics.

Currently,
our business is organized and operated through four segments:



We
market our products in over 100 countries and our customers include hospitals, alternate care sites, home care providers, clinical laboratories, private physicians and original
equipment manufacturers. Our global revenues from continuing operations in 2005 totaled $510 million. Revenue, operating income from continuing operations and total assets by segment are set
forth in Note 17 to the Consolidated Financial Statements.

Acquisitions Completed During 2005

On November 2, 2005, we acquired all of the outstanding capital stock of Intermed Precision Limited ("Intermed"), a company based in Ireland that develops
and supplies orthopedic instruments, implants and micro-machined components used in minimally invasive surgical devices.

On
June 20, 2005 we acquired all outstanding capital stock of Pulmonetic Systems, Inc. ("Pulmonetics"), a company based in Minneapolis, Minnesota, that designs and
manufactures portable, mechanical ventilators for home healthcare.

On
March 16, 2005, we acquired all of the outstanding capital stock of Micro Medical Limited ("Micro Medical"), a company based in the United Kingdom that develops, manufactures
and markets a range of respiratory diagnostic products.

On
March 1, 2005, we acquired the medical division of Oxford Instruments plc ("Oxford Medical"), a business based in the United Kingdom that develops, manufactures, designs and
markets medical diagnostic and monitoring products as well as related disposables and accessories, including electromyography ("EMG") equipment and EMG needles and neurological disposables. On
June 30,

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2005,
we completed the sale of the obstetrics and cardiovascular businesses that we acquired in the Oxford Medical transaction.

On
January 18, 2005, we acquired substantially all of the assets of Navion Biomedical Corporation ("Navion"). As a result, we acquired a business that that develops, manufactures
and markets a device used to facilitate the placement of peripherally inserted central catheters and central venous catheters.

Our Strategy

We focus our development and marketing activities on growth segments of the healthcare industry. We seek to capitalize on our research, development and marketing
expertise, as well as our relationships with physicians and other medical caregivers in these markets to expand our business into high-value opportunities, including disposables, therapy
and service-based products. We have augmented our internal research by acquiring companies with strong research capabilities and in-licensing technologies. In addition to acquisitions and
new in-licensing opportunities, we are working to enhance and extend our existing product lines into next-generation products and to develop new products to broaden our
existing respiratory diagnostics, neurocare, home care, and medical and surgical product offerings. Products that we introduced or upgraded during 2005 included:



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Principal Businesses and Products

|Principal Businesses |                            | Principal Products |                                                                                                                                                                                 | Commenced
Operations
|-------------------- | -------------------------- | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------
|Respiratory Care     |                            |                    |                                                                                                                                                                                 |                     
|                     | Erich Jaeger               |                    | Pulmonary function testing and metabolic equipment; sleep diagnostic and therapy equipment                                                                                      |                     
|                     | SensorMedics               |                    | Pulmonary function testing and metabolic equipment; sleep diagnostic and therapy equipment                                                                                      |                     
|                     | VIASYS Clinical Services   |                    | Contract research services used in the investigation of respiratory illness                                                                                                     |                     
|                     | Micro Medical              |                    | Devices used to diagnose and monitor respiratory illnesses; devices for cardiovascular assessment; CO monitors for use in smoking cessation programs and quit smoking campaigns |                     
|                     | Bear Medical               |                    | Adult, pediatric and infant mechanical ventilators                                                                                                                              |                     
|                     | Bird Medical               |                    | Adult, pediatric and infant mechanical ventilators                                                                                                                              |                     
|                     | EME                        |                    | Infant nasal CPAP                                                                                                                                                               |                     
|                     | SensorMedics Critical Care |                    | Specialized high-frequency oscillatory ventilators                                                                                                                              |                     
|                     | Pulmonetic Systems         |                    | Adult and pediatric home care, transport and sub-acute ventilators                                                                                                              |                     
|NeuroCare            |                            |                    |                                                                                                                                                                                 |                     
|                     | Grason-Stadler             |                    | Hearing screening and diagnostic equipment                                                                                                                                      |                     
|                     | Nicolet Biomedical         |                    | Neurodiagnostic and monitoring equipment                                                                                                                                        |                     
|                     | Nicolet Vascular           |                    | Peripheral vascular diagnostic systems, transcranial doppler systems, fetal and vascular small doppler systems                                                                  |                     
|Medsystems           |                            |                    |                                                                                                                                                                                 |                     
|                     | Corpak                     |                    | Disposable enteral access and airway management devices                                                                                                                         |                     
|                     | Stackhouse                 |                    | Surgical barrier control systems                                                                                                                                                |                     
|Orthopedics          |                            |                    |                                                                                                                                                                                 |                     
|                     | Tecomet                    |                    | Orthopedic and spinal implants, X-ray grids for mammography, components for left ventricular assist devices and aerospace and industrial products                               |                     
|                     | Intermed                   |                    | Orthopedic surgical instruments, cardiac device components, and orthopedic implant components                                                                                   |                     

Respiratory Care

Our Respiratory Care group develops, manufactures, markets and services products for the diagnosis and treatment of respiratory, pulmonary and sleep-related
disorders. These products are used in a variety of settings, from intensive care to homecare, but generally share a common diagnostic focus on breathing and the availability of oxygen throughout the
body. We market our respiratory care products throughout the world to a variety of customers including hospitals, clinics, private physicians,

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and
research centers under the brand names Erich Jaeger, Micro Medical, SensorMedics and Pulmonetic Systems.

Our
Respiratory Care group also develops, manufactures, markets and services life support products to treat respiratory insufficiencies caused by illness, injury or premature birth.
These products are used in a variety of settings, from intensive care units to homecare. We market these products throughout the world to a variety of customers including hospitals, clinics, private
physicians, research centers and
original equipment manufacturers under the VIASYS, Bird Products, Bear Medical, EME, Pulmonetic Systems and SensorMedics Critical Care brand names.

Our
Respiratory Care business is comprised of the following product lines:



Lung Function Testing Equipment

Lung or pulmonary function testing equipment measures and analyzes breathing in order to evaluate the condition of the heart, lungs and metabolism. These
instruments assist in the diagnosis of heart and lung disease and in the evaluation of a patient's fitness and metabolic condition. In pulmonary function testing, a patient typically breathes into a
mouthpiece connected to a diagnostic instrument. This instrument measures the gas concentration, air flow and air volume and collects data on the level of exchange of oxygen and carbon dioxide in the
patient's lungs.

We
market our lung function diagnostic equipment globally under the SensorMedics, Micro Medical and Erich Jaeger brand names. We offer a broad line of pulmonary function testing
equipment, from basic spirometry products, which measure the rate and volume of breathing, to complete pulmonary
function and metabolic systems, which measure a wide range of heart, lung and metabolic functions. Our principal pulmonary function testing products are:



We
believe that through our combined SensorMedics, Micro Medical and Erich Jaeger businesses we represent one of the largest global manufacturers of lung function testing equipment.

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Sleep Diagnostic and Therapeutic Equipment

Sleep diagnostic and therapeutic equipment measures a variety of respiratory and neurological functions to assist in the diagnosis, monitoring and treatment of
sleep disorders, such as snoring and obstructive sleep apnea, a condition that causes a person to stop breathing intermittently during sleep.

We
market our sleep diagnostic and therapeutic testing systems under the SensorMedics and Erich Jaeger brand names. Our sleep diagnostic products range from basic sleep diagnostic
systems that monitor one patient to networked, modular, expandable sleep labs that can monitor multiple patients
simultaneously. Our sleep therapy product line for homecare use includes CPAP systems that assist breathing to allow for uninterrupted sleep. Our principal sleep diagnostic and therapeutic devices
are:



We
believe we hold a market leadership position in sleep diagnostics.

VIASYS Clinical Services ("VCS")

Our clinical services business provides technology and services including VIAPAD, our proprietary
electronic data capture device, to several major pharmaceutical, biotechnology and clinical research organizations. We assist these companies and organizations in the monitoring of subjects in
clinical research studies which investigate treatments for respiratory illnesses. VCS provides customers with high quality data during their clinical studies, which can result in the need for fewer
patients and accelerated data capture. VCS' competence is true paperless data collection in global clinical trials and reliable data capture with centralized data management and reporting for
diagnostic and home monitoring equipment (including electronic diaries).

We
believe the clinical services market offers a significant opportunity for growth within Respiratory Care, as well as in other segments of our Company, such as in our NeuroCare group.

Mechanical Ventilators

Mechanical ventilators are used by patients who are unable to breathe adequately without assistance due to disease or injury. These devices pump heated,
humidified, oxygen-enriched air into the lungs at regulated pressures, volumes and times in order to approximate normal breathing or to modify breathing to treat disorders. They are typically
configured either for adult, pediatric or neonatal use and are marketed globally under the BIRD®, BEAR®, EME®, SENSORMEDICS®, PULMONETIC
SYSTEMS and VIASYS Healthcare® brand names.

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Our
principal mechanical ventilators are:

|                                                                                                                                                                               |  | Usage
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----
|
|AVEA®,a high-end volume/pressure ventilator with extensive monitoring                                                                                                          |  |      
|VELA®,a portable volume/pressure ventilator that can be used for invasive and non invasive ventilation                                                                         |  |      
|TBIRD®,a portable full-feature ventilator that can be used in both hospital and alternative care sites                                                                         |  | X    
|Pulmonetic Systems LTV Ventilator,an ultra small, lightweight, battery-powered ventilator that can be used in homecare and for certain types of emergency medical
applications |  | X    
|V.I.P. BIRD ® & BEAR CUB® 750,ventilators for neonatal and pediatric intensive care units                                                                                      |  |      

Specialty Products

In addition, we offer high-frequency oscillatory ventilators ("HFOV"), which are specialized devices designed to provide superior pulmonary gas
exchange, while protecting the patient's lungs from damage that may be caused by the cyclic expansion and contraction characteristic of conventional ventilators. Our HFOV products are listed by the
U.S. Food and Drug Administration as Class III devices, which require a higher level of "evidence of safety and efficacy" through successful prospective randomized clinical trials, a standard
not required of conventional ventilators. Our primary HFOV products, which are marketed under the SensorMedics brand name, are:



We
also offer a variety of related products including:



We
believe our respiratory care business is a market leader in both home care and hospital ventilation markets.

NeuroCare

Our NeuroCare group develops, manufactures, markets and services a comprehensive line of neurological, vascular and audiology diagnostic systems that are used by
physicians and medical technologists to assist in the diagnosis and monitoring of neurological, vascular, brain and auditory disorders. We market our portfolio of products globally to a variety of
customers under brand names

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such
as Grason-Stadler, Nicolet, TECA, Medelec and Nicolet Vascular. Our NeuroCare business is comprised of the following product lines:



Electromyography and Evoked Potential

EMG is the measurement of electrical activity in the nerves and muscles. EP is the monitoring of patient response to stimuli in order to evaluate the condition of
specific nerve pathways. Physicians and technicians in the fields of neurology, physical medicine and rehabilitation use EMG and EP data to confirm the diagnosis of various diseases and disorders,
including carpal tunnel syndrome, Lou Gehrig's (ALS) disease, multiple sclerosis and spinal cord injury. Our principal EMG and EP diagnostic products are the VikingSelect,
VikingQuest and TECASynergy and Medelec.

Electroencephalography

An EEG is a visual display of electrical activity generated by nerve cells in the brain. Placing electrodes on the scalp allows the brain's activity to be
amplified and displayed in rising and falling potentials called brain waves. Traditionally, physicians use EEGs primarily for the diagnosis of epilepsy and the monitoring of surgical and
pharmaceutical treatments. Our principal EEG diagnostic product line is the NicoletOne system, introduced in mid-2004, which allows screening of brain wave abnormalities.
Increasingly, clinicians are monitoring at-risk acute care patients (especially neonatal and neurological patients) to guide therapies and improve outcomes. Our NicotletOne
Monitor is specifically designed to work in an acute care team setting with its compact size and ease-of-use.

Long-Term Monitoring

Our epilepsy monitoring system combines EEG data with digital video of a patient to enable a physician to assess the frequency and severity of epileptic and
non-epileptic seizures over a multiple day period, i.e., long-term monitoring. Our system helps the physician locate the site of epileptic seizures in the brain for surgical
intervention, to determine the proper dosage of drug therapies, or to determine other courses of treatment for a particular patient. Our principal LTM diagnostic product line is the
NicoletOne system, introduced in mid-2004, and enhanced in mid-2005.

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Audiology

Audiology is the assessment of hearing, auditory performance and balance disorders using a variety of testing techniques, including the evaluation of the function
of the ear and the measurement of neural responses to sound. We offer a broad range of audiometric devices for the screening and diagnosis of hearing loss and ear pathology that we market under the
brand name Grason-Stadler ("GSI"). Our flagship audiometric product is the GSI AUDERA device, which offers a full range of electrophysiological testing including auditory brainstem
response, auditory steady-state response and Otoacoustic emission. These measures are critical for the identification of hearing status of infants and young children who cannot participate in
behavioral hearing testing. In 2005, we introduced a new platform, the GSI Arrow, which provides a cost effective solution for audiology screening.

Intra-Operative Monitoring and Transcranial Doppler

Our intra-operative monitoring products assist surgeons in preserving the functional integrity of a patient's circulatory and nervous systems during and after
complex surgical procedures, such as vascular reconstruction and tumor removal. NeuroCare's primary products in this area are the ENDEAVOR CR, a sophisticated intra-operative monitoring
system that provides simultaneous EEG, EP and EMG monitoring for use in the operating room and intensive care units, and our Pioneer and Companion Transcranial Doppler systems, which monitor blood
flow to the brain in a non-invasive manner.

Physiologic Peripheral Vascular Diagnostics

Our physiologic testing systems include the VasoGuard and MicroLite, non-invasive products that use a variety of
technologies to detect, grade and follow various peripheral vascular diseases. Noninvasive testing is more cost-effective and speeds identification and location of disease thus reducing
time spent on other more expensive and invasive tests. In addition, these systems assist in optimizing other therapies, such as medication, surgery or vascular stent placement.

We
also offer a variety of products related to our neurodiagnostic instruments, including:



Patient Management Software Solutions

Our patient management software solutions are designed to improve clinical productivity by providing data management and connectivity to hospital information
systems. Our customers are able to collect, archive, share and view patient information in local databases and networks. In addition, they may use the solutions to reduce errors and improve
productivity by seamlessly sharing patient results across the hospital's clinical network.

Supplies and Accessories

Along with the extensive portfolio of audio, vascular and neurodiagnostic instruments we now offer a more comprehensive and complementary line of supplies and
accessories. In particular, our current line of EMG/IOM needles and probes are widely considered best-in-class.

We
believe we are market leaders in the neurodiagnostic, peripheral vascular diagnostic and audiologist-focused audio diagnostic markets.

MedSystems

Our MedSystems group develops, manufactures and markets a variety of disposable products for enteral feeding, access location, respiratory therapy and surgical
procedure protection. We market our disposable products, such as our feeding tube systems, location devices, disposable airway management devices, medical access systems and surgical barrier control
systems, to hospitals and homecare,

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long-term
care and, in some cases, to industrial customers. Our MedSystems business is comprised of the following products:



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Orthopedics

Our Orthopedics group designs, develops, and manufactures orthopedic implants and related instruments for orthopedic device manufacturers in the United States,
Europe and Japan. Additionally we engage in the manufacture of cardio vascular components for artificial hearts; we manufacture, using photo chemical etch technology, mammography grids; and
manufacture and assemble a variety of complex aerospace products for the communications, weapons and government space agencies. These products are produced in our manufacturing facilities in the
United States and Ireland. The United States operations are ISO 13485 qualified as well as FDA registered. Our customers market and distribute our products globally.

Our
new product development services provide our customers with the ability to design for manufacturability low cost implants that are easily transferred to commercial production and
meet product launch dates. The principal markets served for medical implants and related medical device uses include orthopedic surgical implants, spinal implants, neuro-crania-maxillofacial mesh,
surface textures for implants, left ventricular assist devices, and medical imaging. In November 2005, we acquired Intermed Precision Limited, a manufacturer of orthopedic implants and
instruments based in Ireland.

The
primary products manufactured by our Orthopedics group are as follows:



VIASYS Customer Care

VIASYS Customer Care provides warranty, technical support and long-term service contract options for our products. In addition, our customer care
professionals provide the training, installation, contract administration, parts and product upgrades to support both our direct customers and our worldwide distributor network. As of
December 31, 2005, we provided these services through an organization of approximately 330 experienced biomedical engineers and technicians.

VIASYS
Customer Care, in conjunction with our research and development organization, is currently working on enhancing the level of service through the introduction of remote monitoring
of selected VIASYS devices. We expect this enhancement to begin to be offered in 2006.

New Products, Research and Development

We seek to combine research and development spending with our significant knowledge base and key industry relationships to develop a pipeline of new products. We
have a very active product development portfolio that is now substantially more productive than past efforts due to the introduction of a disciplined process for managing research and development
throughout the Company in 2005. All projects are closely monitored through each step of development and the basic assumptions about the market, costs and competition are systematically reviewed to
continually validate the viability of the project.

Research
and development expenses totaled $32.3 million (6.3% of revenues), $23.5 million (6.0% of revenues) and $26.5 million (6.7% of revenues) in 2005, 2004, and
2003, respectively. Such amounts

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were
used to develop new products, improve existing products and implement new technology to produce these products. Our principal products currently under development are described below.

Our
Respiratory Care Group has broad initiatives to continue the growth of VCS and our clinical services business; improve our sleep diagnostic and therapy franchise; and develop
applications for nitric oxide, a therapeutic gas with broad clinical efficacy. VCS leverages our competencies in respiratory medicine, pulmonary mechanics and telemedicine to assist in the management
of pharmaceutical trials. We are in the process of developing both software and hardware engineering capabilities to the group in an attempt to improve our value to the pharmaceutical and
biotechnology industries and assist them in bringing better documented and better understood products to market faster than in the past. We continue to conduct research into potentially significant
areas for utilization of nitric oxide. While we are in the early phases, clinical results on a relatively small number of patients have been promising and we intend to increase our focus in this area.

Our
Respiratory Care Group introduced new JLab 5 software for the well-established Erich Jaeger MasterScreen product line as well as adding the new MasterScope Body and
MasterScope PFT to expand the product line and offer key functionality on a value-oriented configuration.

VMAX
Encore builds on the established VMAX and SensorMedics brands in the United States. VMAX and MasterScreen are two competitive but highly complementary product lines that have given
VIASYS market leadership in both the U.S. and Europe. Technical leadership is a critical success factor in this market. To maintain market leadership, VIASYS research and development efforts continue
for this series of products.

SomnoStar
software and firmware improvements were completed in 2005. Further sleep diagnostics product enhancements will continue in 2006 to add improved networking capability and
comprehensive productivity tools. These research and development projects will ensure the SomnoStar remains at the forefront of technical leadership in respiratory sleep diagnostics. A new sleep
amplifier platform developed by our NeuroCare Group will become the next generation amplifier for the SomnoStar. In addition to the Lyra Mask, our Respiratory Care Group is preparing to launch a more
comprehensive CPAP mask line in 2006.

Our
Respiratory Care Group is working on a number of initiatives to enhance and expand the capabilities of our flagship mechanical ventilator platforms, AVEA and VELA. We will continue
to develop these product platforms as long term projects. We are also expanding the use of Heliox medical gas on our AVEA ventilator. AVEA is the only comprehensive, full-featured
ventilator approved for use with Heliox gas in the United States. Heliox is a mixture of medical grade air and helium and its lighter than air qualities make the work of breathing easier for patients
with obstructive breathing disorders such as asthma or COPD. In 2005, we continued the introduction of SiPAP, the next generation of our patented INFANT FLOW noninvasive ventilation product.

Our
NeuroCare Group launched a number of products in 2005 to complement its extensive product portfolio. A next generation LTM (long term EEG monitoring) package for the NicoletOne
neurodiagnostic workstation was introduced bringing a common, simplified user interface across the long term monitoring, sleep, clinical EEG and ICU monitoring environments. The new LTM system also
includes improved signal amplifiers, off-the-shelf inter-device cabling, and full NicVue patient information management compatible services along with a variety of other
customer convenience and product extensibility improvements. The Arrow, a new compact, lightweight Audiometer was introduced as a broadening of the audio diagnostic and screening product line. In
addition, the Audera system was enhanced to include a DPOAE (Distortion Product Otoacoustic Emissions) test capability, employing a harmonic sound to help diagnose cochlear-based hearing disorders.
Language variants were added to the VikingSelect EMG system, NicoletOne line of neuro products, the NicVue patient information management system, and the Companion/Pioneer vascular diagnostics
products to present the appropriate native language to a larger base of customers. The new Elite disposable concentric EMG needle was released, providing enriched signal quality and optimal sharpness
for improved patient comfort. Finally, HIPAA compliance was in the forefront of all 2005 product developments.

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Our
MedSystems Group has recently launched products to establish a new market based on technologies that determine the position of catheters placed into the body such as feeding tubes
and central venous catheters. Generally, these catheters are placed "blindly" at the bedside and position is confirmed by x-ray. Significant healthcare costs are incurred to reposition
these catheters to the optimal position within the body. These new "medical access location" technologies will drastically reduce the time and dollars spent on repositioning these catheters, reduce
patient exposure to x-rays, and improve patient safety and outcomes. Further development and product line additions are planned in this area. MedSystems also expects to introduce several
products to revitalize our barrier protection systems, including a new helmet system for protecting physicians and patients in the surgical suite.

Raw Materials

We believe we have a readily available supply of raw materials for all of our significant products from various sources and do not anticipate any difficulties in
obtaining raw materials essential to our business. However, some components and raw materials are purchased from sole-source suppliers. We believe that we have the ability to locate, over
time, alternative sources of supply at prices competitive with our current supplies or to develop the internal capability to produce such components, if necessary. We have not had a significant
production delay that was primarily attributable to an outside supplier.

Government Regulation

United States

U.S. Food and Drug Administration ("FDA")

In the United States, the testing, manufacture and sale of our products is subject to regulation by numerous governmental authorities, principally the FDA and
corresponding state agencies. Pursuant to the Federal Food, Drug and Cosmetic Act and related regulations, the FDA regulates preclinical and clinical testing, development, manufacture, labeling,
distribution and promotion of medical devices in the United States. If we do not comply with applicable requirements, we can be subject to, among other things:



Further,
if our suppliers or companies to which we supply products do not meet their regulatory requirements, we could also be materially adversely affected.

A
medical device may be marketed in the United States only if: (1) the FDA gives prior authorization; (2) the device is subject to a specific exemption; or (3) the
device was marketed prior to May 28, 1976, the effective date of the Medical Device Amendments to the Federal Food, Drug and

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Cosmetic
Act. Depending on the type of medical device, FDA authorization typically takes one of the following two forms:



The
FDA classifies medical devices in the following three categories, according to the level of patient risk associated with a device.



If
human clinical trials of a device are required, whether to support a 510(k) or a PMA application, the sponsor of the trial, which is usually the manufacturer or the distributor of the
device, must have an investigational device exemption ("IDE"), before beginning human clinical trials. If a device presents a significant risk to the patient, the FDA must approve the sponsor's IDE
application before the clinical trial may start. An IDE application for a significant risk device must be supported by data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRB"), human clinical trials may begin at a specific number of investigational sites with a specific
number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin a clinical trial after obtaining approval for the study by the
IRB at each clinical site without the need for FDA approval of an IDE application.

The
Federal Food, Drug and Cosmetic Act regulates our quality control and manufacturing procedures by requiring us to demonstrate and maintain compliance with the Quality System
Regulation("QSR"). The QSR sets forth the FDA's current good manufacturing practices requirements, which cover the methods used in, and the facilities
and controls used for, the design, manufacture, packaging, labeling, storage, installation and servicing of all finished devices intended for human use. The QSR covers quality management and
organization, device design, buildings,

15

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equipment,
purchase and handling of components, production and process controls, packaging and labeling control, device evaluation, distribution, installation, complaint handling, servicing and
records. These requirements include, among other things, that:



The
FDA monitors compliance with the QSR and current good manufacturing practice requirements by conducting periodic inspections of manufacturing facilities. Violations of applicable
regulations noted by the FDA during inspections of our manufacturing facilities could materially adversely affect the continued marketing of our products.

The
FDA enforces post-marketing controls that include the requirement to file medical device reports ("MDRs") when we become aware of information suggesting that any of our
marketed products may have caused or contributed to a death, serious injury or serious illness. The FDA also requires the filing of an MDR when we become aware that any of our products has
malfunctioned and that a recurrence of that malfunction would likely cause or contribute to a death, serious injury or
serious illness. The FDA relies on MDRs to identify product problems and utilizes MDRs as one mechanism to determine whether it should exercise its enforcement powers.

Other
post-marketing requirements are applicable to our devices including, but not limited to, tracking for certain devices, as well as complaint handling, reporting of
corrections and removals and repair, replacement or refund. Companies can also voluntarily conduct a recall of a problem product.

Other
FDA requirements govern product labeling and promotion and prohibit a manufacturer from marketing an approved device for unapproved indications, among other things. If the FDA
believes that a manufacturer is not in compliance with the law, it can institute an enforcement action against the manufacturer, its officers and employees.

Other Regulations

We are also subject to numerous federal, state and local laws relating to safe working conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances.

International

We derive 43% of our revenues from sales of products outside the United States. Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. These laws and regulations range from simple product registration requirements in some countries to complex clearance and production
controls in others. As a result, the processes and time periods required to obtain foreign marketing approval may be longer or shorter than those necessary to obtain FDA approval or marketing
clearance. These differences may affect the efficiency and timeliness of international market introduction of new products.

A
medical device may only be marketed in the European Union ("EU") if it complies with the Medical Devices Directive ("MDD") and bears the CE mark as evidence of that compliance. To
achieve this, the medical devices in question must meet the "essential requirements" defined under the MDD relating to safety and performance and we, as manufacturer of the devices, must undergo a
verification of our regulatory compliance by a third-party standards certification provider, a so-called

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"Notified
Body". The nature of the assessment depends upon the regulatory class of products concerned, which in turn determines the precise form of testing undertaken by the Notified Body. Similar to
the system in the United States, medical devices in the EU are classified according to the risks posed by their use, with Class I being low risk devices, Class IIa being medium risk
devices, Class IIb being medium/high risk devices and Class III being high risk devices. Our devices fall into the medium and high risk categories and as such require a higher level of
regulatory assessment. As of December 31, 2005, our key respiratory care and neurocare products bore the CE mark.

The
requirements of the MDD must be complied with by the "manufacturer of the device" which is defined as the party responsible for the design, manufacture, packaging and labeling of the
device before it is placed in the EU market, regardless of whether these operations are carried out by this entity or on its behalf. Therefore, where our specialty products and materials are
incorporated by original equipment manufacturers into their products, compliance with the MDD is their responsibility.

Geographic
information is discussed in Note 17 to the Consolidated Financial Statements.

Third-Party Reimbursement

In the United States, health care providers that purchase medical devices generally rely on third-party payors to reimburse all or a portion of the cost of the
devices either directly or bundled as a component of a reimbursement for health care services. Examples of third-party payors are Medicare, Medicaid, private health insurance plans and health
maintenance organizations. Medicare is a federally funded program managed by the Centers for Medicare and Medicaid Services ("CMS"), through local fiscal intermediaries and carriers that administer
coverage and reimbursement for certain health care items and services furnished to the elderly and disabled. Medicaid is an insurance program for the poor that is both federally and state funded and
managed by each state. The federal government sets general guidelines for Medicaid and each state creates specific regulations that govern their individual program. Each payer has its own process and
standards for determining whether it will cover and reimburse a procedure or particular product. Private payers often rely on the lead of the governmental payers in rendering coverage and
reimbursement determinations. Therefore, achieving favorable Medicare coverage and reimbursement is usually a significant gating issue for successful introduction of a new product. The competitive
position of some of our products will depend, in part, upon the extent of coverage and adequate reimbursement for such products and for the procedures in which such products are used. Prices at which
we or our customers seek reimbursement for our products can be subject to challenge, reduction or denial by the government and other payors.

The
federal government and various state governments are currently considering proposals to reform the Medicare and Medicaid systems. We are unable to evaluate what legislation may be
drafted and whether or when any such legislation will be enacted and implemented. Some of these proposals, if adopted, could have a material adverse effect on our business, financial condition and
results of operations.

During
the past several years, the major third-party payors have substantially revised their reimbursement methodologies in an attempt to contain their health care reimbursement costs.
Medicare reimbursement for inpatient hospital services is based on a fixed amount per admission based on the patient's specific diagnosis. As a result, any illness to be treated or procedure to be
performed will be reimbursed only at a prescribed rate set by the government that is known in advance to the health care provider. If the treatment costs less, the provider keeps the overage; if it
costs more, the provider cannot bill the patient for the difference. No separate payment is made in most cases for products such as our medical devices when they are furnished or used in connection
with inpatient care. Many private third-party payors and some state Medicaid programs have also adopted similar prospective payment systems.

Third-party
payors have recently increased their emphasis on managed care, which has led to an increased emphasis on the use of cost-effective medical devices by health care
providers. In addition,

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through
their purchasing power, these payors often seek discounts, price reductions or other incentives from medical product suppliers.

Reimbursement
and health care payment systems in international markets vary significantly by country and include both government sponsored healthcare and private insurance. We have
received international reimbursement approvals for many of our products and plan to seek international reimbursement approvals for other products. In contrast to the United States, Europe is a highly
fragmented market, with a large number of distinct and uniquely structured healthcare delivery and payment systems. European health care systems are beginning to confront the same fiscal pressures and
limitations that characterize the United States health care system and are increasingly adopting many of the same cost and utilization control mechanisms. To the extent that any of our products are
not entitled to reimbursement in any international market, market acceptance of such products would be materially adversely affected.

In
addition to the foregoing Medicare coverage and reimbursement limitations, other aspects of the Medicare and Medicaid programs may negatively affect the Company. In 1977, Congress
adopted the Medicare and Medicaid Anti-Fraud and Abuse Amendments of 1977, which have been strengthened by subsequent amendments and the creation of the Office of Inspector General ("OIG")
to enforce compliance with the statute, as amended (the "Anti-Fraud and Abuse Law"). The Anti-Fraud and Abuse Law prohibits the knowing and willful offer, payment,
solicitation, or receipt of any remuneration in any form as an inducement or reward for either the referral of patients or the arranging for reimbursable services. A violation of the statute is a
felony and
could result in civil penalties, including exclusion from the Medicare program, even if no criminal prosecution is initiated.

The
United States Department of Health and Human Services has issued regulations from time to time setting forth so-called "safe harbors," which would protect certain limited
types of arrangements from prosecution under the statute. Failure to comply with each element of a particular safe harbor does not mean that an arrangement is per se in violation of the
Anti-Fraud and Abuse Law. As the comments to the safe harbors indicate, the purpose of the safe harbors is not to describe all illegal conduct, but to set forth standards for certain
non-violative arrangements. Nevertheless, if an arrangement implicates the Anti-Fraud and Abuse Law and full compliance with a safe harbor cannot be achieved, the Company risks
greater scrutiny by the OIG and, potentially, civil and/or criminal sanctions. The Company believes its arrangements are in compliance with the Anti-Fraud and Abuse Law; however, no
assurance can be given that regulatory authorities will not take a contrary position.

Moreover,
the Civil False Claims Act prohibits knowingly presenting (including "causing" the presentation of) a false, fictitious or fraudulent claim for payment to the United States
federal government. Actions under the Civil False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the government. Violations of the
False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the Civil False Claims Act, and the threat of significant liability, in its
investigations of health care providers, suppliers and manufacturers throughout the country for a wide variety of Medicare billing practices, and has obtained multi-million dollar settlements. Given
the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources in investigating healthcare providers', suppliers' and
manufacturers' compliance with health care billing, coverage and reimbursement rules and fraud and abuse laws.

In
addition, federal law includes other provisions that specifically prohibit certain types of manipulative Medicare billing practices. Federal law also provides for minimum periods of
exclusion from federal and state health care programs for certain offenses and frauds. Many states also have false claims and other health care fraud and abuse laws, which also may include civil and
criminal penalties.

Patents, Licenses and Trademarks

We pursue patent protection of our technology, products and product improvements both in the United States and in selected foreign countries. We also rely on
trade secrets and technological

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innovations
to develop and maintain our competitive position. In an effort to protect our trade secrets, we generally require our employees, consultants and advisors to execute confidentiality and
invention assignment agreements upon commencement of employment or consulting relationships with us.

We
have entered into a number of license and other arrangements under which we have obtained rights to manufacture and market some products or potential products. For instance, a number
of the therapeutic-based products that we are developing incorporate proprietary technologies that we have licensed from third parties. Under our existing licenses, we are subject to
commercialization, development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may
have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license, we may be required to license to the licensor
any related intellectual property that we developed.

We
do not consider any patent or related group of patents to be of such importance that its expiration or termination would materially affect our business.

Competition

The respiratory care, neurocare, medsystems, and orthopedics markets are highly competitive. We compete with many companies ranging from small
start-up enterprises to companies that are larger and more established than us, with access to significant financial resources and greater name recognition, research and development
experience and regulatory, manufacturing, and marketing capabilities. We believe that we compete in each of our markets primarily on the basis of reputation, product reliability and performance,
product features and benefits, price and post-sale service and support.

Our
Respiratory Care business competes with products from firms such as Maquet AG, Dräger Medical AG, General Electric Company, Tyco Healthcare Group, Ferraris Group PLC
and Respironics, Inc. The principal competitors of our NeuroCare segment include Bio-logic Systems Corporation, Nihon Kohden Corporation and XLTEK (Excel Tech Ltd). The
principal competitors of our MedSystems segment include the Ross Products Division of Abbott Laboratories, Tyco Healthcare Group, Vital Signs, Inc., The Dow Chemical Company and J. P. Stevens
Company. The principal competitors of our Orthopedics segment include Symmetry and Accelent.

Employees

As of December 31, 2005, we had approximately 2,302 full-time employees, of which approximately 1,628 were employed in the United States. None
of our employees based in the United States are unionized or subject to collective bargaining agreements. Some of our international employees are represented by either a labor union or a statutory
work council arrangement. In countries with labor unions or work councils, our ability to reduce our workforce or wage rates is subject to agreement or consultation with the appropriate labor union or
works council. We consider our employee relations to be good.

Available Information

Our website address is www.viasyshealthcare.com. Through a link on the Investors Section of our website, we make available, free of charge, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, and our proxy statements as soon as
reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission. Our Code of Business Conduct and Ethics for Directors, Code of Conduct,
Corporate Governance Guidelines and the charters of the Audit Committee, Compensation Committee and Nominating and Governance Committee of our Board of Directors are also available on the Investor
Section of our website. Additionally, printed copies of these documents may be obtained, without charge, by calling our Investor Relations Department at (610) 862-0799 or by
contacting: Investor Relations, VIASYS Healthcare Inc., 227 Washington Street, Suite 200, Conshohocken, PA 19428. The information on the website listed above is not and should not be considered
part of this Annual Report on Form 10-K and is intended to be an inactive textual reference only.

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Item 1A. Risk Factors

Demand for some of our products depends on the capital spending policies of our customers and on government funding policies. Changes in these policies could negatively affect
our business.

A
majority of our customers are hospitals. We also sell to laboratories, universities, healthcare providers and public and private research institutions. Many factors, including public
policy spending provisions, available resources and economic cycles have a significant effect on the capital spending policies of these entities. These factors can have a significant effect on the
demand for our products which would have an adverse effect on our results of operations. For example, a reduction in funding to major government research supported agencies, such as the National
Institutes of Health or the National Science Foundation, could materially adversely affect sales of our sleep diagnostic testing equipment.

We depend on third-party reimbursement to our customers for market acceptance of our products. Our profitability would suffer if third-party payors failed to provide
appropriate levels of reimbursement for the purchase or use of our products or if any governmental or third-party payor were to issue an adverse determination or restrictive coverage
policy.

Sales
of medical products largely depend on the reimbursement of patients' medical expenses by government healthcare programs and private health insurers. The cost of some of our
products is substantial. Without both favorable coverage determinations by, and the financial support of, government and third-party insurers, the market for some of our products could be limited.

Governments
and private insurers in many countries closely examine medical products and devices incorporating new technologies to determine whether to cover and reimburse for the
purchase or use of such products and devices and, if so, the appropriate level of reimbursement. We cannot be sure that third-party payors will cover and reimburse customers for purchases of future
products or that any such reimbursement will enable us to sell these products at profitable prices. We also cannot be sure that third-party payors will maintain the current level of reimbursement to
physicians and medical centers
for use of our existing products. Adverse coverage determinations or any reduction in the amount of this reimbursement could harm our business.

Third-party
payors emphasize managed care, leading to the use of cost-effective medical devices by healthcare providers. In addition, through their purchasing power, these
payors often seek discounts, price reductions or other incentives from medical products suppliers.

The
federal government and private insurers continue to consider ways to change the manner in which healthcare services are provided and paid for in the United States. In the future, it
is possible that the government may institute price controls and further limits on Medicare and Medicaid spending. These controls and limits could materially affect the payments we receive from sales
of our products. Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of the level of patient treatment and other countries
requiring application for, and approval of, government or third-party reimbursement. Even if we succeed in bringing new products to market, uncertainties regarding future healthcare policy,
legislation and regulations, as well as private market practices, could materially affect our ability to sell our products in commercially acceptable quantities at profitable prices.

We may need additional capital to sustain and expand our business, including acquisitions and the development of new products.

As
of December 31, 2005, we had cash and cash equivalents of $19.5 million and a $150.0 million revolving credit facility under which we have $70.2 million
outstanding, which includes $2.7 million of outstanding standby letters of credit, and of which $79.8 million was available for borrowing. The revolving credit facility can be increased
to $200.0 million at our request. Both cash and the credit facility may be used to fund the expansion of our business, either through acquisitions or development of new products. Our ability to
access the credit facility is dependent on complying with the debt

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covenants
that are part of that agreement. These covenants include a maximum leverage ratio of debt to earnings before interest, taxes and depreciation and amortization ("EBITDA") of 3.0, a minimum
ratio of EBITDA to interest expense of 4.0, minimum stockholders' equity and maximum annual capital expenditures of $30 million or 5% of the Company's consolidated net assets. While we were in
compliance with the debt covenants in the Facility at December 31, 2005 and expect to be able to meet these requirements in the future, failure to satisfy any of the conditions would require us
to renegotiate the facility on terms that may not be favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to fund our operations from
other financial institutions, we cannot assure you that we would be successful, or if we were successful that the new credit would be on terms that would be attractive to us in financing our business
plans. The credit facility is due to expire on May 3, 2010.

In
addition, we may need to seek capital beyond that available. Adequate funds for these purposes on terms favorable to us, whether through additional equity financing, debt financing or
other sources, may not be available when needed and, if consummated, may result in significant dilution to existing stockholders. If we are unable to secure additional funding when required, we may be
required to delay, scale back, and/or abandon some or all of our product development programs or proposed acquisitions.

We face aggressive competition in many areas of our business and our business will be harmed if we fail to compete effectively.

We
encounter aggressive competition from numerous companies in many areas of our business. Although we believe that our products currently compete favorably with respect to these
factors, we cannot give assurance that we can maintain our competitive position against our current and potential competitors. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial, technical and marketing resources than we have. We may not be able to compete effectively with these competitors. To remain
competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may have to adjust the prices of many of our products to stay competitive. In addition,
new competitors may emerge and entire product lines may be threatened by new technologies or market trends that reduce the value of these product lines.

A significant percentage of our total assets consist of goodwill from acquired companies and we may be unable to realize the value of this asset.

VIASYS
and its former parent company have paid substantial premiums over the fair value of the net assets of some of the companies that comprise our business. We have acquired
significant intangible assets, including approximately $261.9 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of December 31,
2005. This represents approximately 40% of our total assets as of that date. Our ability to realize the value of this asset will depend on future cash flows of the acquired businesses. Cash flow, in
turn, depends on how well we have identified these acquired businesses as desirable acquisition candidates and how well we can integrate these acquired businesses.

We may incur a variety of costs to engage in future acquisitions of companies, products or technologies, and the anticipated benefits of those acquisitions may never be
realized.

As
a part of our strategy to grow our business, we seek to make strategic acquisitions of, or significant investments in, complementary companies, products or technologies, although no
significant acquisition or investments are currently pending. We may not be successful in the future in identifying companies that meet out acquisition criteria. The failure to identify such companies
may limit the rate at which we
are able to grow our business. Furthermore, any future acquisitions that we do undertake could be accompanied by risks such as:



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We
cannot guarantee that we will be able to successfully integrate any business, products, technologies or personnel that we might acquire in the future, and our failure to do so could
harm our business.

The complexity presented by international operations could have a material adverse effect on our business.

International
revenues account for a substantial portion of our revenues. International revenues from continuing operations, including export revenues from the United States, accounted
for 43% of our
total revenues in 2005 and 44% of our total revenues in 2004. While we plan to continue expanding our presence in international markets, our international operations present a number of risks,
including the following:



Our competitive position is partially dependent on protecting our intellectual property, which can be difficult and expensive.

We
believe that the success of our business depends, in part, on obtaining patent protection for our products, defending our patents once obtained and preserving our trade secrets.
Patent and trade secret protection is important to us because developing and marketing new technologies and products is time consuming and expensive. We own many U.S. and foreign patents and intend to
apply for additional patents to cover our products. We may not receive enforceable patents from any pending or future patent applications owned by or licensed to us. The claims allowed under any
issued patents may not be broad enough to protect our technology.

Our
competitive position is also dependent upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and
techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could result in substantial
expense and diversion of attention from our business and may not adequately protect our intellectual property rights.

In
addition, we may be sued by third parties claiming that our products infringe on the intellectual property rights of others. This risk is exacerbated by the fact that the validity and
breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or
not valid, could result in

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substantial
costs, place a significant strain on our financial resources, divert management resources and harm our reputation. Such claims could result in awards of substantial damages, which could
have a material adverse impact on our operating results. In addition, intellectual property litigation or claims could force us to:



We are involved on an ongoing basis in claims and lawsuits relating to our operations, including product liability, patent infringement, employment, business practices,
commercial transactions, environmental and other matters.

We
are involved in the design, manufacture and sale of health care products, which face an inherent risk of exposure to product liability claims if our products are alleged to have
caused injury or are found to be unsuitable for their intended use. Any such claims could negatively impact the sales of products that are the subject of such claims or other products. Currently, we
are a party to claims and lawsuits alleging that our products have caused injury or death or are otherwise unsuitable. Moreover, we are involved in litigation relating to patent infringement,
employment, business practices, commercial transactions, environmental and other matters.

In
addition, when we enter into new markets or launch new products, we may face litigation related to our new products and/or instituted by our competitors in the new markets.

The
ultimate outcome of these lawsuits cannot be predicted with certainty. Any litigation or claims against us, whether or not valid, could result in substantial costs, place a
significant strain on our financial resources, divert management resources and harm our reputation. While we maintain insurance to limit our exposure to such claims, awards of substantial damages in
connection with such claims could have a material adverse impact on our operating results and financial conditions.

If we breach any of the agreements under which we license commercialization rights to products or technology from others, we could lose license rights that are important to our
business.

We
license rights to products and technology that are important to our business and we expect to enter into additional licenses in the future. Although the products and technology that
we currently license account for less than 5% of our total annual revenues, we expect that this percentage will increase as we develop and introduce additional licensed products to the market. For
instance, a number of the therapy-based products that we are developing incorporate proprietary technologies that we have licensed from third parties. Under these licenses, we are subject to
commercialization, development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach a license agreement, the licensor may
have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license, we may be required to license to the licensor
any related intellectual property that we developed.

Our ability to market and sell our products depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations. Our failure to obtain
or maintain regulatory approvals and compliance could have a material adverse effect on our business.

Our
products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in many other countries in which we do
business.

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The
principal risks that we face in obtaining and maintaining the regulatory approvals necessary to market our products include:



If
we fail to comply with applicable regulations, we could be subject to a number of enforcement actions, including warning letters, fines, product seizures, recalls, injunctions, total
or partial suspension of production, operating restrictions or limitations on marketing, refusal of the government to grant new clearances or approvals, withdrawal of marketing clearances or approvals
and civil and criminal penalties. Companies may also voluntarily conduct a recall of a problem product. For a summary of government regulations applicable to our business, see
"BusinessGovernment Regulation."

We may be unable to successfully develop and/or commercialize our new and existing products.

We
have undertaken a substantial internal development strategy under which we anticipate developing a number of therapy and service-based products. This strategy represents a departure
from our traditional business model and we may not have sufficient expertise and experience necessary to successfully implement this new strategy and develop these new products. Furthermore, the
successful development and commercialization of these new products will depend upon our ability to obtain regulatory approvals, as discussed above. If we are unable to obtain these regulatory
approvals, we will be unable to market and sell our products, which will negatively affect our business. Even if we are able to obtain regulatory approval for our products we may have difficulty in
bringing these products to market. In addition, once our new products are brought to market, their shipment may be delayed or the products may have to be discontinued based on design, mechanical,
software, regulatory or other issues. Finally, we may face competition from other companies who may have a well-established presence in the new market or a strong intellectual property
position. These matters may materially adversely affect our business and reputation and may make us unable to develop and/or commercialize new products in a successful manner.

Our dependence on suppliers for materials could impair our ability to manufacture our products.

Outside
vendors, some of which are sole-source suppliers, provide key components and raw materials that we use in the manufacture of our products. Although we believe that
alternative sources for these components and raw materials are available, any supply interruption in a limited or sole-source component or raw material could harm our ability to
manufacture the affected product until we identify and qualify a new source of supply. In addition, an uncorrected defect or supplier's variation in a component or raw material, either unknown to us
or incompatible with our manufacturing process, could harm our ability to manufacture the affected product. We may not be able to find a qualified alternative supplier in a reasonable time period, or
on commercially reasonable terms, if at all, which could impair our ability to produce and supply our products. If we cannot obtain a necessary component, we may need to find, test and obtain
regulatory approval for a replacement

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component,
which would cause significant delays that could have a material adverse effect on our business and operating results.

We are dependent on our key executives and technical staff, and the loss of key personnel or the failure to attract additional qualified personnel could harm our
business.

Our
business is highly dependent on our key executives and technical staff. The loss of key personnel or the failure to recruit necessary additional or replacement personnel will likely
impede the achievement of our business objectives. There is intense competition for qualified personnel our industry, and there can be no assurances that we will be able to attract and retain the
qualified personnel necessary for the growth of our business.

Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, and certain provisions of Delaware
law could prevent or delay transactions that our stockholders may favor.

Provisions
of our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws may discourage, delay or prevent a merger or acquisition that our
stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. For example, these provisions:



In
addition, our board of directors has adopted a stockholder rights plan intended to protect stockholders in the event of an unfair or coercive offer to acquire our Company and to
provide our board of directors with adequate time to evaluate unsolicited offers. This rights plan may have anti-takeover effects. The rights plan would cause substantial dilution to a
person or group that attempts to acquire us on terms that our board of directors does not believe are in the best interests of us and our stockholders and may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares.

As
a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with
any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our Board of Directors
could rely on Delaware law to prevent or delay an acquisition of us.

Item 1B.    Unresolved Staff Comments.

None.

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Item 2.    Properties

The following is a summary of the properties we owned or leased at December 31, 2005:

|Location                          |  | Leased/
Owned |  | Purpose                                                                                    |  | Business Segment
|--------------------------------- |  | ------------- |  | ------------------------------------------------------------------------------------------ |  | ----------------
|Palm Springs, CA                  |  | Owned         |  | Manufacturing, warehousing and research and development                                    |  | Respiratory Care
|Yorba Linda, CA                   |  | Leased        |  | Research and development, sales and administration                                         |  | Respiratory Care
|Palm Springs, CA                  |  | Leased        |  | Warehousing facility                                                                       |  | Respiratory Care
|Coleton, CA                       |  | Leased        |  | Research and development                                                                   |  | Respiratory Care
|Minneapolis, MN                   |  | Leased        |  | Manufacturing, sales and administration                                                    |  | Respiratory Care
|Hoechberg, Germany                |  | Leased        |  | Manufacturing, warehousing, research and development, sales and administration             |  | Respiratory Care
|Bilthoven, the Netherlands        |  | Leased        |  | Sales office                                                                               |  | Respiratory Care
|Paris, France                     |  | Leased        |  | Sales office                                                                               |  | Respiratory Care
|Brighton, United Kingdom          |  | Leased        |  | Property is vacant                                                                         |  | Respiratory Care
|Coventry, United Kingdom          |  | Leased        |  | Subleased to a third-party tenant                                                          |  | Respiratory Care
|Market Harborough, United Kingdom |  | Leased        |  | Subleased to a third-party tenant                                                          |  | Respiratory Care
|Chatham, United Kingdom           |  | Owned         |  | Manufacturing, warehousing, distribution, research & development, sales and administration |  | Respiratory Care
|Hamburg, Germany                  |  | Leased        |  | Warehousing, sales and administration                                                      |  | Respiratory Care
|Madison, WI                       |  | Leased        |  | Manufacturing, research and development, sales and administration                          |  | NeuroCare       
|Fitchburg, WI                     |  | Leased        |  | Manufacturing and research and development                                                 |  | NeuroCare       
|Fitchburg, WI                     |  | Leased        |  | Warehousing facility                                                                       |  | NeuroCare       
|Golden, CO                        |  | Leased        |  | Sales and administration                                                                   |  | NeuroCare       
|Hawthorne, NY                     |  | Leased        |  | Sales office                                                                               |  | NeuroCare       
|Reykjavik, Iceland                |  | Leased        |  | Research and development and administration                                                |  | NeuroCare       
|Bristol, United Kingdom           |  | Leased        |  | Research and development                                                                   |  | NeuroCare       
|Old Woking, United Kingdom        |  | Owned         |  | Manufacturing facility                                                                     |  | NeuroCare       
|Old Woking, United Kingdom        |  | Leased        |  | Manufacturing, distribution, sales and administration                                      |  | NeuroCare       
|Warwick, United Kingdom           |  | Leased        |  | Sales, administration and warehousing                                                      |  | NeuroCare       
|Milan, Italy                      |  | Leased        |  | Sales office and warehousing                                                               |  | NeuroCare       
|Madrid, Spain                     |  | Leased        |  | Sales office and warehousing                                                               |  | NeuroCare       
|Gorichem, the Netherlands         |  | Leased        |  | Sales and administration                                                                   |  | NeuroCare       
|Osaka, Japan                      |  | Leased        |  | Sales and administration                                                                   |  | NeuroCare       
|Tokyo, Japan                      |  | Leased        |  | Sales and administration                                                                   |  | NeuroCare       
|Wheeling, IL                      |  | Leased        |  | Manufacturing, research and development, sales and administration                          |  | MedSystems      
|Woburn, MA                        |  | Leased        |  | Manufacturing, research and development and sales                                          |  | Orthopedics     
|Woburn, MA                        |  | Leased        |  | Manufacturing                                                                              |  | Orthopedics     
|Wilmington, MA                    |  | Owned         |  | Manufacturing and administration                                                           |  | Orthopedics     
|Gort, Ireland                     |  | Leased        |  | Manufacturing, sales and administration                                                    |  | Orthopedics     
|Ornamore, Ireland                 |  | Leased        |  | Subleased to a third-party tenant                                                          |  | Orthopedics     
|Conshohocken, PA                  |  | Leased        |  | Executive offices                                                                          |  | Corporate       

26

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In connection with our acquisition of EME in 2002, we developed a plan to close our facilities located in Brighton, United Kingdom. The remaining lease expires in April 2007.

As
a result of our restructuring activities, there are a number of properties that are leased by us that we do not use or occupy at this time. These vacant properties include a facility
located in Coventry, United Kingdom, and a facility located in Market Harborough, United Kingdom. These leases expire in September 2010 and December 2014, respectively, and are currently
being subleased to third-parties.

In
the first quarter of 2005, all manufacturing operations previously performed in the Company's leased facility in Yorba Linda, California, were relocated to the Company's owned
facility in Palm Springs, California. In the first quarter of 2005, all sales and administration functions previously conducted in the Company's owned facility in Palm Springs and the leased facility
in Yorba Linda were relocated to a newly leased facility in Yorba Linda, California.

We
believe our facilities are in good condition, are suitable and adequate to accommodate our needs for the foreseeable future, and are, with minor exceptions as described above, fully
utilized and operating at normal capacity.

Item 3.    Legal Proceedings

The Company believes that there are no material pending legal proceedings or threatened claims to which the Company or any of its subsidiaries is a party or of
which any of our properties are subject. However, from time to time the Company faces litigation exposure for existing and potential claims. These claims primarily relate to intellectual property
matters, the manufacture and sale of medical devices, disputes with our distributors and employment matters.

The
Company is subject to litigation in connection with the Company's ventilation business, which is focused on providing care to critically ill patients. As of December 31, 2005,
Pulmonetics, a subsidiary of the Company acquired in 2005, had four product liability cases outstanding related to its ventilator products, and the Company's remaining ventilator business had three
product liability cases outstanding related to its ventilator products. The Company believes that its product liability insurance policies will compensate its exposure in connection with these product
liability cases, subject to applicable deductibles and policy limitations. In addition, the Company believes that it will be indemnified for its
exposure in connection with the cases against Pulmonetics under the Company's acquisition agreement related to the acquisition of Pulmonetics, subject to applicable deductibles and limitations
contained in such agreement.

Tecomet
Inc ("Tecomet"), a subsidiary of the Company, has been advised by Smith & Nephew, Inc. ("S&N") that S&N may file a claim against Tecomet for indemnity and/or
contribution in connection with more than 750 claims settled by S&N with patients who allegedly required revision surgeries resulting from S&N knee implants. Tecomet supplied knee components and a
surface texture to S&N that were allegedly used in the S&N knee implants. Tecomet learned in 2003 that S&N had advised the U.S. Food and Drug Administration that S&N was voluntarily withdrawing
certain of its knee systems from the market due to unspecified problems that required revision surgery in some patients. Tecomet is investigating the claims made by S&N. At this stage, it is not
possible to predict the likelihood or amount of any liability on the part of Tecomet nor the amount, if any, that would be covered under the Company's product liability insurance policies. If a suit
is filed against Tecomet, Tecomet intends to defend it vigorously. In 2004 and 2005, Tecomet was named as a defendant in three lawsuits in Texas brought by plaintiffs alleging that they had to undergo
revision surgeries when their S&N implants failed. These three cases were later dismissed without prejudice. In 2005, Tecomet was named as a defendant in a lawsuit in Oklahoma, which was brought by a
plaintiff alleging facts similar to those raised in the three cases that were filed in Texas. The Company believes that the amount of damages sought in the pending case would not be material to the
Company's consolidated financial position, results of operations or cash flows.

27

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Item 4.    Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal year 2005.

Item 4A.    Executive Officers of the Registrant

The following is a list or our executive officers, their ages and positions as of March 10, 2006:

|Name               |  | Age |  | Positions and Offices Presently Held                                    
|------------------ |  | --- |  | ------------------------------------------------------------------------
|Randy H. Thurman   |  | 56  |  | Chairman, President and Chief Executive Officer                         
|Matthew M. Bennett |  | 34  |  | Executive Vice President, Legal and Business Development                
|Lori J. Cross      |  | 45  |  | Executive Vice President and Group President, NeuroCare                 
|Martin P. Galvan   |  | 53  |  | Executive Vice President, Chief Financial Officer and Investor Relations
|John F. Imperato   |  | 48  |  | Senior Vice President, Business Operations                              
|Thomas I. Kuhn     |  | 52  |  | Senior Vice President and Group President, MedSystems                   
|Gregory G. Martin  |  | 50  |  | Group President, Customer Care and Information Technology               
|Giulio A. Perillo  |  | 59  |  | Senior Vice President and Group President, Orthopedics                  
|Edward Pulwer      |  | 59  |  | Executive Vice President and Group President, Respiratory Care          
|Scott Hurley       |  | 47  |  | Vice President and Corporate Controller                                 
|Wesley N. Riemer   |  | 48  |  | Vice President and Corporate Treasurer                                  

Set
forth below are biographical summaries, including positions and offices held during the past five years, of our executive officers as of March 10, 2006. There are no family
relationships among the executive officers. The executive officers are elected or appointed by the Board of Directors of the Company or by an appropriate subsidiary board of directors to serve until
the election or appointment and qualification of their successors or their earlier death, resignation or removal.

Randy H. Thurman; Chairman, President and Chief Executive Officer

Mr. Thurman has served as Chief Executive Officer since April 2001 and became Chairman of the Board upon our spin-off in
November 2001. Since July 2004, Mr. Thurman has also served as President. From 1996 to April 2001, Mr. Thurman served as Chairman and Chief Executive Officer of
Strategic Reserves LLC, a privately held company providing funding and strategic direction to healthcare technology companies. From 1993 to 1996, Mr. Thurman was Chairman and CEO of Corning
Life Sciences, Inc., which was a global leader in clinical laboratory testing, pharmaceutical research and esoteric reference testing. Concurrent with the aforementioned positions,
Mr. Thurman served as Chairman of the Board of Enzon Pharmaceuticals, Inc. from 1994 to 2001 (Nasdaq: ENZN). From 1984 to 1993, Mr. Thurman held various positions at Rhone-Poulenc
Rorer Pharmaceuticals, Inc., a global pharmaceutical company, ultimately as its President. Mr. Thurman also serves as Lead

28

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Director
of Valeant Pharmaceuticals International (NYSE: VRX) and as a director of Closure Medical Corporation (Nasdaq: CLSR).

Matthew M. Bennett; Executive Vice President, Legal and Business Development

Mr. Bennett joined VIASYS Healthcare Inc. in October 2003 as Corporate Vice President and General Counsel. In September 2004, he was
named Senior Vice President, General Counsel and Business Development, and in January 2006 he was named Executive Vice President, General Counsel and Business Development. Mr. Bennett
previously represented VIASYS Healthcare Inc. since its spin-off in 2001 as the company's outside counsel at Morgan, Lewis and Bockius LLP. Before Morgan Lewis, Mr. Bennett
was a defense attorney at Stradley Ronon Stevens & Young LLP and a clerk for the Superior Court of New Jersey.

Lori J. Cross; Executive Vice President and Group President, NeuroCare

Ms. Cross has served as Executive Vice President and Group President, NeuroCare since January 2006. From November 2004 to
January 2006, Ms. Cross served as Group President, NeuroCare. Ms. Cross joined the Company from General Electric-Datex-Ohmeda, Inc. where from 1998 to November 2003
she was President of Datex-Ohmeda U.S., responsible for the Anesthesia and Drug Delivery and Ventilation business areas and the U.S. Anesthesia Care selling organization. From 1997 to 1998,
Ms. Cross was General Manager, Global Information Solutions Business of Datex-Engstrom in Karlsruhe, Germany. Prior to 1997, Ms. Cross held various positions with Smith & Nephew
Dyonics, Inc. and Baxter Edwards, Inc.

Martin P. Galvan; Executive Vice President, Chief Financial Officer and Investor Relations

Mr. Galvan has served as Executive Vice President, Chief Financial Officer and Investor Relations since January 2006. From June 2001 to
January 2006, Mr. Galvan served as Senior Vice President, Chief Financial Officer, Director of Investor Relations. From June 2001 to October 2003, Mr. Galvan was
also Secretary. Prior to joining the Company, from 1999 to 2001, Mr. Galvan was Chief Financial Officer of Rodel, Inc. From 1979 to 1998, Mr. Galvan held several positions with
Rhone-Poulenc Rorer Pharmaceuticals, Inc., including Vice President, Finance Worldwide; President & General Manager, RPR Mexico & Central America; Vice President, Finance,
Europe/Asia Pacific and Chief Financial Officer, United Kingdom & Ireland.

John Imperato; Senior Vice President, Business Operations

Mr. Imperato has served as Senior Vice President, Business Operations since January 2006. From October 2001 to January 2006,
Mr. Imperato served as Corporate Vice President, Finance. Prior to joining the Company, from 2000 to 2001, Mr. Imperato was Chief Financial Officer of Auxilium A2, Inc., a
start-up pharmaceutical company engaged in development and marketing of ethical pharmaceutical products. From 1999 to 2000, Mr. Imperato was Chief Financial Officer of Omnicare
Clinical Services, Inc., a contract research organization. From 1984 to 1998, Mr. Imperato held several positions with Rhone-Poulenc Rorer Pharmaceuticals, Inc., including Vice
President, Finance, Worldwide Industrial Operations.

Thomas I. Kuhn; Senior Vice President and Group President, MedSystems

Mr. Kuhn has served as Vice President and Group President, MedSystems since January 2006. Mr. Kuhn served as Group President, MedSystems from
2002 to January 2006. Mr. Kuhn served as President of Corpak from 1992 to 2002. From 1983 to 1992, Mr. Kuhn held the following positions at Corpak: Senior Vice President from 1989
to 1992, Vice President, Operations from 1987 to 1989, Vice President Finance and Administration from 1985 to 1987 and Controller from 1983 to 1985.

29

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Gregory G. Martin; Group President, Customer Care and Information Technology

Mr. Martin has served as Group President, Customer Care and Information Technology since January 2006. From November 2003 to
January 2006, Mr. Martin served as Division President, Customer Care. Prior to joining the Company, from 1997 to November 2003, Mr. Martin held the following positions with
DecisionOne: Senior Vice President, Field Operations from November 1999 to November 2003, Senior Vice President, Major Account Operations fro DecisionOne's top 200 Customers from
January 1999 to November 1999, and Vice President and General Manager of DecisionOne Canada from 1997 to January 1999.

Giulio A. Perillo; Senior Vice President and Group President, Orthopedics

Mr. Perillo has served as Senior Vice President and Group President, Orthopedics since January 2006. From September 2004 to
January 2006 Mr. Perillo served as Group President, VIASYS Orthopedics. Mr. Perillo served as Group President, Operations and Corporate Quality from October 2003 to
September 2004 and Corporate Vice President, Operations Management and Systems from March 2003 to October 2003. Prior to joining the Company, Mr. Perillo worked for
Cardinal Health, Inc. as Vice President and General Manager of Cardinal Health's contract pharmaceutical and development business. From 1998 to 2000, Mr. Perillo was President of
Omnicare Pharmaceutics, Inc. From 1997 to 1998, Mr. Perillo was President and Chief Operating Officer of USA Detergents, Inc. From 1994 to 1997, Mr. Perillo was Vice
President and General Manager of Centeon Bio-Services, Inc., a global plasma collection company. From 1990 to 1994, Mr. Perillo was Vice President, Worldwide Manufacturing of
Rhone-Poulenc Rorer Pharmaceuticals, Inc.

Edward Pulwer; Executive Vice President and Group President, Respiratory Care

Mr. Pulwer has served as Executive Vice President and Group President, Respiratory Care since July 2004. Mr. Pulwer served as Group
President, Critical Care from November 2002 to July 2004, Group President, Respiratory Technologies from July 2001 to November 2002, General Manager of SensorMedics from
1999 to July 2001 and Vice President of Sales of SensorMedics from 1996 to 1999. Mr. Pulwer held various sales and marketing positions at SensorMedics from 1983 to 1996. Prior to joining
the Company, from 1977 to 1983, Mr. Pulwer was Group Product Manager for Respiratory Care Products of American Hospital Supply CorporationScientific Products Division, which is
currently a division of Cardinal Health, Inc.

Scott Hurley; Vice President and Corporate Controller

Mr. Hurley has served as Vice President and Corporate Controller since April 2005. Prior to joining the Company, from January 2004 to
April 2005, Mr. Hurley was Vice President, Corporate Controller and Treasurer of Incyte Corporation, a Wilmington, Delaware based company involved in the discovery and development of
oral compounds for the treatment of HIV, inflammation, cancer and diabetes. From 1998 to 2003, Mr. Hurley served as Corporate Controller and Executive Officer of Arrow
International, Inc., a company that develops, manufacturers and markets catheters and related products for critical and cardiac care. From 1993 to 1998, Mr. Hurley served as Director of
Finance, Worldwide Industrial Operations Division of Rhone-Poulenc Rorer Pharmaceuticals, Inc.

Wesley N. Riemer; Vice President and Corporate Treasurer

Mr. Riemer has served as Vice President and Corporate Treasurer since December 2001. Prior to joining the Company, from August 1998 to
December 2001, Mr. Riemer was Assistant Vice President, International Tax at CIGNA Corporation. From June 1991 to August 1998, Mr. Riemer held several positions
within Rhone-Poulenc Rorer Pharmaceuticals, Inc.'s tax department, most recently as Director, International Tax Planning.

30

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

Our common stock is listed and traded on the New York Stock Exchange (the "NYSE") under the symbol "VAS". The following table sets forth the high and low closing
sale prices of our common stock as reported by the NYSE for each quarter period during the last two fiscal years.

High

LowFiscal Year Ended December 31, 2005Quarter ended April 2, 2005

$
21.00

$
17.00Quarter ended July 2, 2005

$
23.35

$
18.79Quarter ended October 1, 2005

$
26.93

$
22.50Quarter ended December 31, 2005

$
28.56

$
22.90Fiscal Year Ended January 1, 2005Quarter ended April 3, 2004

$
24.80

$
20.38Quarter ended July 3, 2004

$
24.00

$
19.00Quarter ended October 2, 2004

$
20.11

$
13.88Quarter ended January 1, 2005

$
19.40

$
16.76


On
March 10, 2006, there were approximately 6,610 holders of record of our common stock. On March 10, 2006, the closing price of our common stock on the NYSE was $29.09.

Since
becoming a publicly traded company in November 2001, we have not paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock
in the foreseeable future. We currently intend to retain any current and future earnings to finance the growth and development of our business. Further, our senior revolving credit facility contains
provisions that limit the amount of cash dividends that can be paid.

Item 6.  Selected Financial Data

The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the accompanying notes and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The consolidated statements of
operations data for the years ended December 31, 2005, January 1, 2005 and January 3, 2004, and the consolidated balance sheet data as of December 31, 2005 and
January 1, 2005, are derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. The consolidated statements of operations data
for the years ended December 28, 2002 and December 29, 2001 and the consolidated balance sheet data as of January 3, 2004, December 28, 2002 and December 29, 2001
are derived from our audited consolidated financial

31

---



statements
not included in this Annual Report on Form 10-K. The historical results presented here are not necessarily indicative of future results.

|                                                                                                                              |                                               | Year Ended               |        
|----------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | -------
|
|
|Consolidated Statements of Operations Data:                                                                                   |                                               |                          |        
|Revenues                                                                                                                      |                                               | $                        | 509,974
|Cost of Revenues                                                                                                              |                                               |                          | 268,858
|                                                                                                                              |                                               |                          |        
|Gross Margin                                                                                                                  |                                               |                          | 241,116
|Operating Expenses:                                                                                                           |                                               |                          |        
|                                                                                                                              | Selling, general and administrative expense   |                          |        
|                                                                                                                              | Research and development expense              |                          |        
|                                                                                                                              | Restructuring charges                         |                          |        
|                                                                                                                              | Purchased in-process research and development |                          |        
|                                                                                                                              | Legal settlement                              |                          |        
|                                                                                                                              |                                               |                          |        
|                                                                                                                              |                                               | Total operating expenses |        
|                                                                                                                              |                                               |                          |        
|Operating Income                                                                                                              |                                               |                          | 4,759  
|Other Income (Expense), net                                                                                                   |                                               |                          | (1,522 
|                                                                                                                              |                                               |                          |        
|Income from Continuing Operations Before Income Taxes                                                                         |                                               |                          | 3,237  
|Provision for Income Taxes                                                                                                    |                                               |                          | (13,542
|                                                                                                                              |                                               |                          |        
|Income (Loss) from Continuing Operations                                                                                      |                                               |                          | (10,305
|Income (Loss) from Discontinued Operations (net of income tax expense (benefit) of $296, ($128), ($665), ($7,821), and $2,006 |                                               |                          | 536    
|                                                                                                                              |                                               |                          |        
|Net Income (Loss)                                                                                                             |                                               | $                        | (9,769 
|                                                                                                                              |                                               |                          |        
|Earnings (Loss) per Share:                                                                                                    |                                               |                          |        
|Basic:                                                                                                                        |                                               |                          |        
|                                                                                                                              | Continuing Operations                         |                          | $      
|                                                                                                                              | Discontinued Operations                       |                          |        
|                                                                                                                              |                                               |                          |        
|                                                                                                                              |                                               | $                        | (.31   
|                                                                                                                              |                                               |                          |        
|Diluted:                                                                                                                      |                                               |                          |        
|                                                                                                                              | Continuing Operations                         |                          | $      
|                                                                                                                              | Discontinued Operations                       |                          |        
|                                                                                                                              |                                               |                          |        
|                                                                                                                              |                                               | $                        | (.31   
|                                                                                                                              |                                               |                          |        
|Weighted Average Shares Outstanding:                                                                                          |                                               |                          |        
|                                                                                                                              | Basic                                         |                          |        
|                                                                                                                              |                                               |                          |        
|                                                                                                                              | Diluted                                       |                          |        
|                                                                                                                              |                                               |                          |        
|Consolidated Balance Sheet Data:                                                                                              |                                               |                          |        
|Total Assets                                                                                                                  |                                               | $                        | 648,587
|Long-Term Debt Obligations                                                                                                    |                                               |                          | 37,100 
|Other Financial Data:                                                                                                         |                                               |                          |        
|Cash Dividends Declared Per Common Share                                                                                      |                                               |                          |       

---

32

---



Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Comparison of Results for the Year Ended December 31, 2005 to the Year Ended January 1, 2005

In order to more fully understand the comparison of the results of operations for the year ended December 31, 2005 as compared to the year ended
January 1, 2005, it is important to note the following significant changes in our operations that occurred in 2005 and 2004:



The
results of operations for each of these acquisitions have been included in the consolidated statements of operations since the date of acquisition.

On
June 30, 2005, we completed the sale of the obstetrics and cardiovascular ("OB and CV") businesses that we acquired in the Oxford Medical transaction in March 2005. The
consolidated financial results have been restated to present OB and CV as a discontinued operation.

Revenues

Revenues increased $116.8 million or 29.7% to $510.0 million in 2005 from $393.2 million in 2004. This increase was due to increases in
revenue of $64.0 million in Respiratory Care, $38.0 million in NeuroCare, $2.3 million in MedSystems, and $12.5 million in Orthopedics. The increase was driven primarily by
higher sales of EMG systems, including sales resulting from the acquisition of Oxford Medical, orthopedic implants, Customer Care, the AVEA venitilator, clinical services, and pulmonary function
testing equipment. The increase was also driven by the sales of portable mechanical ventilators and spirometry systems, which were a result of businesses acquired in 2005.

Cost of Revenues and Gross Margin

Cost of revenues increased $50.0 million or 22.8% to $268.9 million in 2005 from $218.9 million in 2004. Gross margin increased
$66.8 million or 38.3% to $241.1 million in 2005 from $174.3 million in 2004 due primarily to businesses acquired and factors resulting in increased gross margin as a percentage
of revenue. Gross margin as a percentage of revenues increased 300 basis points to 47.3%

33

---



in
2005 from 44.3% in 2004 due to increased sales of higher margin products and manufacturing efficiencies resulting from productivity programs, increased throughput, and the restructuring plan
initiated in the third quarter of 2004. Gross margin as a percentage of revenues in 2005 was negatively impacted by approximately 134 basis points due to costs associated with the step-up
of inventory acquired in the transactions described above.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $39.8 million or 31.8% to $164.6 million in 2005 from $124.8 million in 2004. This
increase was primarily due to acquisitions completed during 2005, higher incentive compensation costs, and higher expenses related to the expansion of our field sales, service and marketing
organizations. These increases were partially offset by cost savings from the restructuring plan initiated in the third quarter of 2004 and a reduction in legal fees totaling $1.6 million
incurred in 2004 in connection with our now resolved suit against INO Therapeutics, LLC.

Purchased in-process research and development

During 2005, we recorded $34.9 million of purchased in-process research and development ("IPR&D") expenses in connection with two separate
business combinations, both of which were accounted for pursuant to SFAS No. 141Business Combinations. This compares to $0.4 million of
purchased in-process research and development expenses recorded during 2004 in connection with the acquisition of substantially all of the assets of Taugagreining.

We
recorded $3.4 million of purchased in-process research and development expenses in connection with the acquisition of Micro Medical. The portion of the Micro
Medical purchase price allocated to in-process research and development was determined based on an independent third party appraisal and represents the estimated fair value of the research
and development project in-process at the time of acquisition. The project had not yet reached technological feasibility, was deemed to have no alternative use and, accordingly, was
immediately charged to operating expense at the acquisition date in accordance with FASB Interpretation No. 4,Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method("FIN 4"). This charge is included in our Consolidated Statements of Operations for the year ended December 31, 2005 as
a separate component of operating expense.

We
recorded $31.5 million of purchased in-process research and development expenses in connection with the acquisition of Pulmonetics. The portion of the Pulmonetics
purchase price allocated to in-process research and development was determined based on an independent third party appraisal and represents the estimated fair value of the research and
development project in-process at the time of acquisition. The project had not yet reached technological feasibility, was deemed to have no alternative use and, accordingly, was
immediately charged to operating expense at the acquisition date in accordance with FIN 4. This charge is included in our Consolidated Statements of Operations for the year ended December 31,
2005 as a separate component of operating expense.

Research and Development Expense

Research and development expense increased $8.8 million or 37.7% to $32.3 million in 2005 from $23.5 million in 2004. This increase is
largely attributable to research and development activities of the companies we acquired in 2004 and 2005.

Restructuring Charges

Restructuring charges were $4.6 million in 2005, compared to $9.0 million in 2004, a decrease of 49.4% over 2004.

In
the third quarter of 2005, we initiated a plan to restructure our international operations, which included closing our manufacturing facility in Bristol, United Kingdom and
terminating certain

34

---



agreements
with distributors. As a result of the plan, 10 positions were eliminated in Bristol and the manufacturing operations were combined into our existing facility in Old Woking, United Kingdom.
As of December 31, 2005, a total of $0.6 million of restructuring expenses had been incurred in connection with this plan, which includes employee severance and related expenses as well
as costs incurred related to the termination of distribution agreements. Total expenses under this plan are not expected to exceed $1.0 million.

In
the third quarter of 2004, we initiated a company-wide restructuring plan to lower our cost structure. The principal components of the plan include reducing worldwide
headcount by approximately 220 employees, transitioning the Respiratory Care's U.S. manufacturing operations from Yorba Linda, California to our Respiratory Care facility in Palm Springs, California,
combining Respiratory Care's U.S. commercial operations in Palm Springs, California and Yorba Linda, California to a newly leased facility in Yorba Linda, California, and the closure of a facility in
Bilthoven, the Netherlands. The plan involves the termination of employees in Germany, the Netherlands, the United Kingdom and the United States. As of December 31, 2005, all of the targeted
positions had been eliminated. The total amount of restructuring expense incurred in connection with this plan was approximately $12.0 million, of which $3.5 million was recognized in
2005. While the costs of this restructuring plan exceeded some of our more recent estimates, they are within our previously disclosed original estimates. During 2005, we realized cost savings of
approximately $12.0 million related to this plan.

In
the fourth quarter of 2003, we initiated a plan to close a machine shop and reduce the number of customer service positions at a Respiratory Care facility in Germany. Due to German
labor regulations, certain positions cannot be eliminated immediately. As a result of this plan, 24 positions are being eliminated over a period of five years. As of December 31, 2005, 15 of
these positions had been eliminated. Severance expense for the remaining employees will continue to be recorded ratably over their remaining employment term. The total amount of restructuring expense
expected to be incurred in connection with this plan is approximately $2.0 million. As of December 31, 2005, a total of $1.5 million of expense had been incurred related to this
plan. Restructuring charges incurred in connection with this plan were $0.4 million during 2005 compared to $0.9 million during 2004. Once this plan is complete, the annual savings from
this plan are expected to total approximately $1.3 million, which will be realized over the next three years as the positions are eliminated.

On
August 6, 2003, we commenced a plan to restructure our NeuroCare segment. The restructuring plan included the termination of 55 general and administrative, service and
manufacturing positions. The plan was carried out in the third and fourth quarters of 2003. The total amount of restructuring expense incurred in connection with this plan was approximately
$0.6 million, all of which was expensed and paid in 2003. Beginning in 2004, this plan resulted in annual cost savings of approximately $3.5 million, much of which was reinvested into
other areas in NeuroCare, such as sales and research and development.

In
2003, as a result of the acquisition of EME, we initiated a restructuring plan related to our Critical Care segment, which resulted in the elimination of 48 positions in the areas of
sales, finance, service and research and development. The total amount of restructuring expense incurred in connection with this plan was approximately $0.9 million, most of which was expensed
and paid in 2003. Beginning in 2004, this plan resulted in annual cost savings of approximately $2.0 million.

Legal Settlement

In the second quarter of 2004, we settled the litigation with INO Therapeutics, LLC ("INO Therapeutics"), AGA AB, and The General Hospital Corporation regarding
the use and sale of nitric oxide gas and devices and received a payment of $6.0 million in connection with the dismissal of the litigation. We had no similar settlements in 2005.

35

---



Provision for Income Taxes

Our effective tax rate was 418.4% in 2005 compared to 36.0% in 2004. The effective rate in 2005 exceeded the statutory federal income tax rate of 35.0% primarily
due to purchased in-process research and development expense ("IPR&D") of $34.9 million which is not deductible for tax purposes. Excluding the impact of IPR&D, our effective tax
rate was 35.5% in 2005. The effective tax rate in 2005 (excluding IPR&D) was higher than the federal statutory tax rate of 35.0% because of non-deductible expenses, a higher tax rate on
foreign net earnings because of different tax rates and losses on which lower tax benefits were provided, and the impact of state taxes. These increases in our effective rate were partially offset by
production activity and export sales benefits and research and development credits. The effective tax rate in 2004 was higher than the statutory tax rate of 35.0% primarily because of the impact of
state income taxes, lower rates on net foreign losses and IPR&D that is not deductible for tax purposes. These increases were partially offset by export sales benefits.

Discontinued Operations

The net income from discontinued operations was $0.5 million in 2005, compared to a net loss of $0.2 million in 2004. On June 30, 2005, we
completed the sale of OB and CV businesses that we acquired in the Oxford Medical transaction in March 2005 for approximately $6.4 million in cash.

Segment Information

Respiratory Care

Revenues increased $64.1 million or 25.8% to $312.3 million in 2005 from $248.2 million in 2004. Revenues from all major product lines
increased, with approximately half of the increase resulting from sales of portable mechanical ventilators and spirometry systems in the operations acquired from Pulmonetics and Micro Medical,
respectively. The remaining increase was primarily attributable to higher sales of AVEA ventilators and pulmonary function testing equipment and higher revenues in our Clinical Services
and Customer Care businesses. These increases were partially offset by lower sales of previous generation ventilators. During the fourth quarter 2005, the company amended an agreement with INO
Therapeutics for the development of an indication for Nitric Oxide. Pursuant to the agreement and in consideration for achieving milestones under the agreement we received $4.5 million and have
included this amount in service revenue for the Respiratory Care segment. Additional milestones are expected to be achieved in 2006 which could, if achieved, result in receipt of up to
$4.5 million.

Operating
income decreased $18.3 million or 75.7% to $5.8 million in 2005 from $24.1 million in 2004. This decrease is primarily the result of a $34.9 million
charge to write-off acquired IPR&D and a $6.0 million payment received from settling litigation with INO Therapeutics, LLC in the second quarter of 2004. This decrease was partially
offset by higher gross margin primarily due to the increased sales, operational efficiencies in part due to the restructuring plan initiated in the third quarter of 2004, product mix and the amounts
received in consideration of the INO milestones. Also benefiting operating income was a reduction in legal expense primarily as a result of a $1.6 million charge incurred in 2004 in connection
with the litigation with INO Therapeutics, LLC and a reduction in restructuring expense.

NeuroCare

Revenues increased $38.0 million or 44.7% to $123.1 million in 2005 from $85.1 million in 2004. Revenue growth was primarily due to higher
sales of EMG products as well as new products introduced in 2004, including NicoletOne and Synergy, which was acquired from Oxford Medical.

We
incurred an operating loss of $1.6 million in 2005 compared to operating loss of $0.2 million in 2004. Operations were negatively impacted by expenses resulting from the
acquisition and integration of Oxford Medical, which was acquired in the first quarter of 2005. Also contributing to the decrease

36

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were
costs incurred to move our vascular manufacturing operations, amortization expense related to the AUDIOSCREENER® hearing screening device acquired in the second quarter of 2004 and
higher selling and other expenses incurred to support a number of new product launches. Partially offsetting these items were improvements in gross margin due to increased sales, new higher margin
products and operational efficiencies.

MedSystems

Revenues increased $2.3 million or 7.4% to $32.9 million in 2005 from $30.6 million in 2004. This increase was primarily due to higher sales
of our enteral feeding tube product line.

Operating
income increased $0.3 million or 4.9% to $6.2 million in 2005 from $5.9 million in 2004. This increase was primarily due to higher gross margin resulting
from increased sales, partially offset by additional expenses associated with the launch in the first quarter of 2005 of our new CORTRAK and NAVIGATOR® systems.

Orthopedics

Revenues increased $12.5 million or 42.5% to $41.8 million in 2005 from $29.3 million in 2004. This increase was primarily due to higher
sales of hip and knee implants as well as cranial and maxiofacial mesh products, resulting from strong overall demand for our products. This increase was partially offset by lower sales of specialty
products and materials.

Operating
income increased $4.4 million, an increase of over 100%, to $8.6 million for in 2005 as compared to $4.2 million in 2004. This increase was primarily due
to increased gross margin resulting from higher sales volume and operational efficiencies resulting from manufacturing process improvements.

Comparison of Results for the Year Ended January 1, 2005 to the Year Ended January 3, 2004

In order to more fully understand the comparison of the results of operations for the year ended January 1, 2005 as compared to the year ended
January 3, 2004, it is important to note the following significant changes in our operations that occurred in 2004 and 2005:

In
the year ended January 1, 2005, our business was organized and operated through the following four reportable segments: Respiratory Technologies, Critical Care, NeuroCare and
Medical and Surgical Products. During the first quarter of 2005, we changed our reportable segments to reflect how we now manage our business. As a result, Respiratory Technologies and Critical Care
operating segments were combined into one operating segment called Respiratory Care. We also split our Medical and Surgical Products operating segment into two separate segments: MedSystems and
Orthopedics. Segment information in this section has been restated to reflect our current segment presentation.

Revenues

Revenues decreased $1.7 million, or 0.4%, to $393.2 million in 2004 from $394.9 million in 2003. This decrease was due to lower sales of
NeuroCare products partially offset by increases of orthopedic and disposable products. The NeuroCare decrease was driven primarily by lower sales of our older NeuroCare product lines coupled with
unusually high sales in 2003 due to the SARS epidemic and government tenders. These decreases were partially offset by the favorable impact of foreign currency translation as well as increased sales
in our orthopedics business and enteral feeding tube product lines.

Cost of Revenues and Gross Margin

Cost of revenues increased $6.1 million, or 2.9%, to $218.9 million in 2004 from $212.8 million in 2003. Gross margin decreased
$7.9 million, or 4.3%, to $174.3 million in 2004 from $182.2 million in 2003. Gross margin as a percentage of revenues decreased 180 basis points to 44.3% in 2004 from 46.1% in
2003. The decrease in gross margin was primarily due to lower sales, a non-recurring high

37

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margin
sale to a foreign government agency in the first quarter of 2003, higher warranty costs and inventory write-offs partially offset by the favorable impact of foreign currency
translation of $3.4 million.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $11.9 million, or 10.5%, to $124.8 million in 2004 from $112.9 million in 2003. This
increase was primarily due to the following factors: higher expenses related to the expansion of our field sales, service and marketing organizations; $2.9 million from the impact of foreign
currency translation; compliance costs associated with the provisions of the Sarbanes-Oxley Act of 2002; and higher legal expenses related to defending our intellectual property and the litigation
involving the commercialization of nitric oxide gas. Partially offsetting these increases were savings related to the restructuring plan initiated in the third quarter of 2004 and lower incentive
compensation.

Research and Development Expense

Research and development expense decreased $3.0 million, or 11.3%, to $23.5 million in 2004 from $26.5 million in 2003. This decrease is
largely attributable to the continued streamlining and refocusing of the Company's research and development programs as well as the movement of several projects out of research and development into
commercialization partially offset by new development projects.

Restructuring Charges

Restructuring charges were $9.0 million in 2004, compared to $1.8 million in 2002.

In
the third quarter of 2004, we initiated a company-wide restructuring plan to lower our cost structure. The principal components of the plan include reducing worldwide
headcount by approximately 220 employees, transitioning the Respiratory Technologies' U.S. manufacturing operations from Yorba Linda, California to our Critical Care facility in Palm Springs,
California, combining Critical Care's U.S. commercial operations with Respiratory Technologies' U.S. commercial operations in a newly leased facility in Yorba Linda, California, and the closure of a
facility in Bilthoven, the Netherlands. The plan involves the termination of employees in Germany, the Netherlands, the United Kingdom and the United States. The total amount of restructuring expense
expected to be incurred in connection with this plan is between $9.5 million and $12.0 million. In 2004, we recorded a restructuring charge relating to this plan of approximately
$8.6 million, including $8.3 million for severance, $0.2 million for employee retention and $0.1 million for other costs. As of January 1, 2005, 200 of the targeted
employees had been terminated and $4.3 million of severance had been paid. We expect all components of the plan to be substantially completed by the end of 2005. We estimate that as a result of
this plan we will achieve annual operating expense savings of approximately $12.0 million in fiscal 2005.

In
the fourth quarter of 2003, we initiated a plan to close a machine shop and reduce the number of customer service positions at a Respiratory Technologies' facility in Germany. Due to
German labor regulations, certain positions cannot be eliminated immediately. As a result of this plan, 24 positions are being eliminated over a period of five years. As of January 1, 2005, 14
of these positions had been eliminated. Severance expense for the remaining 10 employees will continue to be recorded ratably over their remaining employment term. The total amount of restructuring
expense expected to be incurred in connection with this plan is approximately $2.0 million. As of January 1, 2005, a total of $1.2 million of expense had been incurred related to
this plan, of which $0.9 million was recognized in 2004. Once the plan is complete, the annual savings from the plan are expected to total approximately $1.3 million, which will be
realized over the next four years as the positions are eliminated.

On
August 6, 2003, we commenced a plan to restructure our NeuroCare segment. The restructuring plan included the termination of 55 general and administrative, service and
manufacturing positions. The plan was carried out in the third and fourth quarters of 2003. The total amount of

38

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restructuring
expense incurred in connection with this plan was approximately $0.6 million, all of which was expensed and paid in 2003. Beginning in 2004, this plan resulted in annual cost
savings of approximately $3.5 million, much of which was reinvested into other areas in NeuroCare, such as sales and research and development.

In
2003, as a result of the acquisition of EME, the Company initiated a restructuring plan related to its Critical Care segment, which resulted in the elimination of 48 positions in the
areas of sales, finance, service and research and development. The total amount of restructuring expense incurred in connection with this plan was approximately $0.9 million, most of which was
expensed and paid in 2003. Beginning in 2004, this plan resulted in annual cost savings of approximately $2.0 million.

Purchased in-process research and development

During 2004, we recorded a $0.4 million non-recurring charge to write-off in-process research and development costs
attributed to the acquisition of substantially all of the assets of Taugagreining. There were no in-process research and development charges incurred in 2003.

Legal Settlement

In the second quarter of 2004, we settled the litigation with INO Therapeutics, LLC ("INO Therapeutics"), AGA AB, and The General Hospital Corporation regarding
the use and sale of nitric oxide gas and devices and received a payment of $6.0 million in connection with the dismissal of the litigation.

Provision for Income Taxes

Our effective tax rate was 36.0% in 2004 compared to 34.0% in 2003. The effective tax rate in 2004 was more than the statutory federal rate of 35.0% primarily
because of the impact of state income taxes, lower tax rates on net foreign losses and purchased in-process research and development charges that are not deductible for tax purposes. The
2004 effective tax rate impact of nondeductible purchased in-process research and development was an increase of 0.5 percentage points. These increases in the effective tax rate
were partially offset by the tax benefit attributable to U.S. export sales. The effective tax rate in 2003 was less than the statutory federal income tax rate of 35.0% primarily because of the tax
benefit attributable to U.S. export sales and U.S. research and development tax credits.

Discontinued Operations

The net loss from discontinued operations was $0.2 million in 2004, compared to $4.3 million in 2003. In 2003, we sold Medical Data Electronics
("MDE") and our Thermedics Polymer business ("Thermedics"). The results of operations of MDE and Thermedics have been reclassified as discontinued operations for all periods presented. During 2004, we
incurred an additional charge of $0.2 million, net of taxes of $0.1 million, related to the divestiture of Thermedics. The net loss from discontinued operations incurred in 2003 included
a net loss from Thermedics and MDE of $2.4 million and $1.9 million, respectively. The net loss from Thermedics includes an after-tax loss on disposal, including expenses, of
approximately $2.6 million. The net loss from MDE includes an after-tax loss on disposal, including expenses, of $1.0 million.

Segment Information

Respiratory Care

Respiratory Care revenues increased $1.2 million, or 0.5%, to $248.2 million in 2004 from $247.0 million in 2003. This increase was primarily
attributable to the favorable impact of foreign currency translation of $6.1 million, an increase in service revenue of $4.8 million including $1.5 million received from INO
Therapeutics based on our submission of a research and development plan in connection with a co-development agreement in the pulmonary infection/inflammation field and higher

39

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sales
of our AVEA and Vela ventilators. These increases were partially offset by lower international sales as a result of $7.5 million of government tenders in 2003 and sales of
$3.1 million related to the SARS epidemic in 2003, lower revenues in our Clinical Services business due to delays in the initiation of several clinical trials and lower domestic sales of sleep
therapy systems due to a legal dispute, which was settled favorably in early 2005.

Respiratory
Care operating income decreased $15.1 million, or 38.5%, to $24.1 million in 2004 from $39.2 million in 2003. This decrease was mainly due to the
following: costs of $7.6 million related to the restructuring plan initiated in the third quarter of 2004; costs incurred to consolidate the California manufacturing operations; increases in
selling, general and administration expense; lower gross margin attributable to a change in product mix caused by the reduced revenues in our Clinical Services business; and costs related to the
German restructuring plan initiated in the fourth quarter of 2003 of $0.9 million in 2004 compared to $0.3 million in 2003. Selling, general and administrative expense increased
primarily due to the establishment of the infrastructure of our Clinical Services business, higher expenses related to the expansion of our field sales and service organizations, and higher legal
expenses incurred to defend certain intellectual property. These reductions in operating income were partially offset by the $6.0 million legal settlement from INO Therapeutics received in the
second quarter of 2004, reductions in research and development, costs in 2003 of $0.9 million related to the EME restructuring plan initiated in 2003 and a reduction in incentive pay.

NeuroCare

Revenues decreased $6.9 million, or 7.5%, to $85.1 million in 2004 from $92.0 million in 2003. The sales decrease was primarily due to lower
sales of our peripheral vascular high-end systems and older neurodiagnostic EEG and IOM products partially offset by higher sales of our audio
diagnostic products, sales from our new neurodiagnostic EEG and EMG products and an increase in service revenue of $1.4 million.

We
had an operating loss of $0.2 million in 2004 compared to operating income of $5.3 million in 2003. This decrease was primarily due to the following: lower sales volume
and pricing pressures on older product lines, both of which reduced gross margin; higher selling, general and administrative expense primarily related to higher legal and international operating
expenses; higher amortization expense related to our recent acquisition of the AUDIOSCREENER® hearing screening device; costs of $0.8 million related to the restructuring plan
initiated in the third quarter of 2004; inventory write-offs of obsolete inventory related to discontinued products; and the write-off of purchased in-process
research and development costs in the fourth quarter of 2004 related to the acquisition of Taugagreining. Offsetting these decreases was a reduction in research and development expense related to the
movement of several projects out of research and development into commercialization and costs in 2003 of $0.6 million related to the NeuroCare restructuring plan initiated in the third quarter
of 2003.

MedSystems

Revenues increased $1.5 million, or 5.2%, to $30.6 million in 2004 from $29.1 million in 2003. This increase was primarily driven by higher
sales of our enteral feeding tube product line.

Operating
income increased $0.2 million, or 3.5%, to $5.9 million in 2004 from $5.7 million in 2003. The increase was primarily due to increased gross margin
resulting from the higher sales as well as manufacturing efficiencies and lower research and development expense. These increases were partially offset by higher expenses mainly to expand our medical
disposables sales force to pursue opportunities in targeted markets.

40

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Orthopedics

Revenues increased $2.5 million, or 9.3%, to $29.3 million in 2004 from $26.8 million in 2003. This increase was primarily driven by
increased sales in our orthopedic business, partially offset by lower sales of our medical imaging products.

Operating
income increased $0.5 million, or 13.9%, to $4.1 million in 2004 from $3.6 million in 2003. This increase was primarily due to increased gross margin
resulting from the higher sales as well as manufacturing efficiencies and lower research and development expense. These increases were partially offset by costs of $0.2 million related to the
restructuring plan initiated in the third quarter of 2004.

Liquidity and Capital Resources

As of December 31, 2005 and January 1, 2005, we had cash and cash equivalents of $19.5 million and $122.3 million, respectively. At
December 31, 2005, approximately $14.2 million of our cash and cash equivalents was held internationally and could be subject to U.S. income tax if repatriated to the U.S. Our working
capital was approximately $134.3 million and $230.4 million at December 31, 2005 and January 1, 2005, respectively. This decrease was due primarily to cash used and debt
incurred for businesses acquired in 2005.

Our
cash flow from operations decreased by $16.4 million to $22.3 million in 2005 from $38.7 million in 2004. This decrease was primarily the result of increases in
accounts receivable and inventory balances. The overall impact of changes in certain operating assets and liabilities on total operating cash flows resulted in net cash (outflows) inflows of $(27.4)
million, $4.6 million, and $7.9 million in 2005, 2004, and 2003, respectively. Discontinued operations provided (used) cash of $0.5 million, $(0.2) million, and $(4.4) million in
2005, 2004, and 2003, respectively.

We
used net cash in investing activities of $204.3 million in 2005, compared to $24.0 million and $11.3 million in 2004 and 2003, respectively. This increase was due
primarily to businesses acquired in 2005. In January 2005, we paid $3.4 million, net of cash acquired, to acquire substantially all of the assets of Navion Biomedical Corporation. In
March 2005, we paid $45.1 million, net of cash acquired, to acquire Oxford Medical. In March 2005, we paid $37.3 million, net of cash acquired, to acquire all of the
outstanding stock of Micro Medical. In June 2005, we paid $89.7 million, net of cash acquired, to acquire all the outstanding stock of Pulmonetics. In November 2005, we paid
$10.6 million, net of cash acquired, to acquire all of the stock of Intermed Precision. Our expenditures for property, plant and equipment were $19.9 million during 2005, compared to
$10.6 million and $6.0 million during 2004 and 2003, respectively. Our expenditures for intangible assets were $6.1 million, compared to $10.1 million and
$3.9 million in 2004 and 2003, respectively.

We
generated net cash from financing activities of $80.4 million in 2005, compared to $9.4 million and $25.1 million in 2004 and 2003, respectively. In 2005 we
received cash of $67.3 million, net of repayments, under our revolving credit facility to fund acquisitions and working capital. In 2005, we received $11.5 million in proceeds from the
exercise of stock options, compared to $8.5 million and $7.6 million in 2004 and 2003, respectively. In 2005, we received $1.5 million in proceeds from the issuance of common
stock pursuant to our employee stock purchase plan, compared to $1.5 million and $2.1 million in fiscal 2004 and 2003, respectively.

On
May 3, 2005, we entered into a five-year $150.0 million Senior Unsecured Revolving Credit Facility (the "Facility"), replacing the $60.0 million
Senior Revolving Credit Facility which was set to expire on May 31, 2005. The Facility includes a $20.0 million letter of credit sub-facility and a $20.0 million swing
line loan sub-facility. At the request of the Company, the aggregate maximum principal amount available under the Facility may be increased to $200.0 million. The lenders, however,
are not obligated to participate in the increased portion of the Facility. The Facility can be used for working capital and other general corporate purposes, including capital expenditures and
acquisitions. At December 31, 2005, $67.5 million was outstanding under the Facility, with $0 outstanding under the

41

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swing
line loan sub-facility. In addition, $2.7 million of standby letters of credit had been issued under the Facility, and $79.8 million was available for borrowings under
the Facility.

At
the Company's option, loans borrowed under the Facility (other than swing line loans) bear interest at either (1) LIBOR plus an applicable margin that will vary based on the
Company's leverage ratio as defined in the agreement, or (2) the alternative base rate, defined as the higher of the lender's prime rate or the Federal Funds Rate plus .50%. Swing line loans
bear interest at a rate determined by the swing line lender. The Company is required to pay a facility fee based on the total revolving commitment.

Our
ability to access the Facility will depend on complying with certain customary affirmative and negative covenants, including but not limited to our ability to maintain a leverage
ratio of debt to EBITDA of not greater than 3.00 to 1.00, an interest coverage ratio of EBITDA to interest expense of not less than 4.00 to 1.00, minimum stockholders' equity and limits on the amount
of capital expenditures in any one year to the greater of $30 million or 5% of the Company's consolidated net assets. While we are currently in compliance with the debt covenants of the
Facility and expect to be able to meet the requirements of the Facility through the expiration date, failure to satisfy any of the conditions would require us to renegotiate the Facility on terms that
may not be as favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to
fund our operations from other financial institutions, we cannot assure you that we would be successful, or if we were successful, that the new credit arrangement would be on terms that would be
attractive to us in financing our business plans.

During
2006, we expect to spend between $25.0 million to $30.0 million on capital expenditures, primarily related to product development activities, capacity and efficiency
improvement projects, and commencement of the implementation of a new company-wide information systems platform. Our capital requirements will depend on many factors, including the rate of
our sales growth, market acceptance of our new products, research and development spending and the success of our product development efforts, capital spending policies of our customers, government
spending policies and general economic conditions.

In
2004, we initiated a company-wide restructuring plan to lower our cost structure. The purpose of this action was to bring expenses in line with the growth in our core
businesses and enhance our near and long-term profitability. As a result of this initiative, we incurred a total pre-tax restructuring charge of approximately
$12.0 million, all of which has been recognized and paid in 2004 and 2005.

We
believe that our available cash and cash equivalents, cash from operations and cash available under the Facility will be sufficient to finance our operations and commitments for the
foreseeable future. However, it is possible that we may need to raise additional funds to finance unforeseen requirements or to acquire other businesses, products or technologies. These funds may be
obtained through the sale of equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. In addition, even though we may not need additional
funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. There are no assurances that we will be able to obtain additional funds on terms
that would be favorable to us, or at all. If funds are raised by issuing additional equity securities or convertible debt securities, the ownership percentage of existing shareholders would be
reduced. In addition, equity or debt securities issued by us may have rights, preferences or privileges senior to those of our common stock.

42

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2005, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (in millions):

Payments Due by PeriodContractual Obligations

Total

Less than
1 year

1-3 years

3-5 years

More than
5 yearsLong-term debt obligations

$
67.5

$
30.4

$
37.1

$


$
Operating lease obligations


47.8


8.2


13.8


11.0


14.8Purchase obligations


41.2


40.5


0.3


0.3


0.1Total contractual obligations

$
156.5

$
79.1

$
51.2

$
11.3

$
14.9


The
following table summarizes our commercial commitments at December 31, 2005 (in millions):

Amount of Commitment Expiration Per PeriodCommercial Commitments

Total
Amounts
Committed

Less than
1 year

1-3 years

3 -5 years

More than
5 yearsStandby letters of credit

$
2.7

$
2.7

$


$


$
Total commercial commitments

$
2.7

$
2.7

$


$


$



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow
or limited purposes.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for each period. These estimates and judgments are based on historical experience and on various other factors that we believe
are reasonable under the circumstances. Some
of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. We regularly evaluate our estimates and
judgments and make adjustments when facts and circumstances dictate.

We
believe that the following critical accounting estimates affect the more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We derive revenues primarily from the sale of products and to a lesser extent the provision of services and rental of equipment. Revenues for products that
require installation for which the installation either is essential to functionality or is not deemed inconsequential or perfunctory are recognized upon completion of installation. Revenues for
products sold where installation is not essential to functionality and is deemed inconsequential or perfunctory are recognized upon transfer of title with estimated installation costs accrued.

Service
revenues are derived from parts, service contracts, training, repairs not under warranty and research and development for third parties. We sell service contracts on products
when the warranty

43

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period
expires. We recognize revenues from these service contracts ratably over the terms of the contracts, while the cost is recognized when incurred. Revenues from the sale of spare parts are
recognized upon transfer of title. Revenues from training and repairs are recognized at the time the service is performed and the customer has accepted the work.

We
rent products, primarily in the Respiratory Care segment, to hospitals and other customers for periods ranging from two weeks to over a year. We recognize rental revenues ratably over
the terms of the rental contract.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of its customers to make required payments. The allowance
for doubtful accounts is based on our historical collections experience, historical write-offs of our receivables, current trends, credit policy and a percentage of our accounts receivable
by aging category. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined using the "first-in first out" method. Costs include direct materials,
direct labor and applicable manufacturing overhead, and other direct costs.

At
each balance sheet date, we review our quantities of inventories on hand and compare these amounts to the expected usage of each particular product or product line. We record a charge
to cost of revenues for the amount required to reduce the carrying value of the inventories to their estimated net realizable value.

Goodwill Impairment

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. We adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), as of December 30, 2001. Under SFAS No. 142, goodwill and
intangible assets having indefinite lives are not amortized but are instead assigned to reporting units and tested for impairment annually or more frequently if changes in circumstances or the
occurrence of events indicate possible impairment.

Pursuant
to SFAS No. 142, we perform an annual impairment test for goodwill. The impairment test for goodwill is a two-step process. Step one consists of a comparison
of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the
comparison of the implied fair value of the reporting unit with the carrying amount of the reporting unit's goodwill. Any excess of the carrying value of the reporting unit's goodwill over the implied
fair value of the reporting unit's goodwill will be recorded as an impairment loss.

We
performed our annual SFAS No. 142 goodwill impairment assessment for our reporting units as of November 26, 2004 and determined that there was no impairment.

Stock-Based Compensation

Stock options are granted to key employees and non-employee directors. Upon vesting, an option becomes exercisable, meaning, an employee or director
can purchase a share of the Company's common stock at a price that is equal to the closing share price on the day of grant.

SFAS
No. 123, "Accounting for Stock-Based Compensation," permits companies either to continue accounting for stock options under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting

44

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for
Stock Issued to Employees," or to adopt a fair-value-based method to measure compensation cost. Under APB No. 25, which we have elected to continue using, there is no
compensation cost if, on the date of grant, the option's exercise price is equal to or greater than the share price. Under SFAS No. 123, an option's fair value is estimated on the date of
grant, and the value is expensed evenly over the vesting period. If we had accounted for stock-based compensation under the SFAS No. 123 fair-value-based method, net loss would have
increased by $3.6 million for 2005 and net income would have been reduced by $4.4 million and $5.3 million for 2004 and 2003, respectively.

In
order to estimate an option's fair value under SFAS No. 123, we use the Black-Scholes option valuation model. The option valuation model requires a number of assumptions,
including future stock price volatility and expected option life (the amount of time until the options are exercised or expire). Expected option life is based on actual exercise activity from previous
option grants. Volatility is calculated based upon stock price movements over a period of time. Additionally, our share price on the day of grant influences the option value. The higher the share
price, as compared to the grant price, the more the option is worth. Changes in the option value after the day of grant are not reflected in expense. Any change in these assumptions could
significantly impact the values calculated by the option valuation model and, consequently, the pro forma effects disclosed under the caption "Stock-Based Compensation" in Note 2 to the
Consolidated Financial Statements.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs" ("SFAS No. 151"). This statement
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
waste material (spoilage). SFAS No. 151 requires such abnormal expenses to be recognized in the period in which they are incurred. SFAS No. 151 also requires that the allocation of fixed
production overheads to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on its financial position, results of operations or cash flows.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payments" ("SFAS No. 123R"). In April 2005, the SEC adopted a rule permitting
issuers to implement SFAS No. 123R at the beginning of their first fiscal year beginning after June 15, 2005. This statement is a revision to SFAS No. 123 and supersedes APB
No. 25 and amends SFAS No. 95, "Statement of Cash Flows." SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value
of the award at the date of grant. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award.

SFAS
No. 123R permits public companies to choose between the following two adoption methods:



We
adopted SFAS No.123R using the modified prospective method on January 1, 2006.

45

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In
addition, the SEC issued SAB No. 107 "Share-Based Payments" in March 2005, which provides supplemental SFAS No. 123R application guidance based on the views of
the SEC.

The
adoption of SFAS No. 123R will not affect our net cash flows or net financial position, but it will reduce reported net income and earnings per share because we will be
required to recognize compensation expense for share purchase rights granted under its employee stock option and employee stock purchase plans, whereas we have not been required to record such expense
under current
accounting rules. Beginning January 1, 2006, we have adopted the provisions of SFAS 123R using the modified prospective transition method whereby compensation cost is recognized for new
awards granted and awards modified, repurchased, and cancelled after January 1, 2006. For the unvested portion of all awards issued prior to and outstanding at January 1, 2006
compensation cost measured at their respective grant date fair values will be recognized as the remaining requisite service is rendered. Based on the awards outstanding at December 31, 2005 and
the awards expected to be granted in 2006, we estimate that total stock-based compensation will result in a charge to net income of approximately $5,000,000 in 2006. SFAS No. 123R also requires
the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. While we
cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior
periods for such excess tax deductions were $1,971,000, $1,373,000, and $1,203,000 in 2005, 2004 and 2003, respectively.

In
October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into law. In December 2004, the FASB issued Staff Position No. 109-1,
"Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004" ("FSP 109-1") and Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004" ("FSP 109-2"). FSP 109-1 clarifies that the manufacturer's tax deduction provided for under the AJCA should be accounted for as a
special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. Consequently, the enactment of AJCA does not affect deferred tax assets and liabilities existing at the
enactment date. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. We did not repatriate
any foreign earnings under the provisions of the AJCA.

In
March 2005, the FASB issued FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations("FIN
47"). FIN 47 clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143,Accounting for Asset Retirement
Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events
that may be outside the control of the company. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. FIN 47 is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent
recognition of these liabilities. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We have evaluated the impact of FIN 47 and determined that it was not
material to the Company's results of operations or financial position.

In
May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Correctionsa replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3". This statement changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires companies making a
voluntary change in accounting principle to apply that change retrospectively to prior periods financial statements, unless this would be impracticable. This statement will be effective for fiscal
years beginning after December 15, 2005. We will comply with the provisions of this statement for any future accounting changes or error corrections.

46

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect our future results of operations and
financial condition.

Foreign Currency Risk

We derive approximately 43% of our revenues from customers outside the United States. This business is transacted through a network of international subsidiaries
and third-party distributors. Revenues generated through business transacted by international subsidiaries are generally in the local currency that is considered the functional currency of that
foreign subsidiary. Expenses are also incurred in the foreign currencies to match revenues earned and minimize our exchange rate exposure to operating margins. The Company generally views its
investment in most of its foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on the Company's net investment in foreign subsidiaries are
reflected in accumulated other comprehensive income. A 10% depreciation in functional currencies relative to the U.S. dollar would have resulted in a decrease in the Company's net investment in
foreign subsidiaries of approximately $13.7 million at December 31, 2005.

Interest Rate Risk

Our cash and cash equivalents are sensitive to changes in interest rates. Interest rate changes would result in a change in interest income due to the difference
between the current interest rates on cash and cash equivalents and the rate that these financial instruments may adjust to in the future.

We
are also exposed to fluctuations in interest rates on our five-year $150.0 million Senior Unsecured Revolving Credit Facility (the "Facility") which bears interest
at variable rates. Changes in interest rates will affect the amount of our interest payments over the term of the loan. A 100 basis point increase in interest rates under the Facility would have an
estimated negative impact on pre-tax earnings of approximately $675,000 based on the amount outstanding on the Facility as of December 31, 2005.

Item 8.    Financial Statements and Supplementary Data

Our Consolidated Financial Statements, management's report on internal control over financial reporting and our independent registered public accounting firm's
reports on management's assessment and the effectiveness of our internal control over financial reporting and on our financial statements and schedule are included in this Annual Report on
Form 10-K beginning on page F-1.

Item 9.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not
applicable.

Item 9A.    Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures

Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period
covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to
our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance,
however,

47

---



that
the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been
detected.

(b)    Management's Report on Internal Control Over Financial Reporting

Our
management's report on internal control over financial reporting and our independent registered public accounting firm's report on management's assessment and the effectiveness of
our internal control over financial reporting are set forth in Item 8 of this Annual Report on Form 10-K and is incorporated by reference herein.

(c)    Change in Internal Control Over Financial Reporting

No
change in our internal control over financial reporting occurred during our more recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

Item 9B.    Other Information

Not applicable.

48

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PART III

Item 10.    Directors and Executive Officers of the Registrant

The information required by this item with respect to our directors, our Audit Committee and audit committee financial expert is incorporated by reference to the
information set forth under the captions "Proposal No. 1. Election of Directors" and "Board of Directors and Corporate Governance MattersAudit Committee" in our definitive proxy
statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

The
information required by this item with respect to our executive officers is set forth under the caption "Executive Officers of the Registrant" in Item 4A of this Annual Report on
Form 10-K.

The
information required by this item with respect to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information set
forth under the caption entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A.

We
have adopted a "Code of Business Conduct and Ethics for Directors" and a "Code of Conduct" applicable to all employees, including all executive officers of the Company. The "Code of
Business Conduct and Ethics for Directors" and the "Code of Conduct" are posted on our website. The Internet address for out website iswww.viasyshealthcare.com.The "Code of Business Conduct and Ethics
for Directors" and the "Code of Conduct" may be found at the "Investors" page on our website. The information on our website is not and
should not be considered part of this Annual Report on Form 10-K and is intended to be an inactive textual reference only.

The
Board of Directors will not permit any wavier of any ethics and conduct policy for any director or executive officer.

Item 11.    Executive Compensation

The information required by this item is incorporated by reference to the information set forth under the captions entitled "Board of Directors and Corporate
Governance MattersCompensation of Directors" and "Executive Compensation" in our definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item with respect to the security ownership of certain beneficial owners and management is incorporated by reference to the
information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Executive CompensationEquity Compensation Plan Information" in our
definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

49

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Item 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the information set forth under the caption entitled "Related Transactions" in our
definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

Item 14.    Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the information set forth under the caption entitled "Independent Public Accountants and
Related Fees" in our definitive proxy statement for the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Act of 1934.

50

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PART IV

Item 15.    Exhibits and Financial Statement Schedules



|Management's Report on Internal Control Over Financial Reporting                                                      |  | F-1
|--------------------------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting                  |  | F-2
|Report of Independent Registered Public Accounting Firm on Financial Statements and Schedule                          |  | F-3
|Consolidated Balance Sheets as of December 31, 2005 and January 1, 2005                                               |  | F-4
|Consolidated Statements of Operations for the years ended December 31, 2005, January 1, 2005 and January 3, 2004      |  | F-5
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, January 1, 2005 and January 3, 2004      |  | F-6
|Consolidated Statements of Changes in Stockholders' Equity for the period from December 28, 2002 to December 31, 2005 |  | F-7
|Notes to Consolidated Financial Statements                                                                            |  | F-8



|Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2005, January 1, 2005 and January 3, 2004 |  | F-40
|------------------------------------------------------------------------------------------------------------------------ |  | ----

All
other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto.



|Exhibit No. |  | Description                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company, is incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 10/A, filed with the Commission on September 20, 2001.                                              
|3.2         |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company, is incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24,
2001.                    
|3.3         |  | Amended and Restated By-Laws of the Company, is incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                        
|10.1       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Randy H. Thurman, is incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K/A, filed with the
Commission on March 3, 2005.
|10.2       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Martin P. Galvan, is incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K/A, filed with the
Commission on March 3, 2005.
|            |  |                                                                                                                                                                                                                                                                   

51

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|10.3  |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Edward Pulwer, is incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K/A, filed with the
Commission on March 3, 2005.                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4  |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Lori J. Cross, is incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K/A, filed with the
Commission on March 3, 2005.                  
|*10.5  |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Matthew M. Bennett.                                                                                                                                                                          
|*10.6  |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and John F. Imperato.                                                                                                                                                                            
|*10.7  |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Thomas I. Kuhn.                                                                                                                                                                              
|*10.8  |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Gregory G. Martin.                                                                                                                                                                           
|*10.9  |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Giulio A. Perillo.                                                                                                                                                                           
|*10.10 |  | Change of Control Agreement, dated as of September 26, 2005, by and between the Company and Scott Hurley.                                                                                                                                                                        
|*10.11 |  | Change of Control Agreement, dated as of September 26, 2005, by and between the Company and Wesley N. Riemer.                                                                                                                                                                    
|10.12  |  | Plan and Agreement of Distribution between the Company and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24,
2001.                                        
|10.13  |  | Tax Matters Agreement between the Company and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                        
|10.14  |  | Rights Agreement between the Company and the Rights Agent, is incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                        
|10.15 |  | VIASYS Healthcare Inc. Indemnification Agreement between the Company and its directors and officers, is incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form 10/A, filed with the Commission on
July 18, 2001.                              
|10.16 |  | VIASYS Healthcare Inc. Equity Incentive Plan (as amended on May 5, 2004), is incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on August 11, 2004.                                                             
|10.17 |  | VIASYS Healthcare Inc. Deferred Compensation Plan for Directors, is incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24, 2001.                                                               
|10.18 |  | Letter Agreement, dated as of September 24, 2001, by and between the Company, Randy H. Thurman and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form 10/A, filed
with the Commission on October 24, 2001.
|       |  |                                                                                                                                                                                                                                                                                  

52

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|10.19 |  | Term Note, dated as of April 19, 2001, by and between the Company and Randy H. Thurman, is incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18,
2001.                                                                                                                                                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20  |  | Lease for Millennium III of the Millennium Corporate Center, dated October 3, 2001, by and between the Company and Washington Street Associates II, L.P, is incorporated by reference to Exhibit 10.15 to the Company's Registration Statement
on Form 10/A, filed with the Commission on October 24, 2001.                                                                                                                                                                
|10.21  |  | Credit Agreement, dated as of May 3, 2005, among the Company, KeyBank National Association, as co-lead arranger, sole book runner, swing line lender and administrative agent, JP Morgan Chase Bank, N.A., as co-lead arranger and syndication
agent, Fifth Third Bank, as documentation agent, and certain other bank parties therein, is incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed with the Commission on May 6, 2005.
|*21.1  |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|*23.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                  
|*31.1  |  | Chief Executive Officer's Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                          
|*31.2  |  | Chief Financial Officer's Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                          
|*32.1  |  | 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---

53

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | VIASYS Healthcare Inc.
(Registrant)
| |  | -----------------------------------
| |  | By:                                

Date:
March 14, 2006

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated, as of March 14, 2006.

|Signature |  | Title                                      
|--------- |  | -------------------------------------------
|          |  |                                            
|By:       |  | /s/RANDY H. THURMANRandy H. Thurman        
|By:       |  | /s/MARTIN P. GALVANMartin P. Galvan        
|By:       |  | /s/SCOTT HURLEYScott Hurley                
|By:       |  | /s/RONALD A. AHRENSRonald A. Ahrens        
|By:       |  | /s/SANDER A. FLAUMSander A. Flaum          
|By:       |  | /s/KIRK E. GORMANKirk E. Gorman            
|By:       |  | /s/THOMAS W. HOFMANNThomas W. Hofmann      
|By:       |  | /s/ROBERT W. O'LEARYRobert W. O'Leary      
|By:       |  | /s/FRED B. PARKS, PH.D.Fred B. Parks, Ph.D.

54

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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management
of VIASYS Healthcare Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
evaluated the Company's internal control over financial reporting as of December 31, 2005. Management did not include the internal controls of Oxford Instruments plc,
Micro Medical Limited, and Pulmonetic Systems Inc., which were acquired in 2005 and are included in the 2005 consolidated financial statements of the Company and constituted approximately
$163,189,000 and $122,140,000 of total and net assets, respectively, as of December 31, 2005 and approximately $61,274,000 and $(33,300,000) of revenues and net loss, respectively, for the year
then ended. In making this assessment, management used the framework established inInternal Control-Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31,
2005, the Company's internal control over financial reporting was effective.

The
Company's independent registered public accounting firm, Ernst & Young LLP, have audited management's assessment of the Company's internal control over financial reporting.
Their report on management's assessment and their report on the effectiveness of the Company's internal control over financial reporting appear on page F-2 in this Annual Report on
Form 10-K.

|/s/RANDY H. THURMANRandy H. Thurman
Chairman of the Board,
President and Chief Executive Officer |  | 
|------------------------------------------------------------------------------------------------ |  | 
|/s/MARTIN P. GALVANMartin P. Galvan
Executive Vice President and
Chief Financial Officer         |  | 

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To
the Board of Directors and Stockholders of VIASYS Healthcare Inc.:

We
have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that VIASYS Healthcare Inc. maintained
effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). VIASYS Healthcare Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
indicated in the accompanying Management's Report on Internal Controls Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control
over financial reporting did not include the internal controls of Oxford Instruments plc, Micro Medical Limited and Pulmonetic Systems Inc., which were acquired in 2005 and are included in the
2005 consolidated financial statements of VIASYS Healthcare Inc. and constituted approximately $163,189,000 and $122,140,000 of total and net assets, respectively, as of December 31,
2005 and approximately $61,274,000 and $(33,300,000) of revenues and net loss, respectively, for the year then ended.

In
our opinion, management's assessment that VIASYS Healthcare Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our opinion, VIASYS Healthcare Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of VIASYS
Healthcare Inc. and our report dated March 10, 2006 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Philadelphia,
Pennsylvania
March 10, 2006

F-2

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  ON FINANCIAL STATEMENTS AND SCHEDULE

To
the Board of Directors and Stockholders of VIASYS Healthcare Inc.:

We
have audited the accompanying consolidated balance sheets of VIASYS Healthcare Inc. as of December 31, 2005 and January 1, 2005, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement
schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIASYS Healthcare Inc. at
December 31, 2005 and January 1, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of VIASYS Healthcare Inc.'s internal
control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion thereon.



Philadelphia,
Pennsylvania
March 10, 2006

F-3

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VIASYS HEALTHCARE INC.  CONSOLIDATED BALANCE SHEETS

|                                              |                                                                                                                                                                                                          | December 31,
2005                          |         | January 1,
2005 |        
|--------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------------- | -------
|
|ASSETS                                        |                                                                                                                                                                                                          |                                            |         |                 |        
|Current Assets:                               |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              | Cash and cash equivalents                                                                                                                                                                                |                                            | $       | 19,531          |        
|                                              | Accounts receivable, less allowance for doubtful accounts of $6,024 and $5,113 at December 31, 2005 and January 1, 2005, respectively                                                                    |                                            |         | 144,041         |        
|                                              | Inventories                                                                                                                                                                                              |                                            |         | 89,444          |        
|                                              | Deferred income taxes, net                                                                                                                                                                               |                                            |         | 13,054          |        
|                                              | Prepaid expenses and other current assets                                                                                                                                                                |                                            |         | 5,258           |        
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Current Assets                       |         |                 | 271,328
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|Property, Plant and Equipment, net            |                                                                                                                                                                                                          |                                            | 51,564  |                 |        
|Goodwill                                      |                                                                                                                                                                                                          |                                            | 261,856 |                 |        
|Intangible Assets, net                        |                                                                                                                                                                                                          |                                            | 61,237  |                 |        
|Other Assets                                  |                                                                                                                                                                                                          |                                            | 2,602   |                 |        
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Assets                               |         | $               | 648,587
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|LIABILITIES AND STOCKHOLDERS' EQUITY          |                                                                                                                                                                                                          |                                            |         |                 |        
|Current Liabilities:                          |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              | Current portion of long-term obligations                                                                                                                                                                 |                                            | $       | 30,956          |        
|                                              | Accounts payable                                                                                                                                                                                         |                                            |         | 33,014          |        
|                                              | Accrued payroll and related benefits                                                                                                                                                                     |                                            |         | 18,626          |        
|                                              | Deferred revenue                                                                                                                                                                                         |                                            |         | 13,292          |        
|                                              | Accrued installation and warranty costs                                                                                                                                                                  |                                            |         | 8,978           |        
|                                              | Accrued commissions                                                                                                                                                                                      |                                            |         | 4,684           |        
|                                              | Income taxes payable                                                                                                                                                                                     |                                            |         | 5,160           |        
|                                              | Accrued restructuring costs                                                                                                                                                                              |                                            |         | 1,227           |        
|                                              | Other accrued expenses                                                                                                                                                                                   |                                            |         | 21,062          |        
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Current Liabilities                  |         |                 | 136,999
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|Revolving credit facilitynon-current portion |                                                                                                                                                                                                          |                                            | 37,100  |                 |        
|Deferred income taxes, net                    |                                                                                                                                                                                                          |                                            | 16,446  |                 |        
|Other long-term liabilities                   |                                                                                                                                                                                                          |                                            | 7,926   |                 |        
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Liabilities                          |         |                 | 198,471
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|Stockholders' Equity:                         |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              | Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and outstanding                                                                                                                |                                            |         |                |        
|                                              | Common stock, $.01 par value; 100,000,000 shares authorized 31,958,137 and 31,101,239 shares issued; 31,952,540 and 31,095,642 shares outstanding at December 31, 2005 and January 1, 2005, respectively |                                            |         | 319             |        
|                                              | Additional paid-in capital                                                                                                                                                                               |                                            |         | 367,579         |        
|                                              | Treasury stock, at cost; 5,597 shares at December 31, 2005 and January 1, 2005                                                                                                                           |                                            |         | (111            | )      
|                                              | Retained earnings                                                                                                                                                                                        |                                            |         | 71,231          |        
|                                              | Accumulated other comprehensive income                                                                                                                                                                   |                                            |         | 11,098          |        
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Stockholders' Equity                 |         |                 | 450,116
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        
|                                              |                                                                                                                                                                                                          | Total Liabilities and Stockholders' Equity |         | $               | 648,587
|                                              |                                                                                                                                                                                                          |                                            |         |                 |        

See
accompanying notes to the consolidated financial statements.

F-4

---





VIASYS HEALTHCARE INC.  CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                           |                                               | Year Ended                   |        
|---------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------- | -------
|
|
|Revenues:                                                                                                  |                                               |                              |        
|                                                                                                           | Product                                       |                              | $      
|                                                                                                           | Service                                       |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | Total revenues               |        
|                                                                                                           |                                               |                              |        
|Cost of Revenues:                                                                                          |                                               |                              |        
|                                                                                                           | Product                                       |                              |        
|                                                                                                           | Service                                       |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | Total cost of revenues       |        
|                                                                                                           |                                               |                              |        
|Gross Margin                                                                                               |                                               |                              | 241,116
|Operating Expenses:                                                                                        |                                               |                              |        
|                                                                                                           | Selling, general and administrative           |                              |        
|                                                                                                           | Research and development                      |                              |        
|                                                                                                           | Restructuring charges                         |                              |        
|                                                                                                           | Purchased in-process research and development |                              |        
|                                                                                                           | Legal settlement                              |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | Total operating expenses     |        
|                                                                                                           |                                               |                              |        
|Operating Income                                                                                           |                                               |                              | 4,759  
|Other Income (Expense):                                                                                    |                                               |                              |        
|                                                                                                           | Interest income                               |                              |        
|                                                                                                           | Interest expense                              |                              |        
|                                                                                                           | Other, net                                    |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | Total other (expense) income |        
|                                                                                                           |                                               |                              |        
|Income from Continuing Operations Before Income Taxes                                                      |                                               |                              | 3,237  
|Provision for Income Taxes                                                                                 |                                               |                              | (13,542
|                                                                                                           |                                               |                              |        
|(Loss) income from Continuing Operations                                                                   |                                               |                              | (10,305
|Income (loss) from Discontinued Operations (net of income tax benefit (expense) of $(296), $128, and $665) |                                               |                              | 536    
|                                                                                                           |                                               |                              |        
|Net (Loss) income                                                                                          |                                               | $                            | (9,769 
|                                                                                                           |                                               |                              |        
|Earnings (Loss) per Share:                                                                                 |                                               |                              |        
|Basic:                                                                                                     |                                               |                              |        
|                                                                                                           | Continuing Operations                         |                              | $      
|                                                                                                           | Discontinued Operations                       |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | $                            | (.31   
|                                                                                                           |                                               |                              |        
|Diluted:                                                                                                   |                                               |                              |        
|                                                                                                           | Continuing Operations                         |                              | $      
|                                                                                                           | Discontinued Operations                       |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           |                                               | $                            | (.31   
|                                                                                                           |                                               |                              |        
|Weighted Average Shares Outstanding:                                                                       |                                               |                              |        
|                                                                                                           | Basic                                         |                              |        
|                                                                                                           |                                               |                              |        
|                                                                                                           | Diluted                                       |                              |        
|                                                                                                           |                                               |                              |        

See
accompanying notes to the consolidated financial statements.

F-5

---





VIASYS HEALTHCARE INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                      |                                                                                                                     | For the Year Ended                                                          |                                           |                                                                                  |       
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------------------------- | ------
|
|
|Cash Flows from Operating Activities:                                 |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      | Net (loss) income from continuing operations                                                                        |                                                                             | $                                         | (10,305                                                                          | )     
|                                                                      | Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities: |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     | Depreciation and amortization                                               |                                           |                                                                                  | 22,453
|                                                                      |                                                                                                                     | Gain on sale of fixed assets and intangible assets                          |                                           |                                                                                  | (7    
|                                                                      |                                                                                                                     | Tax benefit related to stock option exercises                               |                                           |                                                                                  | 1,971 
|                                                                      |                                                                                                                     | Purchased in-process research and development                               |                                           |                                                                                  | 34,909
|                                                                      |                                                                                                                     | Deferred income taxes                                                       |                                           |                                                                                  | (636  
|                                                                      |                                                                                                                     | Non-cash stock-based compensation                                           |                                           |                                                                                  | 827   
|                                                                      |                                                                                                                     | Changes in operating assets and liabilities, net of effect of acquisitions: |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Accounts receivable                       |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Inventories                               |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Prepaid expenses and other current assets |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Accounts payable                          |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Income taxes payable                      |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Other current liabilities                 |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             | Other, net                                |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash provided by operating activities from continuing operations             |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash provided by (used in) operating activities from discontinued operations |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash provided by operating activities                                        |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Cash Flows from Investing Activities:                                 |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      | Purchases of businesses, net of cash acquired                                                                       |                                                                             |                                           | (186,045                                                                         | )     
|                                                                      | Expenditures for property, plant and equipment                                                                      |                                                                             |                                           | (19,948                                                                          | )     
|                                                                      | Proceeds from sale of property, plant and equipment                                                                 |                                                                             |                                           | 1,423                                                                            |       
|                                                                      | Proceeds from sale of discontinued operation                                                                        |                                                                             |                                           | 6,421                                                                            |       
|                                                                      | Expenditures for intangible assets                                                                                  |                                                                             |                                           | (6,128                                                                           | )     
|                                                                      | Proceeds from sale of intangible assets                                                                             |                                                                             |                                           |                                                                                 |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash used in investing activities from continuing operations                 |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash provided by investing activities from discontinued operations           |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash (used in) provided by investing activities                              |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Cash Flows from Financing Activities:                                 |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      | Increase (decrease) in borrowings under credit facility                                                             |                                                                             |                                           | 67,342                                                                           |       
|                                                                      | Proceeds from stock option exercises                                                                                |                                                                             |                                           | 11,542                                                                           |       
|                                                                      | Proceeds from issuance of common stock under the employee stock purchase plan                                       |                                                                             |                                           | 1,491                                                                            |       
|                                                                      | Net proceeds from issuance of common stock in follow-on offering                                                    |                                                                             |                                           |                                                                                 |       
|                                                                      | Other                                                                                                               |                                                                             |                                           |                                                                                 |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           | Net cash provided by financing activities                                        |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Effect of Currency Exchange Rate Changes on Cash and Cash Equivalents |                                                                                                                     |                                                                             | (1,165                                    | )                                                                                |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Net (decrease) Increase in Cash and Cash Equivalents                  |                                                                                                                     |                                                                             | (102,750                                  | )                                                                                |       
|Cash and Cash Equivalents at Beginning of Period                      |                                                                                                                     |                                                                             | 122,281                                   |                                                                                  |       
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Cash and Cash Equivalents at End of Period                            |                                                                                                                     | $                                                                           | 19,531                                    |                                                                                  | $     
|                                                                      |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|Supplemental Disclosures of Cash Flow Information:                    |                                                                                                                     |                                                                             |                                           |                                                                                  |       
|                                                                      | Cash paid during the year for:                                                                                      |                                                                             |                                           |                                                                                  |       
|                                                                      |                                                                                                                     | Interest                                                                    |                                           | $                                                                                | 1,382 
|                                                                      |                                                                                                                     | Income taxes                                                                |                                           | $                                                                                | 5,482 

See accompanying notes to the consolidated financial statements.

F-6

---





VIASYS HEALTHCARE INC.  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

|                                                                                          |                                                                                           | Common Stock               |     |   |     |   |   |         |        | Accumulated
Other
Comprehensive
Income (Loss) |      |   |  
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------- | --- | - | --- | - | - | ------- | ------ | --------------------------------------------- | ---- | - | -
|
|
|
|Balance at December 28, 2002                                                              |                                                                                           | 26,256                     |     | $ | 263 |   | $ | 266,474 |        | $                                             | (111 | ) | $
|Comprehensive income:                                                                     |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Net income                                                                                |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Foreign currency translation adjustment                                                   |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          |                                                                                           | Total comprehensive income |     |   |     |   |   |         |        |                                               |      |   |  
|Issuance of common stock in connection with follow-on offering                            |                                                                                           | 3,450                      |     |   | 35  |   |   | 62,654  |        |                                               |      |   |  
|Issuance of common stock under the employee stock purchase plan and equity incentive plan |                                                                                           | 715                        |     |   | 5   |   |   | 9,709   |        |                                               |      |   |  
|Tax benefit related to stock option exercises                                             |                                                                                           |                            |     |   |     |   |   | 1,203   |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|Balance at January 3, 2004                                                                |                                                                                           | 30,421                     |     | $ | 303 |   | $ | 340,040 |        | $                                             | (111 | ) | $
|Comprehensive income:                                                                     |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Net income                                                                                |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Foreign currency translation adjustment                                                   |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|Total comprehensive income                                                                |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Issuance of common stock under the employee stock purchase plan and equity incentive plan |                            | 680 |   |     | 8 |   |         | 10,024 |                                               |      |   |  
|Tax benefit related to stock option exercises                                             |                                                                                           |                            |     |   |     |   |   | 1,373   |        |                                               |      |   |  
|Non-cash stock-based compensation                                                         |                                                                                           |                            |     |   |     |   |   | 208     |        |                                               |      |   |  
|Other                                                                                     |                                                                                           |                            |     |   |     |   |   | 111     |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|Balance at January 1, 2005                                                                |                                                                                           | 31,101                     |     | $ | 311 |   | $ | 351,756 |        | $                                             | (111 | ) | $
|Comprehensive loss:                                                                       |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Net loss                                                                                  |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Foreign currency translation adjustment                                                   |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|Total comprehensive loss                                                                  |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|                                                                                          | Issuance of common stock under the employee stock purchase plan and equity incentive plan |                            | 851 |   |     | 8 |   |         | 13,025 |                                               |      |   |  
|Tax benefit related to stock option exercises                                             |                                                                                           |                            |     |   |     |   |   | 1,971   |        |                                               |      |   |  
|Non-cash stock-based compensation                                                         |                                                                                           | 6                          |     |   |     |   |   | 827     |        |                                               |      |   |  
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  
|Balance at December 31, 2005                                                              |                                                                                           | 31,958                     |     | $ | 319 |   | $ | 367,579 |        | $                                             | (111 | ) | $
|                                                                                          |                                                                                           |                            |     |   |     |   |   |         |        |                                               |      |   |  

See
accompanying notes to the consolidated financial statements.

F-7

---





VIASYS HEALTHCARE INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business

VIASYS Healthcare Inc. (the "Company") develops, manufactures, markets and services medical devices and products, including respiratory care equipment,
neurodiagnostic systems, disposable products and other specialty products and materials.

The
Company operated as a division of Thermo Electron Corporation ("Thermo Electron") until its incorporation as a Delaware corporation in August 1995 under the name Thermo
Biomedical Inc., as a wholly-owned subsidiary of Thermo Electron. Subsequently, Thermo Electron contributed all of the assets or stock of its Nicolet Biomedical, Inc., Bird Medical
Technologies, Inc., SensorMedics Corporation, Medical Data Electronics, Inc. ("MDE") and Bear Medical Systems, Inc. subsidiaries to the Company. In September 2000, Thermo
Electron contributed its MWW, Corpak LLC and Tecomet, Inc. subsidiaries and substantially all of the assets and liabilities of its Thermedics Polymer business ("Thermedics") to the Company. The
transfers of these businesses from Thermo Electron were recorded at historical cost.

In
early 2000, Thermo Electron announced that, as a part of a major reorganization, it planned to spin-off its equity interest in the Company as a dividend to Thermo Electron
stockholders. In January 2001, Thermo Biomedical Inc. changed its name to VIASYS Healthcare Inc. Subsequently, Thermo Electron received a favorable ruling from the Internal
Revenue Service regarding the planned spin-off. On October 10, 2001, Thermo Electron's board of directors declared a dividend of all of its equity interest in the Company. The
dividend was distributed on November 15, 2001 to Thermo Electron Stockholders of record on November 7, 2001. The distribution was on the basis of 0.1461 share of Company common stock for
each share of Thermo Electron common stock outstanding.

2.    Summary of Significant Accounting Policies

A summary of the significant accounting policies used by the Company in the preparation of its consolidated financial statements follows:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation.

Fiscal Year

The Company's fiscal year is a 52 or 53 week period ending on the Saturday nearest to December 31. Accordingly, fiscal years 2005, 2004 and 2003 ended on
December 31, 2005, January 1, 2005, and January 3, 2004, respectively, and are identified herein as 2005, 2004 and 2003. Fiscal years 2005 and 2004 consisted of 52 weeks, and
fiscal year 2003 consisted of 53 weeks.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of demand deposits with financial institutions and taxable, short-term money market securities. The
Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates
market value.

F-8

---



Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of some of its customers to make required payments. The allowance for doubtful accounts is based on the Company's historical collections experience, historical
write-offs of its receivables, current trends, credit policy and a percentage of the Company's accounts receivable by aging category. Account balances are written off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. Charges for doubtful accounts are included in selling, general and administrative expense in the
accompanying Consolidated Statements of Operations.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the "first-in first out" method. Costs include direct materials,
direct labor and applicable manufacturing overhead, and other direct costs.

At
each balance sheet date, the Company reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product or product line. The
Company records a charge to cost of revenues for the amount required to reduce the carrying value of the inventories to their estimated net realizable value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. The costs of major additions and improvements that extend the lives of the assets
are capitalized, while maintenance and repair costs are charged to expense as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of
the respective assets, which are 30 years for buildings, 2 to 10 years for machinery and equipment, 3 to 5 years for information technology and 3 to 10 years for furniture
and equipment. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful life of the asset. When assets are retired or otherwise disposed of, the assets
and related accumulated depreciation are removed from the accounts and any gain or loss is included in other, net, in the accompanying Consolidated Statements of Operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. The Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under SFAS No. 142, goodwill and intangible
assets having indefinite lives are not amortized but are instead assigned to reporting units and tested for impairment annually or more frequently if changes in circumstances or the occurrence of
events indicate possible impairment.

Pursuant
to SFAS No. 142, the Company performs an annual impairment test for goodwill. The impairment test for goodwill is a two-step process. Step one consists of a
comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two
requires the comparison of the implied fair value of the reporting unit with the carrying amount of the reporting unit's goodwill. Any excess of the carrying value of the reporting unit's goodwill
over the implied fair value of the reporting unit's goodwill will be recorded as an impairment loss.

F-9

---



The
Company performed its annual SFAS No. 142 goodwill impairment assessment for its reporting units as of November 26, 2005 and determined that there was no impairment.

Intangible Assets

Intangible assets consists of patents, capitalized software development costs, purchased technology and other intangibles and are stated at cost less accumulated
amortization. Intangible assets with an indefinite life, namely certain trademarks, are not amortized. Intangible assets with a definite life are amortized using the straight-line method
over their estimated useful lives, which range from 2 to 17 years.

Capitalized Software Development Costs

Some of the Company's products include embedded software which is essential to the products' functionality. In accordance with SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," costs incurred in the research and development of new software products and enhancements to existing software products are
expensed as incurred until technological
feasibility has been established. The Company capitalizes software development costs when the project reaches technological feasibility and ceases capitalization when the project is ready for release.
Software development costs are amortized on a product-by-product basis over the greater of the ratio of current revenues to total anticipated revenues or on a
straight-line basis over the estimated useful life of the product. Amortization begins when the product is available for general release to the customer. Unamortized capitalized software
development costs at December 31, 2005 and January 1, 2005 were $4,031,000 and $7,421,000 respectively, and are included in intangible assets, net, in the accompanying Consolidated
Balance Sheets.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets, such as
property, plant and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated.

Accrued Installation and Warranty Costs

The Company offers warranties on certain products for various periods of time. The Company accrues for the estimated cost of product warranties at the time
revenue is recognized. The Company's product warranty liability reflects management's best estimate of probable liability under its product warranties. Management estimates the liability based on the
Company's stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty. Factors that affect the Company's warranty
liability include the number of units sold, the length of the warranty, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts

F-10

---



as
necessary. The Company also accrues for the estimated cost of installation at the time revenue is recognized for products that require installation for which the installation is not essential to
functionality and is deemed inconsequential or perfunctory.

Comprehensive Income/Loss

Comprehensive income represents all changes in stockholders' equity except those arising from transactions with stockholders. Total comprehensive income is
presented in the accompanying Consolidated Statements of Changes in Stockholders' Equity. Total accumulated other comprehensive income is displayed as a separate component of stockholders' equity in
the accompanying Consolidated Balance Sheets. Accumulated other comprehensive income as of December 31, 2005 and January 1, 2005 consists solely of accumulated foreign currency
translation adjustments. Foreign currency translation adjustments are not generally adjusted for income taxes as they relate to indefinite investments in foreign subsidiaries.

Revenue Recognition

The Company derives revenues primarily from the sale of products and to a lesser extent the provision of services and rental of equipment. Revenues for products
that require installation for which the installation either is essential to functionality or is not deemed inconsequential or perfunctory are recognized upon completion of installation. Revenues for
products sold where installation is not essential to functionality and is deemed inconsequential or perfunctory are recognized upon transfer of title with estimated installation costs accrued.

Service
revenues are derived from parts, service contracts, training, repairs not under warranty and research and development for third parties. The Company sells service contracts on
products when the warranty period expires. The Company recognizes revenues from these service contracts ratably over the terms of the contracts, while the cost is recognized when incurred. Revenues
from the sale of spare parts are recognized upon transfer of title. Revenues from training and repairs are recognized at the time the service is performed and the customer has accepted the work.

The
Company rents products, primarily in the Respiratory Care segment, to hospitals and other customers for periods ranging from two weeks to over a year. The Company recognizes rental
revenues ratably over the terms of the rental contract. Rental revenue was not material in any of the periods presented and is included in product revenue in the accompanying Consolidated Statements
of Operations.

Cost of Revenues

Cost of revenues includes costs related to the sale of products and to a lesser extent the cost of providing services and renting equipment. Cost of revenues from
the sale of products consists primarily of the cost of materials, direct labor and manufacturing overhead. Cost of revenues from service includes the cost of parts, direct labor and other costs
directly related to servicing the equipment
covered under a service contract. Cost of revenues from rentals primarily includes the depreciation of the rental equipment.

Operating Expenses

Selling, general and administrative expense and research and development expense consist primarily of salaries, commissions, incentive compensation, benefits,
amortization of intangible assets

F-11

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and
other expenses in support of these activities. Research and development costs are charged to expense when incurred.

Shipping and Handling Cost

The Company classifies shipping and handling costs as a component of cost of revenues.

Research and Development Expense

Research and development costs are expensed as incurred. Research and development costs consist of direct and indirect internal costs related to specific projects
as well as fees paid to other entities which conduct certain research activities on behalf of the Company.

Restructuring Charges

Costs associated with restructuring activities initiated on or after December 29, 2002, other than those activities related to purchase business
combinations, are accounted for in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS No. 112"), where applicable. Costs associated with restructuring activities initiated prior to December 29, 2002, other than those activities related to
purchase business combinations, are accounted for in accordance with Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and SFAS No. 112, where applicable.

Purchased In-Process Research and Development (IPR&D)

When the Company acquires another entity, the purchase price is allocated, as applicable, among IPR&D, other identifiable intangible assets, net tangible assets,
and goodwill. The amount allocated to IPR&D represents an estimate of the fair value of purchased in-process technology for research projects that, as of the date of acquisition, have not
reached technological feasibility and have no alternative future use. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project and
discounting the net cash flows back to their present values. The discount rate used is determined at the time of acquisition, in accordance with accepted valuation methods, and includes consideration
of the assessed risk of the project not being developed to a stage of commercial feasibility.

Foreign Currency

The financial statements of the Company's international subsidiaries are maintained in their local currency and are translated into United States ("U.S.") dollars
in accordance with SFAS No. 52, "Foreign Currency Translation." All assets and liabilities of the Company's international subsidiaries are translated at the exchange rate in effect on the
balance sheet date. The resulting translation adjustments are recorded in stockholders' equity as a separate component of accumulated other comprehensive income until such time as the subsidiary is
sold or substantially or completely liquidated. Revenue and expense items are translated at weighted average exchange rates for the year. Transaction gains (losses) resulting from transactions
denominated in foreign currencies and the translation of intercompany balances, other than intercompany debt deemed to be of a long-term nature, are included

F-12

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in
other, net, in the accompanying Consolidated Statements of Operations and totaled ($80,000), ($697,000), and ($1,410,000) in 2005, 2004 and 2003, respectively.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes as prescribed by SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company provides a reserve against its deferred tax assets when, in the opinion of management, it is more likely than not that such assets will not be realized.

Earnings (Loss) per Share

Basic and diluted earnings (loss) per share have been calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per share
("Basic EPS") is computed based upon the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share ("Diluted EPS") is computed based upon the weighted
average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and awards.

The
following table sets forth the reconciliation of the weighted average number of common shares used to compute Basic EPS to those used to compute Diluted EPS for 2005, 2004 and 2003:

2005

2004

2003(in thousands)Weighted average number of common shares outstandingBasic

31,430

30,809

28,284Dilutive effect of outstanding stock options and awards



594

621Weighted average number of common shares outstandingDiluted

31,430

31,403

28,905


Since
the Company incurred a loss for the year ended December 31, 2005, all of the outstanding stock options were excluded from the calculation of diluted weighted average shares
outstanding as their effect would have been anti-dilutive. These options could potentially dilute earnings per
share in the future. Options to purchase 799,000 shares and 527,000 shares of the Company's common stock were excluded from the computation of diluted weighted average shares outstanding for 2004 and
2003, respectively, because their exercise price exceeded the average market price of the Company's common stock during the period and their effect would have been anti-dilutive.

Stock-Based Compensation

At December 31, 2005, the Company has one stock-based employee compensation plan, which is described more fully in Note 10. The Company accounts for this
plan under the intrinsic value method of accounting as defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
related interpretations, and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS No. 148,
"Accounting for Stock-Based CompensationTransition and Disclosure." Under APB No. 25, compensation expense is measured as the difference, if any, between the exercise

F-13

---



price
of the stock option or award and the market value of the Company's common stock on the date of the grant.

If
the Company had elected to recognize compensation expense for its stock-based employee compensation plan based on the fair value of the options granted at the grant date as prescribed
by SFAS No. 123, net income and earnings per share would have been reported as follows:

2005

2004

2003(In thousands, except
per share amounts)Net (loss) income, as reported

$
(9,769
)
$
14,831

$
21,586Add: Stock-based compensation expense included in net income, net of related tax effects


538


135


Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects


(4,119
)

(4,540
)

(5,306
)Pro forma net (loss) income

$
(13,350
)
$
10,426

$
16,280Basic EPS:As reported

$
(.31
)
$
.48

$
.76Pro forma

$
(.42
)
$
.34

$
.58Diluted EPS:As reported

$
(.31
)
$
.47

$
.75Pro forma

$
(.42
)
$
.33

$
.56


Because
the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years, the above pro forma amounts may
not be representative of the effects on reported net income for future years. For purposes of the pro forma disclosures above, the weighted average fair value per stock option granted in 2005, 2004,
and 2003 was $8.68, $6.77, and $5.63, respectively.

The
fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

2005

2004

2003Expected volatility

35.0%

35.0%

34.0%Risk-free interest rate

4.0%

3.4%

3.0%Expected life of options

5 years

5 years

5 yearsExpected dividend yield








The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options.

F-14

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Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, other current assets, accounts payable, deferred revenue and
other current liabilities. The carrying value of these financial instruments approximates their fair value because of their short-term nature.

The
fair value of financial instruments is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents, which are held at
major financial institutions, and accounts receivable. Cash and cash equivalents held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance
Corporation on such deposits. The Company's policy is to place its cash and cash equivalents with high quality financial institutions in order to limit its credit exposure. The Company has not
experienced any losses on its deposits of cash and cash equivalents. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the
Company's customer base. The Company performs ongoing credit evaluations of its customers and generally does not require collateral or other deposits of security from its customers. The Company
maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable. No single customer represented more than 10% of the Company's revenues or accounts
receivable balance for any periods presented.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs" ("SFAS No. 151"). This statement
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
waste material (spoilage). SFAS No. 151 requires such abnormal expenses to be recognized in the period in which they are incurred. SFAS No. 151 also requires that the allocation of fixed
production overheads to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a material impact on its financial position, results of operations or cash flows.

F-15

---



In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payments" ("SFAS No. 123R"). In April 2005, the SEC adopted a rule permitting
issuers to implement SFAS No. 123R at the beginning of their first fiscal year beginning after June 15, 2005. This statement is a revision to SFAS No. 123 and supersedes APB
No. 25 and amends SFAS No. 95, "Statement of Cash Flows." SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value
of the award at the date of grant. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award.

SFAS
No. 123R permits public companies to choose between the following two adoption methods:



The
Company adopted SFAS No.123R using the modified prospective method on January 1, 2006.

In
addition, the SEC issued SAB No. 107 "Share-Based Payments" in March 2005, which provides supplemental SFAS No. 123R application guidance based on the views of
the SEC.

The
adoption of SFAS No. 123R will not affect the Company's net cash flows or net financial position, but it will reduce reported net income and earnings per share because the
Company will be required to recognize compensation expense for share purchase rights granted under its employee stock option and employee stock purchase plans, whereas the Company has not been
required to record such expense under current accounting rules. Beginning January 1, 2006, the Company has adopted the provisions of SFAS 123R using the modified prospective transition
method whereby compensation cost is recognized for new awards granted and awards modified, repurchased, and cancelled after January 1, 2006. For the unvested portion of all awards issued prior
to and outstanding at January 1, 2006 compensation cost measured at their respective grant date fair values will be recognized as the remaining requisite service is rendered. Based on the
awards outstanding at December 31, 2005 and the awards expected to be granted in 2006, we estimate that total stock-based compensation will result in a charge to net income of approximately
$5,000,000 in 2006. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1,971,000, $1,373,000, and $1,203,000 in 2005, 2004 and 2003, respectively.

In
October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into law. In December 2004, the FASB issued Staff Position No. 109-1,
"Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the

F-16

---



American
Jobs Creation Act of 2004" ("FSP 109-1") and Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004" ("FSP 109-2"). FSP 109-1 clarifies that the manufacturer's tax deduction provided for under the AJCA should be accounted for as a
special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. Consequently, the enactment of AJCA does not affect deferred tax assets and liabilities existing at the
enactment date. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. The Company did not
repatriate any foreign earnings under the provisions of the AJCA.

In
March 2005, the FASB issued FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations("FIN
47"). FIN 47 clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143,Accounting for Asset Retirement
Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events
that may be outside the control of the Company. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. FIN 47 is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent
recognition of these liabilities. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company has evaluated the impact of FIN 47 and determined that it
was not material to the Company's results of operations or financial position.

In
May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Correctionsa replacement of Accounting Principles Board (APB) Opinion No. 20
and FASB Statement No. 3". This statement changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires companies making a
voluntary change in accounting principle to apply that change retrospectively to prior periods financial statements, unless this would be impracticable. This statement will be effective for fiscal
years beginning after December 15, 2005. The Company will comply with the provisions of this statement for any future accounting changes or error corrections.

3.    Acquisitions



Effective January 18, 2005, the Company acquired substantially all of the assets of Navion Biomedical Corporation. As a result, we acquired a business that
develops, manufactures and markets a device used to facilitate the placement of peripherally inserted central catheters and central venous catheters, for a cash purchase price of $3,571,000 (including
expenditures associated with the acquisition), of which $178,000, which has been paid out of escrow in the first quarter of 2006. In connection with this acquisition, the Company recorded $601,000 of
goodwill, which was assigned to the Company's MedSystems segment, and $2,900,000 of intangible assets, consisting of purchased technology. An independent appraiser was used to determine the fair
market value and the estimated useful lives of the intangible assets acquired. Other tangible net assets of $70,000 were also acquired.



Effective March 1, 2005, the Company acquired the medical division of Oxford Instruments plc ("Oxford Medical") for a cash purchase price of approximately
$45,979,000, including expenditures associated with the acquisition and certain working capital adjustments. The Oxford Medical business is

F-17

---



based
in the United Kingdom and develops, designs, manufactures and markets medical diagnostic and monitoring products as well as related disposables and accessories. Neurophysiology comprises the
largest of Oxford Medical's several business components. Neurophysiology's principal product lines include electromyography ("EMG") equipment, EMG needles and neurological disposables. The business
also contained obstetrics, antenatal and fetal monitors and ambulatory cardiology products, which was sold in the second quarter of 2005 as described in Note 14. Oxford Medical has been
assigned to the Company's NeuroCare segment.

The
Company has preliminarily allocated the purchase price for the acquisition as follows (in thousands):

Cash and cash equivalents

$
876Accounts receivable


16,776Inventory


8,567Property, plant and equipment


3,920Other current assets


1,491Net assets available for sale


6,421Goodwill


12,970Intangible assets


10,200Non-current deferred income taxes


(1,943
)Liabilities assumed


(13,299
)Net Assets Acquired

$
45,979


The
intangible assets, consisting of trademarks, customer relationships, patents and software technology, are being amortized on a straight-line basis over lives ranging from
5 to 7 years, except the trademarks, which were deemed to have an indefinite life and are, therefore, not subject to amortization. The fair value and the estimated useful lives of the
intangible assets were determined by an independent appraiser. The allocation of the purchase price has not yet been finalized. The final allocation may differ from the amounts included in the
accompanying Consolidated Financial Statements and could result in corresponding adjustments to goodwill.

In
connection with the acquisition of the Oxford Medical business, the Company has initiated exit plans for activities of the acquired businesses that are redundant with the Company's
existing operations. The plan includes the closure of five facilities and the elimination of 22 positions in the areas of sales, finance, service and management. In connection with the plan, the
Company established reserves in purchase accounting totaling $1,354,000. As of December 31, 2005, 11 positions had been eliminated and 3 facilities have been closed. The remaining reserves
established of $155,000 are included in other accrued expenses in the accompanying Consolidated Balance Sheets.



Effective March 16, 2005, the Company acquired all of the outstanding capital stock of Micro Medical Limited ("Micro Medical"), a company based in the
United Kingdom that develops, manufactures and markets a range of respiratory diagnostic products, for an aggregate purchase price of approximately $39,907,000, including expenditures associated with
the acquisition and subject to certain working capital adjustments. In addition, the Company may also be required to pay additional consideration upon the achievement of certain criteria relating to
the performance of the business acquired. Micro Medical has been assigned to the Company's Respiratory Care segment.

F-18

---



The
company has preliminarily allocated the purchase price for the acquisition as follows (in thousands):

Cash and cash equivalents

$
2,589Accounts receivable


4,782Inventory


1,272Property, plant and equipment


9,130Other assets


272Goodwill


23,136Intangible assets:In-process research and development


3,409Developed technology


4,800Trade name


1,900Other


400Accounts payable and other current liabilities


(5,728
)Non-current deferred income taxes


(2,288
)Long-term liabilities


(3,767
)Net Assets Acquired

$
39,907


The
developed technology and other intangible assets are being amortized on a straight-line basis over 10 and 3 years respectively. The trade name was deemed to have
an indefinite life and is, therefore, not subject to amortization. The amount allocated to purchased in-process research and development was expensed on the date of acquisition because the
products under development had not reached technological feasibility and had no future alternative use. See Note 19 for discussion of purchased in-process research and development.
Management utilized an independent appraisal to estimate the fair value of the intangible assets and in-process research and development expenses and the useful lives of the intangible
assets. The allocation of the purchase price has not yet been finalized. The final allocation may differ from the amounts included in the accompanying Consolidated Financial Statements and could
result in corresponding adjustments to goodwill.



Effective June 20, 2005, the Company acquired all of the outstanding capital stock of Pulmonetic Systems, Inc. ("Pulmonetics"), a company based in
Minneapolis, Minnesota, that develops, designs, manufactures and markets portable mechanical ventilators for home health care, for a cash purchase price of approximately $99,787,000, including
expenditures associated with the acquisition and subject to certain working capital adjustments. The purchase price was financed with existing cash and borrowings under the Company's revolving credit
facility and is subject to potential post-closing adjustments based upon, among other things, the net asset value of Pulmonetics as of the closing date. Pulmonetics has been assigned to
the Company's Respiratory Care segment.

F-19

---



The
Company has preliminarily allocated the purchase price for the acquisition as follows (in thousands:)

Cash and cash equivalents

$
10,123Accounts receivable


7,282Inventory


4,148Property, plant and equipment


1,673Other assets


2,613Goodwill


38,455Intangible assets:In-process research and development


31,500Developed technology


13,100Distribution Network


6,200Trade name


1,800Other


1,744Non-current deferred income taxes


(8,140
)Liabilities assumed


(10,711
)Net Assets Acquired

$
99,787


The
intangible assets are being amortized on a straight-line basis over lives ranging from 5-10 years. The amount allocated to purchased
in-process research and development was expensed on the date of acquisition because the products under development had not reached technological feasibility and had no future alternative
use. See Note 19 for discussion of purchased in-process research and development. The fair value of the intangible assets and in-process research and development
expenses and the estimated useful lives of the intangible assets were determined by an independent appraiser. The allocation of the purchase price has not yet been finalized. The final allocation may
differ from the amounts included in the accompanying Consolidated Financial Statements and could result in corresponding adjustments to goodwill.



Effective November 3, 2005, the Company acquired all of the stock of Intermed Precision Limited ("Intermed") for a cash purchase price of $10,661,000,
including expenditures associated with the acquisition. Intermed is based in Ireland and develops and supplies orthopedic instruments, implants, and micro-machined components used in minimally
invasive surgical devices. The business also provides a comprehensive range of services including design, prototyping, regulatory assistance, precision machining of metals and plastics, surface
treatments, and assembly.

F-20

---



The
Company has preliminarily allocated the purchase price for the acquisition as follows (in thousands):

Cash and cash equivalents

$
103Accounts receivable


951Inventory


397Property, plant and equipment


1,497Prepaid expenses


28Other current assets


273Goodwill


7,919Customer relationship


1,300Accounts payable and other current liabilities


(1,065
)Non-current deferred income taxes


(163
)Long term liabilities


(579
)Net Assets Acquired

$
10,661


The
intangible asset, which consists of customer relationships, is being amortized on a straight-line basis over 7 years. The fair value and the estimated useful life
of the intangible asset was determined by an independent appraiser. The allocation of the purchase price has not yet been finalized. The final allocation may differ from the amounts included in the
accompanying Condensed Consolidated Financial Statements and could result in corresponding adjustments to goodwill.



On July 28, 2004, the Company acquired substantially all of the assets of Taugagreining, hf. ("Taugagreining"), an Icelandic company that develops and
markets electroencephalography ("EEG") technology for the diagnosis and monitoring of neurological function, for a cash purchase price of $5,601,000, including expenditures associated with the
acquisition. In addition, the Company may also be required to pay up to $900,000 in additional future payments based on the achievement of various performance milestones through December 31,
2006. Any such payments will be accounted for as additional purchase price.

The
Company has allocated $3,428,000 of the purchase price to goodwill, $1,157,000 to intangible assets, $386,000 to purchased in-process research and development and
$630,000 to net tangible assets. The goodwill was assigned to the Company's NeuroCare segment. All of the goodwill is expected to be deductible for income tax purposes. The intangible assets,
consisting of purchased technology and a three-year non-compete agreement, are being amortized on a straight-line basis over lives ranging from 3 to 5 years.
The amount allocated to purchased in-process research and development was expensed on the date of acquisition, because the product under development had not reached technological
feasibility and had no future alternative use. The amount of the purchase price allocated to purchased in-process research and development and intangible assets was determined by an
independent appraiser.



The results of these acquisitions are included in the accompanying Consolidated Financial Statements since their respective dates of acquisition.

F-21

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The
following unaudited pro forma financial information represents the Company's consolidated results from continuing operations for the periods indicated as if the acquisitions of
Oxford Medical, Micro Medical, Pulmonetics, and Intermed had occurred on January 4, 2004. Unaudited pro forma information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations that would have actually been reported had the acquisitions occurred at the beginning of the periods presented, nor is it necessarily indicative of future
results of operations. These pro forma results are based upon the respective historical financial statements of the respective companies, and do not incorporate, nor do they assume, any benefits from
cost savings or synergies of operations of the combined Company. Unaudited pro forma results of operations are presented after giving effect to certain adjustments, including adjustments to reflect
increased intangible asset amortization, decreased interest income on the cash used to finance the acquisitions, increased interest expense on the debt incurred to finance the Pulmonetics and Intermed
acquisitions and increased income taxes at a rate consistent with the Company's effective tax rate in each year. The pro forma results exclude the write-off of purchased
in-process research and development expenses related to the Micro Medical and Pulmonetics acquisitions.

For the Year EndedDecember 31,
2005

January 1,
2005(In thousands)Revenues

$
553,249

$
493,204Net income

$
27,862

$
13,268Earnings per shareBasic

$
0.89

$
0.43Diluted

$
0.86

$
0.42


4.    Inventories

The components of inventories are as follows:

December 31,
2005

January 1,
2005(In thousands)Raw materials

$
51,811

$
42,621Work-in-process


10,743


7,943Finished goods


26,890


22,087$
89,444

$
72,651


F-22

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5.    Property, Plant and Equipment

Property, plant and equipment consists of the following:

December 31,
2005

January 1,
2005(In thousands)Land

$
1,743

$
990Buildings


13,758


6,892Machinery and equipment


65,291


62,167Information technology


4,367


4,095Furniture and fixtures


12,464


8,796Leasehold improvements


23,146


7,187Construction-in-progress


3,277


5,875124,046


96,002Accumulated depreciation


(72,482
)

(68,495
)$
51,564

$
27,507


Depreciation
expense associated with property, plant and equipment was $9,062,000, $6,871,000, and $7,111,000 in 2005, 2004 and 2003, respectively.

6.    Goodwill

The carrying amount of goodwill, by business segment, for the years ended December 31, 2005 and January 1, 2005, and the changes in those balances
are as follows:

|                             |                                      | Respiratory
Care Segment |         | NeuroCare Segment |   | MedSystems Segment |        | Orthopedics Segment |       | Total |  
|---------------------------- | ------------------------------------ | ------------------------ | ------- | ----------------- | - | ------------------ | ------ | ------------------- | ----- | ----- | -
|
|Balance at January 3, 2004   |                                      | $                        | 122,654 |                   | $ | 54,633             |        | $                   | 5,149 |       | $
|                             | Goodwill as a result of acquisitions |                          |         |                  |   |                    | 3,428  |                     |       |      |  
|                             | Purchase accounting adjustments      |                          |         | (148              | ) |                    |       |                     |       |      |  
|                             | Foreign currency translation         |                          |         | 4,371             |   |                    | 147    |                     |       |      |  
|                             |                                      |                          |         |                   |   |                    |        |                     |       |       |  
|Balance at January 1, 2005   |                                      | $                        | 126,877 |                   | $ | 58,208             |        | $                   | 5,149 |       | $
|                             | Goodwill as a result of acquisitions |                          |         | 61,591            |   |                    | 12,975 |                     |       | 601   |  
|                             | Foreign currency translation         |                          |         | (9,770            | ) |                    | (1,588 | )                   |       |      |  
|                             |                                      |                          |         |                   |   |                    |        |                     |       |       |  
|Balance at December 31, 2005 |                                      | $                        | 178,698 |                   | $ | 69,595             |        | $                   | 5,750 |       | $
|                             |                                      |                          |         |                   |   |                    |        |                     |       |       |  

F-23

---





7.    Intangible Assets

The gross carrying amount and accumulated amortization of the Company's intangible assets as of December 31, 2005 and January 1, 2005 are as
follows:

|                       |  | December 31, 2005 |        | January 1, 2005
|---------------------- |  | ----------------- | ------ | ---------------
|
|
|Software               |  | $                 | 17,832 |                
|Patents                |  |                   | 9,304  |                
|Technology             |  |                   | 38,231 |                
|Trademarks             |  |                   | 7,001  |                
|Customer Relationships |  |                   | 5,706  |                
|Other intangibles      |  |                   | 12,000 |                
|                       |  |                   |        |                
|                       |  | $                 | 90,074 |                
|                       |  |                   |        |                

The gross carrying amount of the Company's intangible assets that have indefinite lives and are not subject to amortization as of
December 31, 2005 and January 1, 2005 are $4,834,000 and $1,033,000 respectively. These assets are comprised of acquired trademarks.

Amortization
expense of intangible assets was $9,605,000, $5,690,000, and $3,843,000 in 2005, 2004 and 2003, respectively.

The
estimated future annual amortization expense for each of the next five succeeding fiscal years is as follows (in thousands):

Fiscal Year

Estimated Amortization Expense2006

$
9,8522007

$
8,7162008

$
8,3462009

$
6,7412010

$
5,327


8.    Revolving Credit Facility

On May 3, 2005, the Company entered into a five-year $150,000,000 Senior Unsecured Revolving Credit Facility (the "Facility"), replacing the
$60,000,000 Senior Revolving Credit Facility which would have expired on May 31, 2005. The Facility includes a $20,000,000 letter of credit sub-facility and a $20,000,000 swing line
loan sub-facility. At the request of the Company, the aggregate maximum principal amount available under the Facility may be increased to $200,000,000. The lenders, however, are not
obligated to participate in the increased portion of the Facility. The Facility can be used for working capital and other general corporate purposes, including capital expenditures and acquisitions.
At December 31, 2005, $67,500,000 was outstanding under the Facility, with $0 outstanding under the swing line loan sub-facility. In addition, $2,715,000 of standby letters of
credit were outstanding under the Facility. At December 31, 2005, $79,785,000 was available for borrowings under the Facility.

At
the Company's option, loans borrowed under the Facility (other than swing line loans) will bear interest at either (1) the London Interbank Borrowing Rate ("LIBOR") plus an
applicable margin that will vary based on the Company's leverage ratio as defined in the agreement, or (2) the alternative base rate, defined as the higher of the lender's prime rate or the
Federal Funds Rate plus .50%. Swing line loans bear interest at a rate determined by the swing line lender. The Company is required to pay a

F-24

---



facility
fee based on the total revolving commitment. The average interest rate incurred for 2005 was 4.51%. The interest rate on borrowings outstanding at December 31, 2005 ranged from 4.82%
to 5.16%.

The
Facility contains customary affirmative and negative covenants, including but not limited to requirements to maintain a leverage ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") no greater than 3.00 to 1.00, an interest coverage ratio of EBITDA to interest expense of not less than 4.00 to 1.00, minimum stockholders' equity and limits
on the amount of capital expenditures in any one year to the greater of $30,000,000 or 5% of the Company's consolidated net assets.

9.    Capital Stock

In August 2001, the Company's Board of Directors and sole stockholder approved an amendment to the Company's Certificate of Incorporation to, among other
items, authorize 5,000,000 shares of preferred stock, $.01 par value per share, for issuance by the Company's Board of Directors without future stockholder approval. The amendment also increased the
number of authorized shares of common stock, $.01 par value per share, for issuance from 3,000 shares to 100,000,000 shares. There was no preferred stock issued or outstanding at December 31,
2005.

The
Company has distributed rights under a Stockholder rights plan adopted by the Company's Board of Directors to holders of outstanding shares of the Company's common stock. Each right
entitles the holder to purchase one ten-thousandth of a share (a Unit) of Series B Junior Participating Preferred Stock, $100 par value, at a purchase price of $75 per Unit, subject
to adjustment. The rights will not be exercisable until the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an
Acquiring Person) has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of common stock (the Stock Acquisition Date), or (ii) 10 business
days following the commencement of a tender offer or exchange offer for 15% or more of the outstanding shares of common stock.

In
the event that a person becomes the beneficial owner of 15% or more of the outstanding shares of common stock, except pursuant to an offer for all outstanding shares of common stock
approved by at least a majority of the members of the Board of Directors, each holder of a right (except for the Acquiring Person) will thereafter have the right to receive, upon exercise, that number
of shares of common stock that equals the exercise price of the right divided by one-half of the current market price of the common stock. In the event that, at any time after any person
has become an Acquiring Person, (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or its common stock is
changed or exchanged (other than a merger that follows an offer approved by the Board of Directors), or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each
holder of a right (except for the Acquiring Person) shall thereafter have the right to receive, upon exercise, the number of shares of common stock of the acquiring company that equals the exercise
price of the right divided by one half of the current market price of such common stock.

At
any time until 10 days following the Stock Acquisition Date, the Company may redeem the rights in whole, but not in part, at a price of $.001 per right (payable in cash or
stock). The rights expire on November 12, 2011, unless earlier redeemed or exchanged.

F-25

---



10.    Stock Option Plan

In September 2001, the Company adopted the Equity Incentive Plan (the "Plan"). The Plan permits the Company's Board of Directors to grant incentive stock
options to employees of the Company and non-qualified stock options, restricted stock, performance stock and other stock-based incentive awards to officers, directors, employees and
consultants of the Company. In February 2002, the Board of Directors amended the Plan and received approval at the Annual Meeting of Stockholders on May 9, 2002 to increase the total
number of shares available for issuance under the Plan from 4,680,000 to 6,680,000. The exercise price for incentive stock options granted under the Plan may not be less than 100% of the fair market
value of the Company's common stock at the date of grant. Options issued under the Plan are generally exercisable in three equal annual installments commencing one year from the date of grant and
expire if not exercised within ten years from the date of grant. At December 31, 2005, approximately 438,000 shares remain available for future grant under the Plan.

A
summary of the Company's stock option activity is as follows:

|                                         |  | Number of
Shares
(in thousands) |   | Weighted Average
Exercise Price
|---------------------------------------- |  | ------------------------------- | - | -------------------------------
|Options outstanding at December 28, 2002 |  | 4,221                           |   | $                              
|Granted                                  |  | 1,642                           |   |                                
|Exercised                                |  | (557                            | ) |                                
|Cancelled or expired                     |  | (521                            | ) |                                
|                                         |  |                                 |   |                                
|Options outstanding at January 3, 2004   |  | 4,785                           |   | $                              
|Granted                                  |  | 1,034                           |   |                                
|Exercised                                |  | (599                            | ) |                                
|Cancelled or expired                     |  | (675                            | ) |                                
|                                         |  |                                 |   |                                
|Options outstanding at January 1, 2005   |  | 4,545                           |   | $                              
|Granted                                  |  | 543                             |   |                                
|Exercised                                |  | (764                            | ) |                                
|Cancelled or expired                     |  | (92                             | ) |                                
|                                         |  |                                 |   |                                
|Options outstanding at December 31, 2005 |  | 4,232                           |   | $                              
|                                         |  |                                 |   |                                
|Options exercisable at year end:         |  |                                 |   |                                
|January 3, 2004                          |  | 1,977                           |   | $                              
|January 1, 2005                          |  | 2,680                           |   | $                              
|December 31, 2005                        |  | 2,774                           |   | $                              

F-26

---



The
following table summarizes information about stock options outstanding and exercisable at December 31, 2005 (shares in thousands):

|              |  | Options Outstanding |  |     |  |  
|------------- |  | ------------------- |  | --- |  | -
|
|
|
|$12.46-$17.81 |  | 2,969               |  | 6.7 |  | $
|$18.79-$28.14 |  | 1,263               |  | 7.7 |  | $
|              |  |                     |  |     |  |  
|$12.46-$28.14 |  | 4,232               |  | 7.0 |  | $
|              |  |                     |  |     |  |  

11.    Employee Benefit Plans

Employee Stock Purchase Plan

In October 2001, the Company adopted an employee stock purchase plan in which substantially all of the Company's full-time employees became
eligible to participate effective July 1, 2002. Under this plan, employees may contribute up to 10% of their compensation toward the purchase of the Company's common stock at the lower of 85%
of the fair market price on the first or last day of each offering period. Proceeds received from the issuance of shares are credited to stockholders' equity in the fiscal year that the shares are
issued. Under the terms of the plan, a total of 650,000 shares of common stock have been reserved for issuance to employees. At December 31, 2005, approximately 325,650 shares remain available
for purchase under the plan.

401(k) Savings Plan

The Company has a 401(k) savings plan that covers substantially all of its U.S. employees. Participants in the savings plan may elect to contribute, on a pretax
basis, a certain percent of their salary to the plan. The Company matches a certain percentage of each participant's contributions as per the provisions of the plan. The expense under the plan related
to the Company's matching contribution was $2,776,000, $2,512,000, and $2,464,000 in 2005, 2004 and 2003, respectively.

12.    Restructuring

In recent years, the Company has initiated a series of restructuring activities to reduce costs, achieve synergies and streamline operations.

2005 Restructuring Plan

In the third quarter of 2005, the Company initiated a plan to restructure its international operations, which included closing its manufacturing facility in
Bristol, United Kingdom and terminating certain agreements with distributors. As a result of the plan, 10 positions were eliminated, the Bristol facility was closed, and the remaining operations were
combined into the Company's existing facility in Old Woking, United Kingdom. For the year ended December 31, 2005, a total of $600,000 of restructuring expenses had been incurred in connection
with this plan, which includes employee severance and related expenses as well as costs incurred related to the termination of distribution agreements. Total expenses under this plan are not expected
to exceed $1,000,000.

F-27

---



2004 Restructuring Plan

In the third quarter of 2004, the Company initiated a company-wide restructuring plan to lower its cost structure. The principal components of the
plan include reducing worldwide headcount by approximately 220 employees, transitioning Respiratory Care's U.S. manufacturing operations from Yorba Linda, California to the Company's Respiratory Care
facility in Palm Springs, California, combining Respiratory Care's U.S. commercial operations in Palm Springs, California and Yorba Linda, California to a newly leased facility in Yorba Linda,
California, and the closure of a facility in Bilthoven, the Netherlands. The plan involves the termination of employees in Germany, the Netherlands, the United Kingdom and the United States. As of
December 31, 2005, all of the targeted positions had been eliminated. The total amount of restructuring expense incurred in connection with this plan was approximately $12,000,000.

A
summary of the restructuring activity associated with the 2004 Restructuring Plan is as follows (in thousands):

|                             |                              | Employee
Severance and
Related Expenses |       | Employee
Retention
Payments |   | Facility
Closure Costs |      | Other Costs |   | Total |  
|---------------------------- | ---------------------------- | --------------------------------------- | ----- | --------------------------- | - | ---------------------- | ---- | ----------- | - | ----- | -
|Balance at January 3, 2004   |                              | $                                       |      |                             | $ |                       |      | $           |  |       | $
|                             | Costs accrued (a)            |                                         |       | 8,248                       |   |                        | 216  |             |   | 6     |  
|                             | Payments                     |                                         |       | (4,284                      | ) |                        | (22  | )           |   | (6    | )
|                             | Foreign currency translation |                                         |       | 278                         |   |                        |     |             |   |      |  
|                             |                              |                                         |       |                             |   |                        |      |             |   |       |  
|Balance at January 1, 2005   |                              | $                                       | 4,242 |                             | $ | 194                    |      | $           |  |       | $
|                             | Costs accrued (a)            |                                         |       | 3,056                       |   |                        | 194  |             |   | 60    |  
|                             | Payments                     |                                         |       | (7,135                      | ) |                        | (388 | )           |   | (60   | )
|                             | Foreign currency translation |                                         |       | (163                        | ) |                        |     |             |   |      |  
|                             |                              |                                         |       |                             |   |                        |      |             |   |       |  
|Balance at December 31, 2005 |                              | $                                       |      |                             | $ |                       |      | $           |  |       | $
|                             |                              |                                         |       |                             |   |                        |      |             |   |       |  

---

2003 German Restructuring Plans

In the fourth quarter of 2003, the Company commenced plans to close a machine shop and reduce the number of customer service positions at a Respiratory Care
facility in Germany. Due to German labor regulations, certain positions cannot be eliminated immediately. As a result of this plan, 24 positions are being eliminated over a period of five years. As of
December 31, 2005, 15 of these positions had been eliminated and approximately $533,000 of severance has been paid. Severance expense for the remaining employees will continue to be recorded
ratably over their remaining employment term. The total amount of restructuring expense expected to be incurred in connection with this plan is approximately $2,000,000. As of December 31,
2005, a total of approximately $1,536,000 of restructuring expense had been incurred in connection with this plan since inception.

F-28

---



A
summary of the restructuring activity associated with the 2003 Restructuring Plans is as follows (in thousands):

|                             |                              | EME Restructuring Plan |   | NeuroCare
Restructuring
Plan |   | German
Restructuring
Plan |    |   |  
|---------------------------- | ---------------------------- | ---------------------- | - | ---------------------------- | - | ------------------------- | -- | - | -
|
|Balance at December 28, 2002 |                              | $                      |  |                              | $ |                          |    | $ | 
|                             | Costs accrued                |                        |   | 899                          |   |                           | 7  |   |  
|                             | Payments                     |                        |   | (848                         | ) |                           | (7 | ) |  
|                             | Foreign currency translation |                        |   | (51                          | ) |                           |   |   |  
|                             |                              |                        |   |                              |   |                           |    |   |  
|Balance at January 3, 2004   |                              | $                      |  |                              | $ |                          |    | $ | 
|                             | Costs accrued                |                        |   | 5                            |   |                           |   |   |  
|                             | Payments                     |                        |   | (5                           | ) |                           |   |   |  
|                             | Foreign currency translation |                        |   |                             |   |                           |   |   |  
|                             |                              |                        |   |                              |   |                           |    |   |  
|Balance at January 1, 2005   |                              | $                      |  |                              | $ |                          |    | $ | 
|                             | Costs accrued                |                        |   |                             |   |                           |   |   |  
|                             | Payments                     |                        |   |                             |   |                           |   |   |  
|                             | Foreign currency translation |                        |   |                             |   |                           |   |   |  
|                             |                              |                        |   |                              |   |                           |    |   |  
|Balance at December 31, 2005 |                              | $                      |  |                              | $ |                          |    | $ | 
|                             |                              |                        |   |                              |   |                           |    |   |  

2002 and 2001 Restructuring Plans

Throughout 2002 and 2001, the Company initiated various restructuring programs. As a result of these efforts, the Company incurred costs to close and consolidate
facilities, retain certain employees and terminate approximately 250 employees. The facilities affected by these actions included the Company's New Hampshire and Colorado facilities, which were
consolidated with the Company's NeuroCare operations in Wisconsin. In addition, the Company vacated several sales and service offices, mainly in
Germany and Austria, and consolidated those operations into one facility in Germany. The balance of this reserve at December 31, 2005 was $258,000 and was comprised primarily of lease
obligations associated with the abandoned facilities less estimated sublease income. These amounts will be paid over their respective lease terms, the longest of which extends to 2014.

F-29

---





13.    Income Taxes

The components of income from continuing operations before income taxes are as follows (in thousands):

2005

2004

2003Domestic

$
4,952

$
34,718

$
29,106Foreign


(1,715
)

(11,207
)

10,038$
3,237

$
23,511

$
39,144


The
components of the provision for income taxes on continuing operations are as follows (in thousands):

2005

2004

2003Current:Federal

$
10,973

$
4,053

$
5,399State


1,191


1,659


1,352Foreign


2,014


502


3,485Total current


14,178


6,214


10,236Deferred:Federal


(183
)

5,059


2,492State


2


410


227Foreign


(455
)

(3,208
)

351Total deferred


(636
)

2,261


3,070Total provision for income taxes

$
13,542

$
8,475

$
13,306


The
provision for income taxes differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes due
to the following (in thousands):

2005

2004

2003Federal Statutory Rate

$
1,133

$
8,229

$
13,700Increases (Decreases) Resulting From:State income taxes, net of federal tax


775


1,345


1,026Production activity and export sales benefits


(2,060
)

(1,983
)

(1,750
)Effect of foreign operations


1,001


621


324In-process research and development


12,215


128


Research and development credit


(324
)

(150
)

(202
)Nondeductible expenses


1,011


301


315Other


(209
)

(16
)

(107
)$
13,542

$
8,475

$
13,306


F-30

---



Deferred
tax assets and liabilities in the accompanying Consolidated Balance Sheets consist of the following (in thousands):

2005

2004Deferred Tax Assets (Liabilities):Reserves and accruals

$
5,760

$
4,134Inventory basis difference


4,376


4,837Net operating loss and credit carryforwards


4,939


3,347Accrued compensation


2,017


1,526Depreciation and amortization


(15,939
)

(6,450
)Deferred credits and amortization


1,267


1,224Prepaid expenses


(683
)

(716
)Other, net


884


(550
)2,621


7,352Less: Valuation allowance


(6,013
)

(1,001
)$
(3,392
)
$
6,351


The
valuation allowance relates to uncertainty surrounding the realization of tax net operating loss carryforwards, the utilization of foreign tax credits, and other acquisition related
items. The portion of the valuation allowance that relates to net operating loss and credit carryforwards represents 68% of the total, and the portion related to acquisition related items represents
32% of the total. To the extent tax benefits are realized and the valuation allowance is no longer required, approximately 81% will be adjusted through goodwill and 19% would reverse through tax
expense.

At
December 31, 2005, the Company had U.S. and foreign net operating loss carryforwards of approximately $13,300,000. A portion of the U.S. net operating losses can be carried
back with the remainder eligible to be carried forward for up to 20 years. The Company had $6,000,000 of foreign net operating losses. Approximately $4,200,000 of the net foreign operating loss
carryforwards do not expire. The remainder expire at various times over the next 5 years. Deferred taxes have not been provided on approximately $10,700,000 of cumulative undistributed earnings
of foreign subsidiaries that could be subject to taxation if remitted to the U.S. since the Company plans to keep such amounts permanently invested overseas.

14.    Discontinued Operations

In September 2002, the Company announced its plan to exit the patient monitoring business by divesting MDE and in September 2003, the Company
announced its plan to sell certain assets of Thermedics. Thermedics manufactured polyurethanes for medical and industrial applications. These decisions were made as a result of the determination that
MDE and Thermedics did not fit into the Company's long-term strategy of focusing and investing resources in the Respiratory Care, NeuroCare, Med Systems and Orthopedics segments. The
consolidated financial statements have been restated to account for MDE and Thermedics as discontinued operations. MDE and Thermedics were previously part of the Med Systems segment.

On
April 3, 2003, the Company sold MDE to Invivo Corporation ("Invivo") for $9,257,000. The Company recorded in 2003 and 2002 respectively, an after-tax charge of
$958,000 ($1,511,000 pre-tax) and $14,285,000 ($22,513,000 pre-tax), to write-down the assets of MDE to their estimated net

F-31

---



realizable
value less the costs to sell. The total goodwill included in determining the loss was $27,000,000.

On
October 3, 2003, the Company sold Thermedics to Noveon, Inc. for $14,632,000 in cash. In connection with the sale, the Company provided for an after-tax loss
on disposal, including expenses, totaling $2,600,000. Included in this loss was $2,459,000 of goodwill.

On
June 30, 2005, the Company completed the sale of the obstetrics and cardiovascular ("OB and CV") businesses that were acquired from Oxford Medical in March 2005 for
approximately $6,421,000. The assets were recorded at fair value as of the date of acquisition and no gain or loss was recognized on the sale. The results of the OB and CV businesses have been
reported as discontinued operations in the Consolidated Statements of Operations. The Company earned a selling commission of approximately $140,000 as compensation for continuing to run operations
related to portions of the OB and CV business until the completion of the transition in the fourth quarter of 2005.

The
operating results of the OBCV, MDE and Thermedics discontinued operations are as follows:

2005

2004

2003(In thousands)Revenues

$
5,089

$


$
12,513Gain/(Loss) before income taxes

$
832

$
(333
)
$
(4,917
)Net Gain/(Loss)

$
536

$
(205
)
$
(4,252
)


15.    Commitments and Contingencies

Commitments

The Company leases certain office, warehouse and manufacturing space under various operating lease arrangements. Future annual minimum rent payments under
operating leases having initial or remaining noncancelable lease terms in excess of one year at December 31, 2005 are as follows (in thousands):

Fiscal Year2006

8,1682007

7,5542008

6,2452009

5,8292010

5,159Thereafter

14,821


Total
rent expense under operating leases was $8,405,000, $7,104,000, and $5,372,000 in 2005, 2004 and 2003, respectively.

Contingencies

On June 28, 2005, the Company received an adverse jury verdict in a case alleging employment discrimination and appealed the decision. The Company
subsequently resolved the matter on February 27, 2006 pursuant to a confidential agreement. The net cost of this case to the Company, taking into account settlement amounts paid, legal fees
incurred and deductibles paid as well as insurance proceeds received, was not material to the Company.

F-32

---



Tecomet Inc.
("Tecomet"), a subsidiary of the Company has been advised by Smith & Nephew, Inc. ("S&N") that S&N may file a claim against Tecomet for indemnity
and/or contribution in connection with more than 750 claims settled by S&N with patients who allegedly required revision surgeries resulting from S&N knee implants. Tecomet supplied knee components
and a surface texture to S&N that were allegedly used in the S&N knee implants. Tecomet learned in 2003 that S&N had advised the U.S. Food and Drug Administration that S&N was voluntarily withdrawing
certain of its knee systems from the market due to unspecified problems that required revision surgery in some patients. Tecomet is investigating the claims made by S&N. At this stage, it is not
possible to predict the likelihood or amount of any liability on the part of Tecomet nor the amount, if any, that would be covered under the Company's product liability insurance policies. If a suit
is filed against Tecomet, Tecomet intends to defend it vigorously. In 2004 and 2005, Tecomet was named as a defendant in three lawsuits in Texas brought by plaintiffs alleging that they had to undergo
revision surgeries when their S&N implants failed. These three cases were later dismissed without prejudice. In 2005, Tecomet was named as a defendant in a lawsuit in Oklahoma, which was brought by a
plaintiff alleging facts similar to those raised in the three cases that were filed in Texas. The Company believes that the amount of damages sought in the pending case would not be material to the
Company's consolidated financial position, results of operations or cash flows.

The
Company is involved in litigation related to its ventilation business, which is focused on providing care to critically ill patients. As of December 31, 2005, Pulmonetic
Systems Inc. ("Pulmonetics"), a subsidiary of the Company acquired in 2005, had four product liability cases outstanding related to its ventilator products, and the Company's remaining
ventilator business had three product liability cases outstanding related to its ventilator products. The Company believes that its product liability insurance policies, subject to applicable
deductibles and policy limitations, limit its exposure in connection with these product liability cases. The Company also believes that it will be indemnified for its remaining exposure in connection
with the cases against Pulmonetics under the Company's acquisition agreement related to the acquisition of Pulmonetics, subject to limitations contained in such agreement.

On
May 13, 2004, the Company settled litigation with INO Therapeutics, LLC ("INO Therapeutics"), AGA AB and The General Hospital Corporation regarding the use and sale of nitric
oxide gas and devices and entered into a settlement and co-development agreement with INO Therapeutics. Following dismissal of the litigation, the Company received $7,500,000 in the second
quarter of 2004. This included $6,000,000 in connection with the dismissal of the litigation, which is included in Legal Settlement in the accompanying 2004 Consolidated Statement of Operations. In
addition, the Company received $1,500,000 related to the Company's submission to INO Therapeutics of a research and development plan for a nitric oxide indication in connection with the
co-development agreement, which is included in service revenue in the accompanying 2004 Consolidated Statement of Operations.

In
the fourth quarter of 2005, the Company achieved another milestone under the co-development agreement by submitting an application for an investigational new drug ("IND")
and received $1,500,000.

In
addition, during 2005, the Company and INO Therapeutics amended certain portions of the co-development agreement. Pursuant to the amendments, the Company recognized
$1,250,000 in the second quarter of 2005 related to the buyout by INO Therapeutics of a purchase obligation. In addition, the Company recognized $3,000,000 in the fourth quarter of 2005 upon the
achievement of a milestone under the amended co-development agreement. All amounts received in 2005 are included in

F-33

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service
revenue in the accompanying 2005 Consolidated Statement of Operations. Additional payments totaling $4.5 million may be earned by the Company if future development milestones are
achieved.

The
milestone payments earned to date are non-refundable and are not contingent on future performance under the co-development agreement.

In
July 1999, the Company commenced a lawsuit against a former employee and a related corporation, Pulmonetic Systems, Inc. ("Pulmonetics"), for patent infringement and
other actions. The defendants in this case counter-sued, claiming, among other things, trade libel, abuse of process, unfair competition, false advertising, breach of contract and
violations of antitrust laws. In March 2002, the parties entered into an agreement, which settled all outstanding lawsuits between the companies and related parties. Under the agreement both
companies have access to certain technologies and rights used in the companies' ventilators and the Company was paid $4,000,000 in licensing fees over the three years ended March 2005. The
licensing fees were recognized ratably over a four-year period. $1,000,000 was recognized during 2005 and no amounts are outstanding at December 31, 2005. Effective June 20,
2005, the Company acquired all of the outstanding stock of Pulmonetics for a cash purchase price of approximately $99,787,000 (including expenditures associated with the acquisition and subject to
certain working capital adjustments). Pulmonetics has been assigned to the Company's Respiratory Care segment.

In
addition to the matters discussed above, from time to time the Company faces litigation and liability exposure for existing and potential claims. These claims are primarily related to
patent and intellectual property matters, the manufacturing and sale of medical devices, distributor terminations, employment matters and the Company's ongoing restructuring efforts. The Company's
international operations, which generated 43% of the Company's total revenues in 2005 and 44% of the Company's total
revenues in 2004 and 2003, also expose the Company to the risks of being sued in a foreign jurisdiction.

Any
claims, with or without merit, could result in costly litigation, reduced sales, significant liabilities and diversion of management's time, attention and resources. The Company
believes that it maintains adequate insurance coverage, including product liability and employment practices liability insurance, to cover certain employment and product liability litigation. However,
there can be no assurance that its insurance coverage is adequate or that it will continue to be available to the Company on acceptable terms, if at all. A successful claim or series of claims brought
against the Company could require it to pay substantial amounts that could materially adversely affect the results of the Company's operations and financial conditions. While there can be no
assurances as to the ultimate outcome of any litigation involving the Company, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a
material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

16.    Related-party Transactions

Advance to Chief Executive Officer

In 2001, the Company advanced its chief executive officer $500,000, which was forgiven ratably over the four years following execution of his employment
agreement. At December 31, 2005, the advance balance has been forgiven in full.

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17.    Segment and Geographic Information

Segment Information

The Company has aggregated its business units into four reportable segments: Respiratory Care, NeuroCare, MedSystems, and Orthopedics. The Respiratory Care
segment develops, manufactures, markets and services products for the diagnosis and treatment of respiratory insufficiency caused by illness, injury or premature birth, pulmonary and sleep-related
disorders. The NeuroCare segment principally develops, manufactures, markets, and services a comprehensive line of neurodiagnostic, vascular and audiology systems. The MedSystems segment develops,
manufactures and markets medical imaging equipment and cardio-vascular implants. The Orthopedics segment manufactures and markets disposable medical products and specialty metal components for
orthopedics. In classifying operations into a particular segment, the Company aggregates businesses with similar economic characteristics, products and services, production processes, customers and
methods of distribution.

The
Company previously organized and operated its business through the following four reportable segments: Respiratory Technologies, Critical Care, NeuroCare and Medical and Surgical
Products. During the first quarter of 2005, the Company changed its reportable segments to reflect how it now manages its business. As a result, Respiratory Technologies and Critical Care operating
segments were combined into one operating segment called Respiratory Care. The Company also split its Medical and Surgical Products operating segment into two separate segments: MedSystems and
Orthopedics.

Summarized
financial information concerning the Company's reportable segments is shown in the following table.

|                                                       |                                                       | 2005          |         | 2004    |         | 2003    |        
|------------------------------------------------------ | ----------------------------------------------------- | ------------- | ------- | ------- | ------- | ------- | -------
|
|Revenues:                                              |                                                       |               |         |         |         |         |        
|                                                       | Respiratory Care                                      |               | $       | 312,268 |         | $       | 248,229
|                                                       | NeuroCare                                             |               |         | 123,057 |         |         | 85,056 
|                                                       | Med Systems                                           |               |         | 32,882  |         |         | 30,609 
|                                                       | Orthopedics                                           |               |         | 41,767  |         |         | 29,308 
|                                                       |                                                       |               |         |         |         |         |        
|                                                       |                                                       | $             | 509,974 |         | $       | 393,202 |        
|                                                       |                                                       |               |         |         |         |         |        
|Income from Continuing Operations Before Income Taxes: |                                                       |               |         |         |         |         |        
|                                                       | Operating Income (Loss):                              |               |         |         |         |         |        
|                                                       | Respiratory Care                                      |               | $       | 5,841   |         | $       | 24,055 
|                                                       | NeuroCare                                             |               |         | (1,639  | )       |         | (229   
|                                                       | Med Systems                                           |               |         | 6,174   |         |         | 5,884  
|                                                       | Orthopedics                                           |               |         | 8,570   |         |         | 4,156  
|                                                       |                                                       | Corporate (a) |         |         | (14,187 | )       |        
|                                                       |                                                       |               |         |         |         |         |        
|                                                       | Operating Income                                      |               |         | 4,759   |         |         | 22,603 
|                                                       | Other Income (Expense), net                           |               |         | (1,522  | )       |         | 908    
|                                                       |                                                       |               |         |         |         |         |        
|                                                       | Income from Continuing Operations Before Income Taxes |               | $       | 3,237   |         | $       | 23,511 
|                                                       |                                                       |               |         |         |         |         |        
|Total Assets:                                          |                                                       |               |         |         |         |         |        
|                                                       | Respiratory Care                                      |               | $       | 422,457 |         | $       | 279,914
|                                                       | NeuroCare                                             |               |         | 149,424 |         |         | 119,608
|                                                       | Med Systems                                           |               |         | 28,049  |         |         | 18,286 
|                                                       | Orthopedics                                           |               |         | 36,560  |         |         | 25,024 
|                                                       |                                                       | Corporate (b) |         |         | 12,097  |         |        
|                                                       |                                                       |               |         |         |         |         |        
|                                                       |                                                       | $             | 648,587 |         | $       | 547,836 |        
|                                                       |                                                       |               |         |         |         |         |        
|                                                       |                                                       |               |         |         |         |         |        

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|Depreciation and Amortization: |                  |   |        |        |   |        |       |   |        |      
|------------------------------ | ---------------- | - | ------ | ------ | - | ------ | ----- | - | ------ | -----
|                               | Respiratory Care |   | $      | 12,632 |   | $      | 8,914 |   | $      | 7,020
|                               | NeuroCare        |   |        | 6,499  |   |        | 3,825 |   |        | 3,041
|                               | Med Systems      |   |        | 1,292  |   |        | 1,018 |   |        | 1,139
|                               | Orthopedics      |   |        | 1,418  |   |        | 1,311 |   |        | 1,062
|                               | Corporate        |   |        | 612    |   |        | 507   |   |        | 512  
|                               |                  |   |        |        |   |        |      
|                               |                  | $ | 22,453 |        | $ | 15,575 |       | $ | 12,774 |      
|                               |                  |   |        |        |   |        |      
|Capital Expenditures:          |                  |   |        |        |   |        |       |   |        |      
|                               | Respiratory Care |   | $      | 12,619 |   | $      | 5,140 |   | $      | 2,415
|                               | NeuroCare        |   |        | 2,242  |   |        | 1,229 |   |        | 536  
|                               | Med Systems      |   |        | 1,535  |   |        | 1,388 |   |        | 1,350
|                               | Orthopedics      |   |        | 3,094  |   |        | 1,932 |   |        | 1,146
|                               | Corporate        |   |        | 458    |   |        | 912   |   |        | 518  
|                               |                  |   |        |        |   |        |      
|                               |                  | $ | 19,948 |        | $ | 10,601 |       | $ | 5,965  |      
|                               |                  |   |        |        |   |        |      

---

Geographic Information

The following table summarizes revenues and long-lived assets by geographic area. Revenues are based on the location in which the sale is settled.
Long-lived asset data (which consists of property, plant and equipment, goodwill, intangible assets and other assets) is based on physical location.

|                   |                | 2005                    |         | 2004    |         | 2003   
|------------------ | -------------- | ----------------------- | ------- | ------- | ------- | -------
|
|Revenues:          |                |                         |         |         |         |        
|                   | United States  |                         | $       | 292,450 |         | $      
|                   | International  |                         |         | 217,524 |         |        
|                   |                |                         |         |         |         |        
|                   |                | Total Revenues          |         | $       | 509,974 |        
|                   |                |                         |         |         |         |        
|Long-Lived Assets: |                |                         |         |         |         |        
|United States      |                | $                       | 244,253 |         | $       | 163,443
|International:     |                |                         |         |         |         |        
|                   | Germany        |                         |         | 45,467  |         |        
|                   | United Kingdom |                         |         | 74,202  |         |        
|                   | Other          |                         |         | 13,337  |         |        
|                   |                |                         |         |         |         |        
|                   |                | Total Long-Lived Assets |         | $       | 377,259 |        
|                   |                |                         |         |         |         |        

There
was no country outside of the U.S. in which revenues exceeded 10% of the Company's total revenues in 2005, 2004 or 2003.

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18.    Summarized Quarterly Financial Data (Unaudited)

Summarized quarterly financial results for the year ended December 31, 2005 are as follows:

|                                             |          | For the Quarter Ended  
|-------------------------------------------- | -------- | -----------------------
|
|
|Revenues                                     |          | $                      
|Gross Margin                                 |          | $                      
|Income (Loss) from Continuing Operations (b) |          | $                      
|Discontinued Operations                      |          |                        
|                                             |          |                        
|Net Income (Loss)                            |          | $                      
|                                             |          |                        
|Earnings (Loss) per Share (2):               |          |                        
|                                             | Basic:   |                        
|                                             |          | Continuing Operations  
|                                             |          | Discontinued Operations
|                                             |          |                        
|                                             |          | $                      
|                                             |          |                        
|                                             | Diluted: |                        
|                                             |          | Continuing Operations  
|                                             |          | Discontinued Operations
|                                             |          |                        
|                                             |          | $                      
|                                             |          |                        

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F-37

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Summarized
quarterly financial results for the year ended January 1, 2005 are as follows:

|                                  |          | For the Quarter Ended   |       
|--------------------------------- | -------- | ----------------------- | ------
|
|
|Revenues                          |          | $                       | 95,589
|Gross Margin                      |          | $                       | 41,857
|Income from Continuing Operations |          | $                       | 2,678 
|Discontinued Operations           |          |                         |      
|                                  |          |                         |       
|Net Income                        |          | $                       | 2,678 
|                                  |          |                         |       
|Earnings (Loss) per Share (2):    |          |                         |       
|                                  | Basic:   |                         |       
|                                  |          | Continuing Operations   |       
|                                  |          | Discontinued Operations |       
|                                  |          |                         |       
|                                  |          | $                       | .09   
|                                  |          |                         |       
|                                  | Diluted: |                         |       
|                                  |          | Continuing Operations   |       
|                                  |          | Discontinued Operations |       
|                                  |          |                         |       
|                                  |          | $                       | .09   
|                                  |          |                         |       

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19.    Purchased In-Process Research and Development Expenses

During the second quarter of 2005, the Company recorded $34,909,000 of purchased in-process research and development expenses in connection with two
separate business combinations, both of which were accounted for pursuant to SFAS No. 141,Business Combinations.

The
Company recorded $3,409,000 of purchased in-process research and development expenses in connection with the acquisition of Micro Medical. The portion of the Micro
Medical purchase price allocated to in-process research and development represents the estimated fair value of the research and development project in-process at the time of
acquisition. The project had not yet reached technological feasibility, was deemed to have no alternative use and, accordingly, was immediately charged to operating expense at the acquisition date in
accordance with FASB Interpretation No. 4,Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method("FIN 4"). This charge is included in the Company's Consolidated Statements of Operations for the year ended December 31, 2005 as a separate component of
operating expense.

F-38

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The
technology acquired was a versatile, portable spirometer which uses Micro Medical's precision Gold Standard Digital Volume Transducer especially suited to measuring very low flow
rates in patients with chronic obstructive pulmonary disease. At the date of acquisition the project was in late-stage development, but further design and development was required at the
date of acquisition. Development activities were substantially completed in 2005. The estimated fair value of the project was determined by using estimated future discounted cash flows at a discount
rate of 24%. The discount rate used takes into account the stage of completion and the risks surrounding successful development and commercialization of the technology. Risks to completion of
development within a reasonable period of time are relatively low and risk to successful commercialization include acceptance of the technology in the marketplace and competition.

The
Company recorded $31,500,000 of purchased in-process research and development expenses in connection with the acquisition of Pulmonetics. The portion of the Pulmonetics
purchase price allocated to in-process research and development was determined based on an independent third party appraisal and represents the estimated fair value of the research and
development project in-process at the time of acquisition. The project had not yet reached technological feasibility, was deemed to have no alternative use and, accordingly, was
immediately charged to operating expense at the acquisition date in accordance with FIN 4. This charge is included in the Company's Consolidated Statements of Operations for the year ended
December 31, 2005 as a separate component of operating expense.

The
technology acquired represents a portable ventilator. The Company believes that at the date of acquisition the device was in mid-stage development. Development activities
include pilot testing and approval from the United States Food and Drug Administration ("FDA"). In 2005, the Company incurred approximately $1,800,000 to further develop the technology. The Company
expects to incur an additional amount up to $4,900,000 through 2007 to complete the development of the technology. The estimated fair value of the project was determined by using estimated future
discounted cash flows at a discount rate of approximately 16%. The discount rate used takes into account the stage of completion and the risks surrounding successful development and commercialization
of the technology. Risks to commercialization include approval from the FDA and acceptance of the technology in the marketplace.

The
Company recorded $386,000 of purchased in-process research and development expenses in connection with the acquisition of
Taugagreining.The portion of the Taugagreining purchase price allocated to in-process research and development expense was determined by an
independent third party appraisal and represents the estimated fair value of the research and development project in-process at the time of acquisition. The project had not yet reached
technological feasibility, was deemed to have no alternative use and, accordingly, was immediately charged to operating expense at the acquisition date in accordance with FIN 4. This charge is
included in the Company's Consolidated Statements of Operations for the year ended January 1, 2005.

F-39

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VIASYS HEALTHCARE INC.  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

|Description                     |  | Balance at
Beginning
of Year |       | Acquisition
Adjustments |   | Additions
Charged to
Costs and
Expenses |  | Accounts
Written Off |       | Other (a) |   | Balance a
End of Year
|------------------------------- |  | ---------------------------- | ----- | ----------------------- | - | --------------------------------------- |  | -------------------- | ----- | --------- | - | ---------------------
|
|Allowance for Doubtful Accounts |  |                              |       |                         |   |                                         |  |                      |       |           |   |                      
|Year Ended December 31, 2005    |  | $                            | 5,113 |                         | $ | 1,475                                   |  | $                    | 2,367 |           | $ | (2,544               
|Year Ended January 1, 2005      |  | $                            | 5,955 |                         |   |                                        |  | $                    | 528   |           | $ | (1,491               
|Year Ended January 3, 2004      |  | $                            | 6,113 |                         |   |                                        |  | $                    | 464   |           | $ | (1,272               

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F-40

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VIASYS HEALTHCARE INC.  EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company, is incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form 10/A, filed with the Commission on September 20, 2001.                                              
|3.2         |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company, is incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24, 2001.                    
|3.3         |  | Amended and Restated By-Laws of the Company, is incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                        
|10.1       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Randy H. Thurman, is incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K/A, filed with the Commission on March
3, 2005.
|10.2       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Martin P. Galvan, is incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K/A, filed with the Commission on March
3, 2005.
|10.3       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Edward Pulwer, is incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K/A, filed with the Commission on March 3,
2005.   
|10.4       |  | Amended and Restated Employment Agreement, dated as of November 29, 2004, by and between the Company and Lori J. Cross, is incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K/A, filed with the Commission on March 3,
2005.   
|*10.5       |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Matthew M. Bennett.                                                                                                                                                           
|*10.6       |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and John F. Imperato.                                                                                                                                                             
|*10.7       |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Thomas I. Kuhn.                                                                                                                                                               
|*10.8       |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Gregory G. Martin.                                                                                                                                                            
|*10.9       |  | Employment Agreement, dated as of November 29, 2004, by and between the Company and Giulio A. Perillo                                                                                                                                                             
|*10.10      |  | Change of Control Agreement, dated as of September 26, 2005, by and between the Company and Scott Hurley.                                                                                                                                                         
|*10.11      |  | Change of Control Agreement, dated as of September 26, 2005, by and between the Company and Wesley N. Riemer.                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                   

F-41

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|10.12  |  | Plan and Agreement of Distribution between the Company and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24, 2001.                                                                                                                                                                                                                                   
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13  |  | Tax Matters Agreement between the Company and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                                                                                                                                                                                                   
|10.14  |  | Rights Agreement between the Company and the Rights Agent, is incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                                                                                                                                                                                                                   
|10.15 |  | VIASYS Healthcare Inc. Indemnification Agreement between the Company and its directors and officers, is incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18,
2001.                                                                                                                                                                                                                         
|10.16 |  | VIASYS Healthcare Inc. Equity Incentive Plan (as amended on May 5, 2004), is incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on August 11, 2004.                                                                                                                                                                                                                                                        
|10.17 |  | VIASYS Healthcare Inc. Deferred Compensation Plan for Directors, is incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form 10/A, filed with the Commission on October 24, 2001.                                                                                                                                                                                                                                                          
|10.18 |  | Letter Agreement, dated as of September 24, 2001, by and between the Company, Randy H. Thurman and Thermo Electron Corporation, is incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form 10/A, filed with the
Commission on October 24, 2001.                                                                                                                                                                                           
|10.19 |  | Term Note, dated as of April 19, 2001, by and between the Company and Randy H. Thurman, is incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form 10/A, filed with the Commission on July 18, 2001.                                                                                                                                                                                                                                     
|10.20  |  | Lease for Millennium III of the Millennium Corporate Center, dated October 3, 2001, by and between the Company and Washington Street Associates II, L.P, is incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form
10/A, filed with the Commission on October 24, 2001.                                                                                                                                                                 
|10.21  |  | Credit Agreement, dated as of May 3, 2005, among the Company, Key Bank National Association, as co-lead arranger, sole book runner, swing line lender and administrative agent, JP Morgan Chase Bank, N.A., as co-lead arranger and syndication agent,
Fifth Third Bank, as documentation agent, and certain other bank parties therein, is incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed with the Commission on May 6, 2005.
|*21.1  |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|*23.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                   
|*31.1  |  | Chief Executive Officer's Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                           
|*31.2  |  | Chief Financial Officer's Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                           
|*32.1  |  | 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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