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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-K

(mark one)

|ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 29, 2001
|- | --------------------------------------------------------------------------------------------------------------------------------
|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 registeredCommon Stock, $.01 par value

New York Stock ExchangeSeries A Junior Participating Preferred Stock Purchase Rights

New York Stock Exchange


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

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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 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. ý

The
aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 8, 2002, was approximately $569,865,000.

As
of March 8, 2002, the Registrant had 26,054,153 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2002, are incorporated by reference
into Part III. Copies of these documents can be obtained at no cost by calling the Company's Investor Relations Department at (610) 862-0826.

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Forward-looking Information

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 statements regarding our ability to find alternative
suppliers for certain components, the effect of the expiration of our patents on our business, the expected time for shipments of our products to customers and the resulting effect on our backlog, the
sufficiency of our facilities, our retention of all of our future earnings for use in our business, the effect of changes in foreign exchange rates on our business and the effect on our business of
legal proceedings in which we are involved. 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:



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This
list of factors that may affect our future performance and financial and competitive position and also the accuracy of forward-looking statements is illustrative, but it is by no
means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

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Item 1.Business

Overview

We are a healthcare technology company engaged in developing, manufacturing, marketing and servicing of a variety of medical devices, instruments and medical and
surgical products for use in the respiratory, neurocare and medical and surgical product markets. We were incorporated in Delaware in August 1995 as a wholly-owned subsidiary of Thermo
Electron. Our business was formed from a number of enterprises acquired or originated by Thermo Electron, including Bird Medical Systems, Bear Medical Technologies, SensorMedics and Nicolet
Biomedical. On November 15, 2001, 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. This distribution resulted in the receipt by each Thermo Electron common stockholder of record of 0.1461 shares of our common stock for each share of Thermo Electron common
stock owned by such common stockholder of record.

The
three segments through which we operate our business are:



We
currently market our products in over 100 countries and our customers include hospitals, alternate care sites, clinical laboratories, private physicians and original equipment
manufacturers. Our global revenues in 2001 totaled $358 million.

Our Strategy

We focus our development and marketing activities on growth segments of the healthcare industry. We are seeking 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 therapy and
information-based products. We have augmented our internal research by in-licensing technologies that have resulted in newly launched products including MotoVate, a biofeedback system for
stroke rehabilitation and MircoGuide, a system used to rapidly identify the site for therapeutic intervention in the treatment of tremors due to Parkinson's disease. In addition to developing these
new 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 care,
neurocare and medical and surgical product offerings. Next generation products that we have recently introduced include: the Endeavor ICU, a neuro intensive care unit ("ICU") monitor for tracking
brain function; the Vital Vac, a smoke evacuator for electro and laser surgical applications; and the Alpha Screen, a portable eight-channel sleep diagnostic system.

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Principal Products

|Principal Brands              |                             | Principal Products |                                                                                               | Commenced
Operations |      | Acquired by
Thermo Electron
|----------------------------- | --------------------------- | ------------------ | --------------------------------------------------------------------------------------------- | -------------------- | ---- | ---------------------------
|Respiratory Care              |                             |                    |                                                                                               |                      |      |                            
|                              | Bear Medical Systems        |                    | Mechanical ventilators                                                                        |                      | 1972 |                            
|                              | Bird Medical Technologies   |                    | Mechanical ventilators                                                                        |                      | 1954 |                            
|                              | Erich Jaeger                |                    | Pulmonary function testing and metabolic equipment                                            |                      | 1954 |                            
|                              | SensorMedics                |                    | Pulmonary function testing equipment, sleep diagnostic equipment, and specialized ventilators |                      | 1983 |                            
|                              | Health Management Systems   |                    | Contract research                                                                             |                      | 1998 |                            
|Neurocare                     |                             |                    |                                                                                               |                      |      |                            
|                              | Grason-Stadler              |                    | Hearing diagnostic equipment                                                                  |                      | 1949 |                            
|                              | Nicolet Biomedical          |                    | Neurodiagnostic equipment                                                                     |                      | 1967 |                            
|                              | Nicolet Vascular            |                    | Peripheral vascular testing equipment                                                         |                      | 1976 |                            
|                              | Toennies                    |                    | Neurodiagnostic equipment                                                                     |                      | 1936 |                            
|Medical and Surgical Products |                             |                    |                                                                                               |                      |      |                            
|                              | Corpak                      |                    | Critical care feeding tubes and disposable respiratory accessories                            |                      | 1980 |                            
|                              | Medical Data Electronics    |                    | Wireless patient monitoring systems                                                           |                      | 1979 |                            
|                              | Stackhouse                  |                    | Surgical barrier control systems                                                              |                      | 1936 |                            
|                              | Tecomet                     |                    | Surgical implant components and medical imaging components                                    |                      | 1964 |                            
|                              | Thermedics Polymer Products |                    | Medical grade polyurethanes and polyurethane films                                            |                      | 1983 |                            

Respiratory Care Products

Our Respiratory Care group develops, manufactures and markets a variety of medical devices for the diagnosis and treatment of respiratory-related disorders. These
products are used in a variety of settings, from intensive care to home care, but they generally share a common therapeutic or diagnostic focus on breathing and the adequate availability of oxygen
throughout the body. We market our respiratory care products in the United States and internationally to a variety of customers including hospitals, clinics, private physicians, research centers and
original equipment manufacturers under the brand names Bird, Bear, Erich Jaeger and SensorMedics. Our respiratory care business is comprised of the following product lines:



Mechanical ventilators assist patients who are unable to breathe adequately for themselves due to disease or injury. These devices pump heated, humidified,
oxygen-enriched air into the lungs at

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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 or pediatric use. We market
our mechanical ventilators globally under the Bird, Bear and SensorMedics brand names. We offer a range of adult and pediatric ventilators for institutional and home use, including:



We
also offer several portable adult ventilators, such as the Legacy, the Avian and the Bear 33, which are primarily used for home care, patient transport and military applications.

We
also currently offer a range of infant and pediatric ventilators, including the Bird V.I.P. and the Bear Cub 750 ventilators, which are similar in function to adult ventilators but
deliver smaller amounts of oxygen at lower pressures than adult ventilators. Each of these products provides for air flow in synchronization with a patient's normal breathing patterns, thereby
reducing the strain on an infant's lungs. The Bear Cub 750 is designed for newborns and patients under 35 kg. We designed the Bird V.I.P. for use with newborns and patients under 60 kg.

In
addition, we offer high frequency ventilators, which are specialized ventilators designed to reduce the damage to a patient's lungs that may be caused by the continuous expansion and
compression characteristic of traditional mechanical ventilation. We offer our SensorMedics 3100A HFOV for use in children with acute respiratory failure, which provides superior oxygenation at much
lower pressures, thus reducing lung damage as compared with conventional ventilators and other types of high frequency ventilators. In October 2001, the Food and Drug Administration ("FDA")
approved the 3100B HFOV, a high frequency oscillating ventilator product developed by us, for use in the treatment of adult respiratory distress syndrome ("ARDS").

We
also offer a variety of related respiratory care products, including:



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 pulmonary function testing equipment internationally under the SensorMedics 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 range of heart, lung and metabolic functions. Our principal pulmonary function testing products are:



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We
believe that our SensorMedics and Erich Jaeger subsidiaries combined represent one of the largest manufacturers of pulmonary function testing equipment globally.



Sleep diagnostic testing equipment measures a variety of respiratory and neurological functions to assist in the diagnosis and monitoring of sleep disorders, such
as snoring and obstructive sleep apnea, a condition that causes a person to stop breathing intermittently during sleep. Our products range from basic sleep diagnostic systems that monitor one patient,
such as the SensorMedics SomnoTract, to a networked, modular, expandable sleep lab that can monitor multiple patients simultaneously, such as the SensorMedics SomnoStar. Our sleep therapy product, the
Alura, is a continuous positive airway pressure, or CPAP, system that assists breathing to allow for uninterrupted sleep.



We have been hired by major pharmaceutical companies to provide services and products for pharmaceutical research and development.

Neurocare Products

Our neurocare group develops, manufactures and markets a comprehensive line of neurodiagnostic systems that measure, analyze and display electrical impulses from
a patient's brain, nerves and muscles. Physicians and technologists use these data to assist in the diagnosis of neurological, brain, auditory, psychological, learning and sleep disorders. We market
our neurodiagnostic products globally to a variety of customers under a number of brand names, including Grason-Stadler, Nicolet, Nicolet Vascular, IMEX and EME. Our products address the principal
areas of neurodiagnostics, including:

Electromyography and Evoked PotentialElectromyography, or EMG, is the measurement of electrical activity in the nerves and
muscles. Evoked potential, or 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 Lou Gehrig's disease, multiple sclerosis and spinal cord injury. Our
principal EMG and EP diagnostic product is the Nicolet Viking, which offers a high quality signal to distinguish electrical impulses within the body from background noise. We believe that the success
of the Viking results from its high signal quality, reliability and modular design.

ElectroencephalographyAn electroencephalograph, or 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. Physicians use EEGs primarily for epilepsy
diagnosis and monitoring of surgical and pharmaceutical treatments. Our
principal EEG diagnostic product is the Nicolet AllianceWorks digital EEG monitor, which allows screening of brain wave abnormalities.

Epilepsy MonitoringOur BMSI epilepsy monitoring system combines EEG data with digital video of a patient to enable a
physician to assess the frequency and severity of epileptic seizures over a multiple day period, typically three or four days. Our system helps the physician to locate the site of

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epileptic seizures in the brain for surgical intervention and to determine the proper dosage of drug therapies for treatment of a particular patient.

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 audiology diagnostic instruments for middle ear testing in
adults and children that we market under the Grason-Stadler and Nicolet brand names. We also offer instruments for evaluating balance disorders, such as the Nystar System, which analyzes reflexive eye
movements in response to visual stimuli. In September 1999, we introduced the GSI 70, an infant hearing screener for early detection of hearing disorders that could affect the development of
speech and language abilities in children.

Intra-Operative Monitoring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. In 2000, Nicolet Biomedical introduced the Bravo Endeavor, a
sophisticated 16-channel intra-operative monitoring system providing simultaneous EEG, EP and EMG monitoring for use in the operating room and intensive care units.

NeurosurgeryIn late 2001, we in-licensed MicroGuide, a product for the localization of the treatment site for
neurosurgical intervention in patients with Parkinson's disease. This product reduces the time required for localization and improves the accuracy of placement of stimulation products as therapy for
the treatment of tremors.

In
addition, we offer a variety of products related to our neurodiagnostic instruments, including:



In
contrast to many other neurodiagnostic systems, Nicolet Biomedical has designed its neurodiagnostic systems to function on all personal computer systems compatible with Windows
software to prevent its products from becoming obsolete in the short-term as a result of changes in personal computer technologies.

Medical and Surgical Products

We market our critical care disposable products, such as our tube feeding systems, disposable respiratory accessories and surgical barrier control systems, to
hospitals and clinics globally. We market our specialty products and materials, such as our medical grade plastics, called polyurethanes, to original equipment manufacturers for inclusion in their
products. We market our patient monitoring products globally to a variety of customers, including hospitals, universities, clinics and physicians.



We develop, manufacture and market a variety of critical care disposable products, including:



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We develop, manufacture and market a variety of specialty products and materials for inclusion by original equipment manufacturers in their products, including:





We develop, manufacture and market a variety of wireless patient monitoring systems that measure, display and document a variety of vital signs, including heart
activity, blood pressure, pulse rate, blood oxygen levels, body temperature, respiration rate and other specialized parameters. These systems enable hospitals to relocate patients who require
monitoring but do not otherwise need to be in an intensive care unit to lower cost settings. We market our wireless patient monitoring systems to hospitals globally.

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We
offer our wireless, portable patient monitors under the Escort brand name. Our Escort wireless monitors are capable of monitoring up to 11 vital signs and transmitting this
information over radio frequencies to a monitoring station. These monitors are well-suited for emergency room use, where patients often require transportation to other areas of the
hospital.

We
also offer a computer-based wireless central monitoring station for our Escort wireless monitors that we market under the Escort Vision brand name. The Escort Vision central
monitoring station provides centralized, real-time patient monitoring, alarm surveillance and documentation for up to 16 patients. Because the Escort Vision central monitoring station
receives patient data by radio signal, it provides hospitals with flexibility in designing a patient monitoring system and allows patient monitoring units to be moved easily to different areas of a
hospital.

We
also offer a line of telemetry transmitters that transmit data about a patient's cardiovascular system, such as blood pressure and pulse, to a central monitoring station. Telemetry
systems are used in post-coronary care and other situations where a patient requires heart monitoring but is allowed freedom of movement as part of the recovery process.

New Products, Research and Development

We are seeking to capitalize on our research, development and marketing expertise and our relationships with physicians and other medical caregivers in the
respiratory care and neurocare markets to expand our business into high-value opportunities, including therapy and information-based products. We estimate that the global demand for
respiratory care equipment and disposables is growing at an annual rate of 10% and that the neurocare market is growing at an annual rate of 8%. We out-license key technology to others and
in-license technology from partners in order to expand our business and broaden our product portfolio. We currently have six such in-licensing arrangements. In order to
incentivize our partners, our agreements link the partners' compensation to our success. In addition to our partnering strategy, we have pursued a substantial internal development strategy. Our
internal research and development staff is currently working on the development of approximately 15 next-generation and new products.

We
are developing a number of therapy and service-based products, including those described below.

Inhaled Drug Delivery Device and Related Asthma Therapy ProgramWe are developing, with technology licensed from Battelle
Pulmonary Therapeutics, Inc., an electrohydrodynamic, or EHD, nebulizer that provides for the administration of a drug in a uniform particle size to a targeted location. A nebulizer is a device
that transforms a liquid drug into a vapor, thereby permitting the administration of the drug into the respiratory system. Traditional nebulizers for asthma treatment provide for an uneven particle
size, which causes a significant portion of the administered drug to end up in the mouth, throat and stomach, with only a small portion reaching the lungs.

We
believe that our EHD nebulizer will require 510(k) clearance from the FDA prior to marketing in the United States. Although we have designed and tested the prototype of our EHD
nebulizer, human clinical trials of the device have yet to be performed. We plan to commence a human clinical trial of our nebulizer with the use of albuterol, a generic drug used in the treatment of
asthma, in the second half of 2002.

Consciousness MonitorWe are developing a consciousness monitor to accurately assess a patient's level of consciousness when
under the effects of anesthesia. Incorporating third-party proprietary technology that we license, our monitor uses high frequency data along with existing lower frequency bandwidth technology to
provide a more comprehensive view of the state of brain activity during anesthetic procedures. Clinical trials were completed in the fourth quarter of 2001 and the data was

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submitted to the FDA in the first quarter of 2002. Approval of a 510(k) clearance application is pending.

Peripheral Nerve ImagingWe are developing a system to locate peripheral nerves non-invasively. Use of peripheral
nerve imaging will improve the safety and effectiveness of regional nerve blocks and will enable regional, rather than general, anesthesia to be used in some surgical procedures. The system may also
be used in pre-surgical planning to avoid nerves during surgical intervention. We plan to configure the nerve imaging system to work with much of the same hardware as our consciousness
monitoring product. We believe that the device will require 510(k) clearance from the FDA prior to marketing in the United States, and we currently expect to submit a 510(k) application with the FDA
in the second half of 2002.

Gas Clearance and Rebreathing DeviceWe are developing a device that rapidly clears gases such as carbon monoxide and some
anesthesias from the blood. This device also allows a patient to rebreathe exhaled gases when hyperventilating, thereby enabling the rapid delivery of oxygen to a patient without decreasing the level
of carbon dioxide in the blood. We do not believe that this device will require 510(k) clearance from the FDA prior to marketing it as a rebreather in the United States. However, we believe that this
device will require 510(k) clearance from the FDA prior to marketing it as a gas clearance device in the United States. We are conducting clinical trials of the device under an Investigational Device
Exemption ("IDE") from the FDA and expect to submit a 510(k) application in the second quarter of 2002.

We
have historically organized our research and development activities by operating group and subsidiary. However, we recently implemented an initiative to strategically reorganize our
research and development efforts by product area and functional use rather than along traditional company lines. In 2001, we created a Technical Advisory Board comprised of many of our top research
scientists and marketing managers. The purpose of this board is to foster intercompany coordination, to help understand potential research and development areas as well as to prioritize investment
spending. For example, our Erich Jaeger, Nicolet Biomedical and SensorMedics operations each historically maintained a research and development group with expertise in the area of brain wave
amplifiers. We are currently engaged in a project in which the members of these groups share their expertise in brain wave amplifiers in order to take advantage of each member's specialized knowledge.
We believe that a number of other opportunities exist to structure our research and development organization on a functional, rather than organizational, basis.

In
addition to developing therapy and service-based products, we plan to enhance and extend our existing product lines into next generation products and to develop new products to
broaden our existing portfolio of respiratory care, neurocare and medical and surgical products. We primarily focus our research and development activities on responding to marketplace needs. Our
internal research and development efforts include work to produce next-generation products for our core businesses as well as new products that expand our portfolio in market segments
where we already compete. For example, we are developing new ventilator platforms that will enable us to offer a more comprehensive suite of products in the respiratory critical care market. In our
respiratory care and neurocare businesses we
have several products that are pending FDA approval. We also have efforts underway in each of our businesses to leverage our technologies for new applications. For example, we are attempting to expand
the use of our HTC grids, an image enhancer for mammography X-rays, to general radiology.

Our
research and development expenses totaled $28.4 million in fiscal 2001, $24.8 million in fiscal 2000, and $18.5 million in fiscal 1999. We expect research and
development expenses to increase in the future as we seek to enhance our existing products and develop additional products. As of December 29, 2001, we had approximately 200
full-time employees engaged in research and development.

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Raw Materials

We believe that we have a readily available supply of raw materials for all of our significant products from various sources and we do not anticipate any
difficulties in obtaining raw materials essential to our business. However, we purchase some components and raw materials, such as the raw materials for our medical grade polyurethanes and the
beryllium copper strips included in our medical imaging components, from sole sources of supply. 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 never had a significant production delay that was primarily attributable
to an outside supplier.

Government Regulation

United States



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



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



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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 nonsignificant 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
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, or
QSR, which sets forth the FDA's current good manufacturing practices requirements. These requirements include, among other things, that:



The
FDA monitors compliance with the QSR and current good manufacturing practices requirements by conducting periodic inspections of manufacturing facilities. Violations of applicable
regulations noted by the FDA during inspections of our manufacturing facilities could 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

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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 to
determine whether it should exercise its enforcement powers.

Other
FDA requirements govern product labeling and prohibit a manufacturer from marketing an approved device for unapproved applications. 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.



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. In addition, some of our products, such as our wireless patient monitoring systems, transmit or receive information through radio
signals and are, therefore, subject to regulation by the U.S. Federal Communications Commission.

International

We derive a significant portion of our revenue from sales of our 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 our products.

We
may not sell medical devices in European Union countries unless the devices bear the CE mark, a symbol of adherence to quality assurance standards and compliance with applicable
regulatory requirements known as the European Directives. Almost all of our manufacturing facilities have received ISO 9001 certification, evidence of a quality system that meets the requirements of
the Medical Device Directive, a European directive that prescribes safety standards for medical devices. Compliance with the Medical Device Directive is one of the prerequisites to CE mark
certification of a medical device. As of December 29, 2001, all of our key respiratory care and neurocare products bore the CE mark.

Unapproved
medical devices manufactured in the United States may be distributed and sold outside the United States subject to FDA export requirements. An unapproved device that could be
marketed under the FDA's 510(k) premarket notification requirements may be exported to another country without the FDA's permission if the device meets the specifications of a foreign purchaser, is
not in conflict with the laws of the country to which it is exported, is marketed for export only and is not distributed in the United States. An unapproved device that is subject to PMA requirements
may be exported after notification to the FDA if the device is approved for use by selected countries or regional regulatory authorities specified in the Food, Drug and Cosmetic Act and if the device
meets the specifications of a foreign purchaser, is not in conflict with the laws of the country to which it is exported, is marketed for export only and is not distributed in the United States. An
unapproved device that is not approved by recognized countries may only be exported after a determination by the FDA that exportation is not contrary to the public health and that the device is
approved in the country to which it is exported, meets the specifications of a foreign purchaser, is not in conflict with the laws of the country to which it is exported, is marketed for export only
and is not distributed in the United States.

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Third Party Reimbursement

In the United States, healthcare providers that purchase medical devices generally rely on third party payors to reimburse all or a portion of the cost of the
devices. Examples of third party payors are Medicare, Medicaid, private health insurance plans and health maintenance organizations. The Centers for Medicare and Medicaid Services of the U.S.
Department of Health and Human Services ("CMS"), fund and administer the Medicare program. CMS and the states jointly fund the Medicaid program, and the states administer the Medicaid program under
general federal oversight. 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 seek reimbursement for our products can be subject to challenge by the government.

The
federal government and various state governments are currently considering proposals to reform the Medicare and Medicaid healthcare reimbursement system. 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 an 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 healthcare 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 healthcare 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 instrumentation 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 healthcare
providers. In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical products suppliers.

Reimbursement
and healthcare 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 healthcare systems are beginning to confront the same fiscal pressures and
limitations that characterize the United States healthcare 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 in such international market would be adversely affected.

Patents, Licenses and Trademarks

We pursue a policy of seeking patent protection of our technology, products, and product improvements both in the United States and in selected foreign countries.
As of December 29, 2001, we held 131 issued U.S. patents and 36 patents in foreign countries, which expire at various dates over the next 20 years. We also had approximately 27 pending
U.S. patent applications and approximately 21 pending patent applications in foreign jurisdictions. 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.

15

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We
also rely on trade secrets and technological 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 of our products or product candidates. 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 and 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 develop.

Backlog

Our total backlog of firm orders was $59.6 million and $61.2 million at December 29, 2001 and December 30, 2000, respectively. Our
backlog of firm orders for the Respiratory Care segment was $28.2 million and $26.0 million at year-end 2001 and 2000, respectively. The backlog of firm orders for the
Neurocare segment was $15.9 million and $17.5 million at year-end 2001 and 2000, respectively. The backlog of firm orders for the Medical and Surgical Products segment was
$15.5 million and $17.7 million at year-end 2001 and 2000, respectively. We anticipate that substantially all of the backlog at December 29, 2001, will be shipped or
completed during the next twelve months. Certain of these orders may be canceled by the customer upon payment of a cancellation fee.

Competition

The respiratory care, neurocare and medical and surgical product 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 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 group competes with products from firms such as Siemens AG, Tyco Healthcare Group, Dragerwork AG and Respironics, Inc. The principal competitors of our
neurocare group include Bio-logic Systems Corporation, Shanghai Kohden Medical Instrument Corporation, formerly Nihen Koden Corporation, Teca-Oxford Instruments PLC, and Excel
Tech Ltd. The principal competitors of our medical and surgical group include the Ross Products Division of Abbott Laboratories, The Dow Chemical Company and Agilent Technologies Inc.

Employees

As of December 29, 2001, we had a total of 1,814 full-time employees, consisting of 1,452 employees based in the United States and 362
employees based outside of the United States. We have no collective bargaining agreements with our United States employees. Eight of our operating locations outside the United States have collective
bargaining agreements and/or work council agreements covering approximately 314 employees.

16

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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 policies in turn can
have a significant effect on the demand for our products. For example, a reduction in funding to major government research support agencies, such as the National Institute of Health and the National
Science Foundation, could 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.

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, particularly our SensorMedics VMAX and Erich Jaeger MasterScreen pulmonary function and metabolic diagnostic systems, our epilepsy monitoring systems and our
intra-operative monitoring systems is substantial. Without the financial support of government or third party insurers, the market for some of our products will be limited.

Governments
and private insurers in many countries closely examine medical products and devices incorporating new technologies to determine whether to 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 reimburse sales of our products now under development or 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 current
products. Any reduction in the amount of this reimbursement could harm our business.

During
the past several years, major third party payors have substantially revised their reimbursement methodologies in an attempt to contain their healthcare reimbursement costs. 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 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 have considered ways to change and have changed, 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 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 regulation, as well as private market practices, could affect our ability to sell our products in commercially acceptable quantities at profitable prices.

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Thermo Electron's Internal Revenue Service private letter ruling relating to the spinoff contemplated a public offering of our stock prior to November 15, 2002.

Thermo Electron received a private letter ruling from the Internal Revenue Service (the "IRS") that provided that no gain or loss would be recognized by us, by
Thermo Electron or by Thermo Electron's stockholders as a result of the spinoff. This ruling contemplated that, in order to raise additional capital, we would engage in an initial public offering of
10% to 20% of our stock within one year of the spinoff. If a public offering is not conducted within one year of the spinoff, it is possible that the IRS could withdraw the ruling, possibly resulting
in the spinoff being treated as a distribution of our shares that is taxable to Thermo Electron and/or to the Thermo Electron stockholders who received our stock in the distribution. In such event it
is also possible that we could be obligated to indemnify Thermo Electron against adverse tax consequences resulting from the spinoff being treated as a taxable distribution.

A
public offering was part of the IRS ruling because our ability to grow business may be dependent on our ability to efficiently access the capital markets. It may not be possible for us
to complete a public offering for a number of reasons, including adverse equity market conditions or unfavorable developments in our business. If a public offering cannot be completed or if the amount
that can be raised is less than expected or if the terms are unfavorable, it may be necessary for us to revise our business plan to reduce expenditures, including curtailing our growth strategies,
foregoing acquisitions or reducing our product development efforts.

Additional financing must be obtained to repay our promissory note to Thermo Electron which matures on November 15, 2002.

As of December 29, 2001, we owed Thermo Electron principal and interest of $33.5 million, which is evidenced by an unsecured promissory note that
matures on November 15, 2002. Our cash resources and net operating cash flow are not expected to provide us with sufficient funds to repay the principal
amount of $33.3 million when the note matures. As a result, we need to obtain funding through public or private financing or other arrangements. Our ability to obtain debt or equity funding
will depend on a number of factors, including market conditions, our operating performance and investor interest.

While
we are attempting to refinance the promissory note and to obtain additional working capital by entering into a credit facility or other debt arrangement with an institutional
lender, we cannot assure you that such an arrangement will be available to us or, if it is available, that it will be on terms that would be attractive in financing our business plans.

Alternatively,
Thermo Electron could be repaid from the proceeds of a successful public offering that we may need to conduct. Such public offering may not occur before
November 15, 2002 or the amount raised may not be sufficient to repay the promissory note. Even if the public offering occurs before November 15, 2002 and the amount is sufficient to
repay the Thermo Electron note, the need to allocate proceeds of the offering to repaying debt may require us to revise our business plan to reduce expenditures, such as curtailing growth strategies,
foregoing acquisitions or reducing our product development efforts. If we raise additional funds by issuing securities, further dilution to our stockholders may result. In addition, as a condition of
giving additional funds to us, future investors may demand rights superior to those of then-existing stockholders.

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

In addition to the capital we need to raise in order to pay off the promissory note to Thermo Electron, we may need to seek additional capital to support the
development of our new products and otherwise expand our business. 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

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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, or abandon some
or all of our product development programs.

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 competitors in many areas of our business. Although we believe that our products currently compete favorably
with respect to these factors, we cannot assure you 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. For example, a number of large
medical device companies, including Philips Medical Systems, which acquired Agilent Technologies' Healthcare Solutions Group in August 2001, and GE Medical Systems, have entered the market for
portable patient monitoring systems. These companies have substantially greater resources, including capital, name recognition and manufacturing and marketing capabilities, than our company. To remain
competitive we must develop new products and periodically enhance our existing products in a timely manner. 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.

It may be difficult for us to increase our revenues or profits because some of the markets for our products are mature.

Some of the markets in which we compete, such as the market for mechanical ventilators, are relatively mature. Revenues in these markets have been flat or
declining over the past several years. To address this issue, we are pursuing a number of strategies to enable us to continue to develop and introduce new products and increase our revenues and market
share. These strategies may not result in the growth of our business and we may not be able to successfully implement these strategies.

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

Thermo has 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 $177.5 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of December 29, 2001. This
represents approximately 44% 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. These cash flows in turn
depend on how well we have identified these acquired businesses as desirable acquisition candidates and how well we can integrate these acquired businesses.

Difficulties presented by international operations could negatively affect 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 39% of our total revenues in 2001, 35% of our total revenues in 2000 and 34% of our total revenues in 1999. We plan to continue expanding our presence in international
markets. Our international operations present a number of risks, including the following:



19

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Fluctuations in our quarterly operating results could cause our stock price to decrease.

Our operating results have fluctuated significantly from quarter to quarter in the past and are likely to vary in the future. These fluctuations are due to
several factors relating to the sale of our products, including the timing and volume of customer orders, customer cancellations, reductions in orders by our distributors and the timing and amount of
our expenses. For example:



Because
of these fluctuations, it is likely that in some future quarter or quarters our operating results could fall below the expectations of securities analysts or investors. If so,
the market price of our stock would likely decrease.

Our
quarterly results may also be adversely affected because some customers may have inadequate financial resources to purchase our products or may fail to pay for our products after
receiving them. In particular, hospitals are increasingly experiencing financial constraints, consolidations and reorganizations as a result of cost containment measures and declining third-party
reimbursement for services, which may result in decreased product orders or an increase in bad debts in any quarter.

Our management team is new and its working relationships are untested.

Until the third quarter of 2000, we functioned primarily as a holding company for a number of businesses that had been acquired by Thermo Electron. We have only
recently assembled our management team. Significantly, Randy H. Thurman became our President and Chief Executive Officer and a director in April 2001 and Martin P. Galvan became our Chief
Financial Officer in June 2001. Members of our management team have generally not worked with each other in the past and we therefore cannot assess at this time the effectiveness of their
working relationships.

We adopted a new name in connection with the spinoff from Thermo Electron. Our new name will not immediately be recognized as a brand in the marketplace and, as a result, our
business could suffer.

Prior to the spinoff from Thermo Electron, we changed our corporate name from Thermo Biomedical Inc. to VIASYS Healthcare Inc. The loss of the
"Thermo" brand name may hinder our

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ability to establish new relationships. In addition, our customers, suppliers and partners may react negatively to our separation from Thermo Electron.

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

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 obtain issued 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.

We may become involved in litigation relating to our intellectual property rights, which may result in substantial expense and may divert our attention from the implementation
of our business strategy.

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. 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 our attention from our business and may not adequately protect our intellectual property rights.

In
addition, we may be sued by third parties which claim that our products infringe 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 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 significant adverse impact on our results of operations. In addition, intellectual property litigation or claims could force us to:



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 and 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

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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 develop.

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 could negatively affect 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. 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,
withdrawal of marketing clearances or approvals and civil and criminal penalties. 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 products.

As part of our spinoff from Thermo Electron, we commenced 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 also 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.

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,
such as the raw materials for our medical-grade polyurethanes and the beryllium copper strips included in our medical imaging components. 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

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product. We may not be able to find a sufficient 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 component, which would cause significant delays that could seriously
harm our business and operating results. Although we have not experienced any material shortages or delays to date, we expect that we may experience shortages and delays in the future, especially in
the area of electronic components, such as video boards for our line of products for long-term epilepsy monitoring.

Our business could suffer due to potential defects in software contained in some of our products.

Some of our products, such as our neurodiagnostic and intra-operative monitoring products, incorporate sophisticated computer software that we have developed or
licensed from third parties. Software as complex as that incorporated into our products may contain errors or failures, especially when first introduced. In addition, new products or enhancements may
contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Because some of our products are used with critically ill patients, we expect
that our customers will have an increased sensitivity to software defects. Any errors or performance problems that arise may cause delays in product shipments, loss of revenue, delays in market
acceptance of our products, diversion of management's time, damage to our reputation, litigation and increased service or warranty costs.

Anti-takeover provisions in our charter documents and under Delaware law and the potential tax effects of the distribution could prevent or delay transactions that
our stockholders may favor.

Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for your shares. For example, these provisions:



In
addition, our board of directors has approved 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 you might otherwise receive a premium for your shares.

The
tax treatment of the distribution under the Internal Revenue Code and regulations thereunder could also serve to discourage an acquisition of our company following the distribution.
An acquisition of our company within two years following the spinoff from Thermo Electron could result in federal tax liability being imposed on Thermo Electron and, in more limited circumstances, on
stockholders of Thermo Electron who received shares of our common stock in the distribution. In addition, an

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acquisition more than two years after the distribution could cause the distribution to be taxable to Thermo Electron if the acquisition were determined to be pursuant to an overall plan that existed
at the time of the distribution. As part of the distribution, we may indemnify Thermo Electron, but not its stockholders, for any resulting tax liability if the tax liability is attributable to
certain acts by us, including an acquisition of our company. The prospect of that tax liability and our indemnification obligation may have anti-takeover effects.

We may have potential business conflicts of interest with Thermo Electron with respect to our past and ongoing relationships that could harm our business operations.

Conflicts of interest may arise between us and Thermo Electron in a number of areas relating to our past and ongoing relationships, including:



We
may not be able to resolve any potential conflicts.

We have only operated as a separate, stand-alone entity since the Spinoff Date and we may have difficulty integrating our business organization.

We operate our business through a number of subsidiaries and operating divisions. Some of our subsidiaries and operating divisions were only recently combined
with our existing operations as a result of the reorganization of Thermo Electron described under the caption "BusinessOverview." Thermo Electron has conducted these operations largely as
autonomous, unaffiliated businesses. As part of our spinoff from Thermo Electron, we plan to manage these operations in a more coordinated manner. The following factors may make it difficult for us to
integrate and consolidate our operations:



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Executive Officers of the Company

|Name                   |  | Age |  | Position                                                    
|---------------------- |  | --- |  | ------------------------------------------------------------
|Randy H. Thurman       |  | 52  |  | Chairman of the Board, President and Chief Executive Officer
|William B. Ross        |  | 51  |  | Executive Vice President and Chief Operating Officer        
|Martin P. Galvan       |  | 50  |  | Senior Vice President and Chief Financial Officer           
|Frank J. McCaney       |  | 47  |  | Senior Vice President, Marketing and Business Development   
|Gerald G. Brew         |  | 46  |  | Group President, VIASYS Neurocare                           
|Stephen P. Connelly    |  | 50  |  | Group President, Medical/Surgical and International Sales   
|Edward Pulwer          |  | 55  |  | Group President, VIASYS Respiratory Technologies            
|Teunis T. van den Berg |  | 58  |  | Group President, VIASYS Critical Care                       

Randy
H. Thurman has served as our President and Chief Executive Officer since April 2001 and became our Chairman upon the distribution of our common stock by Thermo Electron.
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. Mr. Thurman is also currently a director and formerly served as Chairman of the Board of directors of Enzon, Inc. and a director of CuraGen Corporation
and CLOSURE Medical Corporation.

William
B. Ross has served as our Executive Vice President and Chief Operating Officer since April 2001 and the President of SensorMedics Corporation, one of our wholly-owned
subsidiaries, since October 1996. From July 2000 to April 2001, Mr. Ross served as our interim Chief Executive Officer and as one of our directors. Mr. Ross was
President of SensorMedics Corporation's critical care division from January 1995 to October 1996, and prior to that time, was the Vice President, Sales and Marketing for SensorMedics
Corporation.

Martin
P. Galvan has served as our Senior Vice President and Chief Financial Officer since June 2001. From January 1999 to June 2001, Mr. Galvan served as
Chief Financial Officer of Rodel, Inc., a precision surface technologies firm serving the semiconductor industry. From 1979 to January 1998, Mr. Galvan held positions at
Rhone-Poulenc Rorer Pharmaceuticals, Inc., a global pharmaceuticals company, most recently as Vice President, Finance.

Frank
J. McCaney has served as Senior Vice President, Marketing and Business Development, since April 2001. From October 1998 to April 2001, Mr. McCaney
served as Vice President, Global Marketing. From October 1996 to October 1998, he was Director of Business Development of Diametrics Medical, Inc., a leading critical care
technology company.

Gerald
G. Brew has served as our Group President, VIASYS Neurocare since April 2001 and the President of the Nicolet Biomedical operation since October 1993. From 1988 to
1993, Mr. Brew held several positions at Nicolet Instrument Corporation, most recently as a Vice President. Mr. Brew currently serves as the Vice Chairman of the American Academy of
Neurology Foundation.

Stephen
P. Connelly has served as Group President, Medical/Surgical and International Sales since August 2001. Between 2000 and 2001, Mr. Connelly was a consultant in the
healthcare industry. From 1980 to 1999, he held a number of positions at Rhone-Poulenc Rorer, a global pharmaceutical company, including Senior Vice President and General Manager, The Americas, from
1995 to 1998, and Senior Vice President, Asia/Pacific from 1992 to 1995.

Edward
Pulwer has served as Group President, VIASYS Respiratory Technologies since June 2001 and has served as the General Manager of SensorMedics Corporation, one of our
wholly-owned subsidiaries, since October 1999. Mr. Pulwer has held numerous positions with SensorMedics since 1983, including Vice President for world wide sales, regional area sales
manager, and critical care marketing and sales manager.

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Teunis
T. van den Berg has served as Group President, VIASYS Critical Care since July 2001. From 1998 to 2001, Mr. van den Berg served as President of Bird Medical
Technologies. From 1998 to 2001, Mr. van den Berg was President of Bear Medical Systems. Mr. van den Berg served as Vice President of Bird Products Company from 1984 to 1998.

Item 2.Properties

We own or lease 14 properties in the United States and lease 13 properties internationally, which generally consist of administrative and sales offices,
manufacturing, assembly and distribution facilities, and warehouse facilities. In the United States, we own facilities with an aggregate size of approximately 319,000 square feet, and we lease
approximately 376,000 square feet of space. Our corporate headquarters are located in Conshohocken, Pennsylvania occupying approximately 7,964 square feet. Internationally, we lease facilities with an
aggregate size of approximately 135,000 square feet. We believe our current facilities will be sufficient to meet our needs for the foreseeable future and that additional space will be available at a
reasonable cost to meet our needs in the future.

Item 3.Legal Proceedings

There are no material pending legal proceedings to which we or any of our subsidiaries is a party or of which any of our properties are subject.

In
July 1999, we commenced a lawsuit against Pulmonetic Systems, Inc. and Douglas DeVries, a former employee for patient 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 that settles all outstanding lawsuits between the companies and related parties. Under the agreement both companies will have access to certain technologies and
rights used in the companies' ventilators and we will be paid $4 million over the next three years.

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

None.

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PART II

Item 5.Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock began trading on an as issued basis on the New York Stock Exchange under the symbol "VAS" on November 7, 2001. The high and low sale
prices of our common stock for the fourth quarter of 2001 was $19.85 and $14.96, respectively, as reported in the consolidated transaction reporting system.

As
of March 8, 2002, we estimate that we had approximately 26,054,153 holders of record of our common stock. The closing market price on the New York Stock Exchange for the
Company's common stock on March 8, 2002 was $21.90.

Item 6.Selected Financial Data

|                                                 |                                                | Year Ended |        
|------------------------------------------------ | ---------------------------------------------- | ---------- | -------
|
|
|Statement of Income Data                         |                                                |            |        
|Revenues                                         |                                                | $          | 358,433
|                                                 |                                                |            |        
|Costs and Operating Expenses:                    |                                                |            |        
|                                                 | Cost of revenues                               |            |        
|                                                 | Selling, general and administrative expenses   |            |        
|                                                 | Research and development expenses              |            |        
|                                                 | Restructuring and other unusual costs (income) |            |        
|                                                 |                                                |            |        
|                                                 |                                                |            | 328,671
|                                                 |                                                |            |        
|Operating Income                                 |                                                |            | 29,762 
|Interest Income                                  |                                                |            | 304    
|Interest Expense                                 |                                                |            | (2,002 
|Other Income (Expense), Net                      |                                                |            | (45    
|                                                 |                                                |            |        
|Income Before Income Taxes and Minority Interest |                                                |            | 28,019 
|Provision for Income Taxes                       |                                                |            | (11,757
|Minority Interest Expense                        |                                                |            |       
|                                                 |                                                |            |        
|Net Income                                       |                                                | $          | 16,262 
|                                                 |                                                |            |        
|Basic Earnings Per Share                         |                                                | $          | .63    
|                                                 |                                                |            |        
|Diluted Earnings Per Share                       |                                                | $          | .62    
|                                                 |                                                |            |        
|Basic Weighted Average Shares Outstanding        |                                                |            | 26,002 
|                                                 |                                                |            |        
|Diluted Weighted Average Shares Outstanding      |                                                |            | 26,076 
|                                                 |                                                |            |        
|Balance Sheet Data                               |                                                |            |        
|Cash and Cash Equivalents                        |                                                | $          | 14,968 
|Working Capital                                  |                                                |            | 89,519 
|Total Assets                                     |                                                |            | 405,275
|Short-term Obligations                           |                                                |            | 33,357 
|Long-term Obligations                            |                                                |            |       
|Minority Interest                                |                                                |            |       
|Stockholders' Investment                         |                                                |            | 299,668
|Other Financial Data                             |                                                |            |        
|Book Value Per Diluted Share                     |                                                | $          | 11.49  
|Cash Dividends                                   |                                                |            |       

27

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

Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
the reporting period. The most significant estimates and assumptions relate to our allowance for doubtful accounts, inventory reserves, warranty reserves and restructuring reserves.

We
maintain an allowance for doubtful accounts for customer returns and for estimated losses resulting from the inability of our customers to make required payments. These allowances are
determined by analyzing historical data and trends. If actual losses are greater than estimated amounts or if the financial condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, future results from operations could be adversely affected.

Inventories
are written down for estimated obsolescence or unmarketablity equal to the difference between the cost of inventory and the estimated net realizable value based upon
assumptions about future market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We
offer warranties on some products of various lengths. At the time of shipment, we establish a reserve for the estimated cost of warranties based on our best estimate of the amounts
necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The cost of warranties is affected by the length of the warranty, the product's
failure rates and the customer's usage. If the actual cost of warranties differs from our estimated amounts, future results of operations could be adversely affected.

Beginning
in 2000, we initiated an ongoing plan to reduce costs and promote efficiencies and in connection with such, we have recorded reserves for restructurings. The amount of the
reserves include estimated costs relating to abandoned facilities. Should actual amounts differ from these estimates or should additional cost reductions or potential efficiencies be identified,
further reserves may be recognized in future periods. We continue to evaluate opportunities to reduce costs and streamline operations by consolidating facilities and eliminating duplicate functions.

Operations

We report our operations in three segments: Respiratory Care, Neurocare and Medical and Surgical Products. The Respiratory Care segment develops, manufactures and
markets a variety of medical devices for the diagnosis and treatment of respiratory-related disorders. The Neurocare segment principally develops, manufactures and markets a comprehensive line of
neurodiagnostic, vascular and audiology systems. The Medical and Surgical Products segment develops, manufactures and markets critical care disposable devices, a line of wireless patient monitoring
systems and specialty products and materials for sale to original equipment manufacturers.

28

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The
following table shows revenues contributed by each of our operating segments, expressed in absolute dollars (in thousands) and as percentages of total revenues for the periods
presented:

Year EndedOperating SegmentDecember 29, 2001

December 30, 2000

January 1, 2000Respiratory Care

$
184,357

51
%
$
172,553

50
%
$
184,371

51
%Neurocare


86,161

24
%

90,902

26
%

91,624

26
%Medical and Surgical Products


87,915

25
%

81,973

24
%

82,558

23
%Totals

$
358,433

100
%
$
345,428

100
%
$
358,553

100
%


Revenues

We derive revenues primarily from the sale of products and to a lesser extent the provision of services, in each of our three operating segments. When complex
installation is required, revenue is recognized upon completion of installation. In all other situations revenue is recognized when title is transferred and there is no further customer obligation.
Effective January 2, 2000, we adopted SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." Under SAB No. 101, 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. As our
revenues were not materially affected by the adoption of SAB No. 101, we recorded no cumulative effect of the change in accounting principle for periods prior to 2000. We provide a reserve for
our estimate of installation and warranty costs at the time of shipment.

We
recognize revenues from service contracts ratably over the terms of the contracts. Our service revenues are derived from parts and supplies, in-house and field repairs,
service contracts and customer education.

Export
revenues accounted for 24% of our total revenues in 2001, 23% of our total revenues in 2000 and 24% of our total revenues in 1999. Revenues from countries outside the United
States, based on selling location, accounted for 15% of our total revenues in 2001, 12% of our total revenues in 2000 and 10% of our total revenues in 1999.

Costs and Operating Expenses

Our cost of revenues consists primarily of manufacturing overhead, materials, parts and labor. Our selling, general and administrative expenses and research and
development expenses consist primarily of salaries, commissions, benefits, amortization and other expenses in support of these activities.

We
were party to a corporate services arrangement with Thermo Electron through November 15, 2001 under which Thermo Electron's corporate staff provided certain administrative
services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management and certain
financial and other services, for which we have paid Thermo Electron annually an amount equal to 0.8% of our consolidated revenues. Effective April 2001, the fee under this agreement was
reduced to 0.6% through the Spinoff Date. For these services we were charged $2.1 million, $2.8 million and $2.9 million in 2001, 2000 and 1999, respectively. These amounts were
recorded as selling, general and administrative expenses. For additional items such as employee benefit plans, insurance coverage and other identifiable costs, Thermo Electron has charged us based
upon costs attributable to our company. On the Spinoff Date, the corporate services arrangement with Thermo Electron was terminated and was replaced with the transition services agreement described
below.

29

---

In
connection with the spinoff distribution, we entered into a transition services agreement under which Thermo Electron's corporate staff will continue to provide us with certain
administrative services. Thermo Electron will provide us with these services in a manner consistent with the services that Thermo Electron provided to us prior to the distribution. In return, we will
pay Thermo Electron a fee equal to 0.6% of our consolidated revenues for the period from November 16, 2001 through December 29, 2001, 0.4% for the first quarter of 2002 and 0.1% for the
second quarter of 2002, plus out-of-pocket and third party expenses. The transition services agreement provides that Thermo Electron's corporate staff will provide us with
corporate record keeping, legal, treasury, employee benefit, internal audit, executive compensation, real estate and information systems services until December 31, 2001, financial reporting
and securities compliance services until March 31, 2002, tax related services until April 30, 2002 and risk management services until June 30, 2002. For these services we were
charged $0.3 million in 2001. The transition services agreement provides that Thermo Electron, at its discretion, may also provide us with additional services specifically requested by us, such
as acquisition and offering support services, on terms upon which we and Thermo Electron mutually agree.



The following table sets forth line items from our consolidated statements of income as percentages of total revenues for the periods indicated:

Year EndedDecember 29,
2001

December 30,
2000

January 1,
2000Revenues

100
%
100
%
100
%Costs and Operating Expenses:Cost of revenues

52
%
52
%
52
%Selling, general and administrative expenses

30
%
30
%
29
%Research and development expenses

8
%
7
%
5
%Restructuring and other unusual costs

2
%
1
%

%92
%
90
%
86
%Operating Income

8
%
10
%
14
%Other Expenses, Net


%
(1
)%

%Provision for Income Taxes

(3
)%
(4
)%
(6
)%Net Income

5
%
5
%
8
%


Year Ended December 29, 2001 Compared With Year Ended December 30, 2000

Revenues

Revenues increased 4% to $358.4 million in 2001 from $345.4 million in 2000. Increases in revenues of $11.8 million in the Respiratory Care
segment and $5.9 million in the Medical and Surgical Products segment were offset by a decrease in revenues of $4.7 million in the Neurocare segment. We estimate that approximately
$6.0 million of our revenues in 2000 were attributable to demand for year 2000 compliant products that we were unable to ship in 1999, including $1.5 million in the Respiratory Care
segment and $4.5 million in the Neurocare segment.

Revenues
in the Respiratory Care segment increased 7% to $184.4 million in 2001 from $172.6 million in 2000. Revenues increased primarily due to an increase in
international demand for ventilation products. Backlog increased 8% to $28.2 million at December 29, 2001 from $26.0 million at December 30, 2000 due to the increase
described above.

30

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Revenues
in the Neurocare segment decreased 5% to $86.2 million in 2001 from $90.9 million in 2000, primarily due to the completion of shipments in 2000 of year 2000
compliant products that had been ordered in 1999. Backlog decreased 9% to $15.9 million from $17.5 million due to disruptions caused by our European restructuring in the fourth quarter
of 2001.

Revenues
in the Medical and Surgical Products segment increased 7% to $87.9 million in 2001 from $82.0 million in 2000. The increase in revenues resulted primarily from
$3.8 million of higher sales of orthopedic implants and $1.5 million from medical resins and tubing as well as increased demand for film used in the manufacture of secure glass for
adverse weather conditions and security applications. Higher revenues also resulted from increased sales of feeding tubes. Backlog decreased 13% to $15.5 million from $17.7 million
primarily due to lack of orders from a major customer of orthopedic devices who was evaluating its suppliers following a merger.

Costs and Gross Margin

Our gross margin was 48% in 2001 and 2000. Improvements in the Respiratory Care segment margins and flat margins in the Medical and Surgical Products segment were
offset by lower margins in the
Neurocare segment. The Respiratory Care segment improvements were primarily due to the impact of the sales increase mentioned above and the consolidation and other restructuring efforts discussed
below and in Note 10 to the consolidated financial statements. The Neurocare segment was adversely affected by lower sales volume in 2001 resulting in a higher proportion of fixed manufacturing
costs to revenues and by reduced margins due to competitive pricing pressure. These negative pressures were partially offset by cost reduction programs begun by management in late 2001.

Selling, General and Administrative

Selling, general and administrative expenses as a percentage of revenues was 30% in 2001 and 2000. Selling, general and administrative expenses increased 4% to
$107.0 million in 2001 from $102.9 million in 2000. We incurred approximately $3.8 million of higher selling, general and administrative expenses to establish corporate office
functions in becoming a public company.

Research and Development

Research and development expenses increased $3.6 million to $28.4 million in 2001 from $24.8 million in 2000. The increase was primarily due
to higher research and development costs for new products in existing and emerging markets, including several new sleep therapy products and new ventilator platforms. We are also investing in the
development of in-licensed technologies, such as a level of consciousness monitor for surgical anesthesia.

Restructuring and Other Unusual Costs

We recorded restructuring and other unusual costs of $5.8 million in 2001 compared to $2.0 million in 2000. During the third quarter of 2001, we
approved and commenced a plan to restructure operations in an effort to reduce costs and streamline operations (see Note 10 to the consolidated financial statements). Total restructuring costs
associated with this plan are estimated to be $4.6 million. Costs associated with this plan of $4.0 million were recorded in 2001. Of the total $5.8 million restructuring and
other unusual costs incurred in 2001, $3.9 million was for severance costs related to the reduction of approximately 167 employees across all functions and $1.6 million was for employee
retention costs for 23 employees, principally key management team members, to help assure their availability at least through the distribution date of our common stock, which occurred on
November 15, 2001. As of December 29, 2001, all but one of the employees covered by a retention agreement remained with our company. The remaining 2001 costs incurred included
$0.1 million for abandoned facility costs and $0.2 million for other restructuring costs. The $5.8 million 2001 charges included $2.7 million in the Respiratory Care
segment, $2.0 in the Neurocare segment, $0.8 million in

31

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the Medical and Surgical Products segment and $0.3 million in the corporate office. We expect to incur approximately $1.0 million in charges in 2002 for the costs associated with the
2001 plan that will be
recorded in the period in which they are incurred. Subsequent to year-end, we have committed to an additional plan to restructure operations in the Neurocare segment in an effort to reduce
costs and streamline operations. Estimated costs for this plan are $1.3 million including severance and facility closure costs. This plan includes the closure of the Neurocare segment's
operating facility in Colorado and its consolidation with existing operations in Wisconsin. The associated costs will be recognized and the cash outlays will occur over the remainder of 2002. In
addition, we are considering further opportunities within our European operations to reduce costs and streamline operations by consolidating facilities and eliminating duplicate functions.

Interest Expense, Net

Interest expense was $2.0 million in 2001 and $2.1 million in 2000. Interest income was immaterial in both periods.

Provision for Income Taxes

Our effective tax rate was 42% in 2001 and 43% in 2000. The effective tax rates exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes and nondeductible amortization of goodwill.

Year Ended December 30, 2000 Compared With Year Ended January 1, 2000

Revenues

Revenues decreased 4% to $345.4 million in 2000 from $358.6 million in 1999. Revenues decreased by $11.8 million in the Respiratory Care
segment, $0.7 million in the Neurocare segment and $0.6 million in the Medical and Surgical Products segment. We believe that approximately $22.0 million of our revenues in 1999
were attributable to demand for year 2000 compliant products, including $15.0 million in the Respiratory Care segment and $7.0 million in the Neurocare segment. We estimate that
approximately $6.0 million of our revenues in 2000 were attributable to demand for year 2000 compliant products that we were unable to ship in 1999, including $1.5 million in the
Respiratory Care segment and $4.5 million in the Neurocare segment.

Revenues
in the Respiratory Care segment decreased 6% to $172.6 million in 2000 from $184.4 million in 1999. Revenues increased $18.4 million due to the inclusion of
Erich Jaeger, acquired in July 1999, for
the full year in 2000. This increase was offset by a decline in sales of respiratory products due to strong demand in 1999 for year 2000 compliant products and competitive pricing pressures in Europe
due to Euro weakness in 2000. Our export sales from the United States generally are denominated in U.S. dollars. As the Euro weakens, selling prices of competitors with manufacturing bases in Europe
become relatively lower. Backlog for this segment increased to $26.0 million at December 30, 2000, from $23.4 million at January 1, 2000, primarily due to renewed growth
after softness in 2000.

Revenues
in the Neurocare segment decreased 1% to $90.9 million in 2000 from $91.6 million in 1999. Revenues decreased due to the effect of competitive pricing pressures
and customer capital budget restraints in 2000 and high demand in 1999 for year 2000 compliant products. These decreases were offset in part by completion of shipments in early 2000 of year 2000
compliant products that we had been unable to ship by the end of 1999. Backlog for this segment decreased to $17.5 million at December 30, 2000, from $20.2 million at
January 1, 2000, primarily due to the completion of shipments for year 2000 compliant products and new products that had been ordered in 1999.

Revenues
in the Medical and Surgical Products segment decreased 1% to $82.0 million in 2000 from $82.6 million in 1999. The decrease was primarily due to
$3.1 million of lower revenues from

32

---

patient monitoring equipment due to a continuing downturn in demand. This decrease was offset in part by an increase in demand for polyurethane films due to the introduction of product improvements.
Backlog for this segment increased to $17.7 million at December 30, 2000, from $12.0 million at January 1, 2000, due in part to orders growth in our precision metal
components business for new product introductions and releases of orders for most of 2001 from several large customers. In addition, backlog increased due to demand for polyurethane films, offset in
part by lower orders for wireless patient monitoring equipment.

Total
backlog increased to $61.2 million at December 30, 2000, from $55.7 million at January 1, 1999 due to the reasons discussed above.



Our gross margin was 48% in both 2000 and 1999. Improvement in the Neurocare and Medical and Surgical Products segments, primarily due to the introduction of
higher-margin products, was offset in part by a decrease in the gross margin in the Respiratory Care segment, primarily due to lower revenues at existing businesses.



Selling, general and administrative expenses as a percentage of revenues were 30% in 2000 and 29% in 1999. Selling, general and administrative expenses as a
percentage of revenues increased in the Respiratory Care segment due to the inclusion of Erich Jaeger for a full period in 2000 and its higher expenses as a percentage of revenues. This was offset, in
part, by a reduction in expenses as a percentage of revenues in the Medical and Surgical Products segment due to a reduction in selling expenses associated with wireless patient monitoring equipment.
Selling, general and administrative expenses decreased slightly to $102.9 million in 2000 from $103.8 million in 1999. This expense decrease was primarily due to lower costs in the
Respiratory Care segment for incentive compensation, which fluctuates based on the degree to which the segment achieves targeted sales and operating results, and lower selling expenses discussed
above.



Research and development expenses increased 34% to $24.8 million in 2000 from $18.5 million in 1999. The increase was primarily due to the inclusion
of expenses at Erich Jaeger for the full year in 2000. In addition, higher research and development costs for new products contributed to the increase, including expenditures for seizure prediction
and level of consciousness products in the Neurocare segment.



We recorded restructuring and unusual costs of $2.0 million in 2000. These costs included $1.3 million for employee retention costs. Restructuring
and unusual costs also include $0.3 million of severance for 54 employees in the Respiratory Care segment, $0.2 million for abandoned facility costs and $0.1 million of other
restructuring costs.



Interest expense increased to $2.1 million in 2000 from $1.4 million in 1999. The increase in interest expense was primarily due to the inclusion in
2000 of a full year of interest expense incurred on borrowings used to fund the acquisition of Erich Jaeger, compared with five months in 1999. This increase was offset in part by the effect of lower
outstanding borrowings related to the acquisition of Medical Data Electronics. Interest income was immaterial in both periods.

33

---



Our effective tax rate was 43% in 2000 and 41% in 1999. The effective tax rates exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes and nondeductible amortization of goodwill. The effective tax rate increased in 2000 due in part to an increase in losses outside the U.S. that were not benefited.

Liquidity and Capital Resources

Cash generated from operating activities was $18.6 million for 2001. Our cash flow primarily reflects net income, excluding the non-cash effect
associated with depreciation and amortization. Cash of $13.5 million was used to fund an increase in accounts receivable primarily in ventilation product lines within the Respiratory Care
segment, resulting from increased direct sales to end-users, which have longer payment cycles than distributors and increased international sales, which generally take longer to collect
than domestic receivables. The cash from operations also reflected an increase in inventories of $6.2 million, primarily due to an increase of $2.7 million in the Respiratory Care
segment as the result of new products and expanded volume purchases and an increase of $1.9 million in the Neurocare segment due to an increase in deferred sales in 2001 as compared to 2000
because installation was not complete.

Cash
used in investing activities was $7.5 million for 2001. Capital expenditures have been the principal component of our investing activities. We purchased property, plant and
equipment using cash of $11.0 million in 2001. During 2002, we expect to make capital expenditures of approximately $12.0 million.

During
2001, our financing activities used cash of $8.3 million, primarily due to net transfers of $1.6 million and the repayment of short-term obligations of
$7.7 million to Thermo Electron.

At
the Spinoff Date, debt to Thermo Electron was $33.3 million, which was evidenced by an unsecured promissory note. This promissory note bears interest at the prime rate plus
0.5% payable quarterly and matures in November 2002. In the event that we receive cash proceeds from a debt financing prior to the maturity of the note, we must prepay the principal up to the
net amount of such proceeds.

Our
consolidated working capital was $89.5 million at December 29, 2001, compared with $68.2 million at December 30, 2000. Our cash and cash equivalents
totaled $15.0 million at December 29, 2001, compared with $12.6 million at December 30, 2000. In accordance with Thermo Electron's past practices, we transferred, until the
Spinoff Date, all of our cash and cash equivalents, other than the cash and cash equivalents of our foreign subsidiaries to Thermo Electron. On the Spinoff Date, Thermo Electron provided us with cash
and cash equivalents so that we had a "net debt" balance of $18.7 million. For purposes of this calculation, "net debt" is defined as our outstanding indebtedness to Thermo Electron as of the
Spinoff Date less our cash and cash equivalents as of such date. Cash and cash equivalents in the 2000 consolidated balance sheet represent cash of our foreign subsidiaries.

We
believe that we have or will generate sufficient capital resources to meet the capital requirements of our existing business for at least the next 12 months and to pay interest
as it becomes due on our promissory note to Thermo Electron. We do not expect, however, that our capital resources and our operating cash flow will be sufficient to repay the principal amount of the
promissory note when it matures. As a result, we need to seek additional funding, through public or private financing or other arrangements, to repay this debt. In this regard, we have had discussions
with various institutional leaders. To date, these discussions have resulted in a $10.0 million uncommitted demand note being established with ABN AMRO. Under the terms of the note, the
interest charged on any principal amount drawn by us will be at a rate quoted by ABN AMRO and agreed to by us on the date such amount is drawn. The rate may be based upon LIBOR or ABN AMRO's cost of
funds, in each case

34

---

plus an applicable margin, the prime rate or such other rate that is agreeable to us. The note may be terminated at any time by ABN AMRO. In addition to the note, we have signed a commitment letter
for ABN AMRO to structure, arrange and syndicate a $60.0 million multi-year revolving credit facility on a best efforts basis. We expect that this credit facility will be available
to us by the end of the second quarter of 2002. Pursuant to the terms of the promissory note, Thermo Electron may have a right to any amounts borrowed under these facilities up to the amount then due
under the promissory note.

While
we expect that the credit facility will be put in place, our ability to obtain this or other debt or equity financing will depend on a number of factors, including market
conditions, our operating performance and investor interest. As a result, we cannot assure you that we will be successful in obtaining the funds necessary to repay the Thermo Electron promissory note
when it matures. Even if we are able to obtain additional financing, it may not be at the level desired. Because such proceeds must first be allocated to repay Thermo Electron, we may be required to
revise our business plan to reduce expenditures, including curtailing our growth strategies, foregoing acquisitions or reducing our product development efforts.

Beyond
the next 12 months 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. Although we are not a
party to any agreement or letter of intent with respect to a potential transaction, we may enter into acquisitions or strategic arrangements in the future that would require us to seek additional debt
or equity financing.

The
Internal Revenue Service ruling with respect to the spinoff distribution of our common stock by Thermo Electron contemplated a public offering of 10% to 20% of our stock within one
year after the distribution. We may be unable to complete a public offering for a number of reasons, including adverse market conditions or adverse developments in our business. If we are unable to
complete a public offering, we may be required to revise our business plan to reduce expenditures, including curtailing our growth strategies, foregoing acquisitions or reducing our product
development efforts. In addition, if we do not conduct an offering within one year after the spinoff, the distribution could become taxable. Thermo Electron may assert that we are responsible for any
resulting tax liability if the liability can be attributed to certain acts by us.

Risk Management

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. We manage our exposure to these risks through our regular operating and financing activities.

We
generally view our investment in international subsidiaries with a functional currency other than our reporting currency as long-term. Our investment in international
subsidiaries is sensitive to fluctuations in currency exchange rates. The functional currencies of our international subsidiaries are principally denominated in the Euro, Sterling and Yen. The effect
of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the "Accumulated other comprehensive items" component of stockholder's investment. A 10%
reduction in year-end 2001 functional currencies, relative to the U.S. dollar, would result in a $1.5 million reduction of stockholders' investment. A 10% reduction in
year-end 2000 functional currencies, relative to the U.S. dollar, would result in a $1.4 million reduction of stockholder's investment.

Our
cash, cash equivalents and variable-rate short-term obligations are sensitive to changes in interest rates. Interest rate changes would result in a change in
interest income and expense due to the difference between the current interest rates on cash, cash equivalents and the variable-rate short-term obligations and the rate that
these financial instruments may adjust to in the future. A 10% increase in

35

---

year-end 2001 interest rates would result in a negative impact of $116,000 on our net income. A 10% increase in year-end 2000 interest rates would have resulted in a negative
impact of $168,000 on our net income.

Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-lived
Assets." We will adopt the requirements of SFAS No. 144 effective December 30, 2001 and do not expect a material effect from adoption.

In
July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." We will adopt the requirements of SFAS No. 142 effective December 30,
2001. SFAS No. 142 requires companies to stop amortizing goodwill and other intangible assets deemed to have an indefinite life. SFAS No. 142 also requires companies to annually test
goodwill for impairment and to perform an initial impairment test in the year of adoption. We have completed this test and determined that there is no impairment of goodwill. Amortization of goodwill
in 2001, 2000 and 1999 was $5.2 million, $5.0 million and $4.7 million, respectively.

In
December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenues in financial statements. For a description of our implementation of SAB No. 101, see "OverviewRevenues" above.

In
1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires that all derivatives, including
foreign currency exchange contracts, be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges must be recorded through earnings. If a derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. We adopted SFAS No. 133 in the first quarter of 2001. We do not believe the effect of adoption of SFAS No. 133
has been, or will be, material to our consolidated financial statements.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

The information required under this item is included elsewhere in this report on Form 10-K and incorporated herein by reference. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 8.Financial Statements and Supplementary Data

Our Consolidated Financial Statements as of December 29, 2001, and Supplementary Data required by this item are attached to this report on
Form 10-K beginning on page F-1 and incorporated herein by reference.

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

None.

36

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PART III

Item 10.Directors and Executive Officers of the Registrant



Information
with respect to the members of the Board of Directors of the Company is set forth under the caption "Election of Directors" in our definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, which information is incorporated herein by reference.



Information
with respect to the executive officers of the Company is set forth under the caption "Executive Officers of the Company" contained in Part I, Item I of this report,
which information is incorporated herein by reference.



Information
with respect to the Section 16(a) compliance of the directors and executive officers of the Company is set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, which information is incorporated herein by
reference.

Item 11.Executive Compensation

Information required under this item is set forth under the caption "Executive Compensation" in our definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, which information is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management

Information required under this item is set forth under the caption "Stock Ownership" in our definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, which information is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions

Information required under this item is set forth under the caption "Relationship with Affiliates" in our definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, which information is incorporated herein by reference.

37

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PART IV

Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



The following financial statement and reports of independent auditors are included herein:

Report of Independent Public Accountants

F-1Consolidated Balance Sheets

F-2Consolidated Statements of Income

F-3Consolidated Statements of Cash Flows

F-4Consolidated Statements of Comprehensive Income and Stockholders' Investment

F-5Notes to Consolidated Financial Statements

F-6




Schedule II:
Valuation and Qualifying Accounts

All
other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto.



|Exhibit
Number |  | Description of Exhibit                                                                       
|-------------- |  | ---------------------------------------------------------------------------------------------
|3.2*           |  | Amended and Restated Certificate of Incorporation of the Company.                            
|3.3*           |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company.
|3.5*           |  | Amended and Restated By-laws of the Company.                                                 
|10.1*          |  | Plan and Agreement of Distribution between Thermo Electron Corporation and the Company.      
|10.2*          |  | Tax Matters Agreement between Thermo Electron Corporation and the Registrant.                
|10.3*          |  | Transition Services Agreement between Thermo Electron Corporation and the Company.           
|10.4*          |  | Rights Agreement between the Rights Agent and the Company.                                   
|10.5*          |  | Indemnification Agreement between the Company and its directors and officers.                
|               |  |                                                                                              

38

---

|10.6*    |  | Equity Incentive Plan of the Company (maximum number of shares issuable in the aggregate under this plan is 4,680,000 shares, after adjustment to reflect the one-for-1.5384615 reverse stock split effected in October 2001).
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7*    |  | Deferred Compensation Plan for Directors of the Company.                                                                                                                                                                      
|10.8*   |  | Employment Agreement dated as of April 2, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                    
|10.9*   |  | Letter Agreement dated as of September 24, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                   
|10.10*  |  | Executive Retention Agreement dated as of April 16, 2001 by and between the Company and Randy H. Thurman.                                                                                                                     
|10.11*   |  | Term Note dated as of April 19, 2001 issued by Randy H. Thurman to the Company.                                                                                                                                               
|10.12*  |  | Employment Agreement dated as of June 8, 2001 by and between the Company and Martin P. Galvan.                                                                                                                                
|10.13*  |  | Executive Retention Agreement dated as of June 11, 2001 by and between the Company and Martin P. Galvan.                                                                                                                      
|10.14*   |  | Promissory Note issued by the Company to Thermo Electron Corporation.                                                                                                                                                         
|10.15*   |  | 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.                                                                        
|10.16*  |  | Form of Executive Retention Agreement by and between the Company, entered into with the following executive officers: Gerald G. Brew, Stephen P. Connelly and William B. Ross.                                                
|10.17** |  | Employment Agreement dated as of August 27, 2001 by and between the Company and Stephen P. Connelly.                                                                                                                          
|21.1**   |  | Subsidiaries of the Company.                                                                                                                                                                                                  
|23.1**   |  | Independent Auditor's Report on Schedule.                                                                                                                                                                                     
|23.2**   |  | Consent of Independent Public Accountants.                                                                                                                                                                                    
|99.1**   |  | Letter of Arthur Andersen Representations.                                                                                                                                                                                    

---

39

---



SCHEDULE II

Valuation and Qualifying Accounts
(In thousands)

|Description                     |  | Balance at
Beginning
of Year |       | Provision
Charged to
Expense |   | Accounts
Recovered |  | Accounts
Written
Off |     | Other(a) |   | Balance
at End
of Year
|------------------------------- |  | ---------------------------- | ----- | ---------------------------- | - | ------------------ |  | -------------------- | --- | -------- | - | ----------------------
|Allowance for Doubtful Accounts |  |                              |       |                              |   |                    |  |                      |     |          |   |                       
|Year Ended December 29, 2001    |  | $                            | 6,913 |                              | $ | 1,758              |  | $                    | 202 |          | $ | (1,354                
|Year Ended December 30, 2000    |  | $                            | 6,601 |                              | $ | 2,427              |  | $                    |    |          | $ | (1,118                
|Year Ended January 1, 2000      |  | $                            | 3,448 |                              | $ | 3,362              |  | $                    | 263 |          | $ | (1,139                

|Description                    |  | Balance at
Beginning
of Year |       | Provision
Charged to
Expense |   | Activity
Charged to
Reserve |  | Other(c) |        | Balance
at End
of Year
|------------------------------ |  | ---------------------------- | ----- | ---------------------------- | - | --------------------------- |  | -------- | ------ | ----------------------
|Accrued Restructuring Costs(b) |  |                              |       |                              |   |                             |  |          |        |                       
|Year Ended December 29, 2001   |  | $                            | 1,110 |                              | $ | 5,833                       |  | $        | (4,280 | )                     
|Year Ended December 30, 2000   |  | $                            | 159   |                              | $ | 1,964                       |  | $        | (1,000 | )                     
|Year Ended January 1, 2000     |  | $                            | 777   |                              | $ |                            |  | $        | (516   | )                     

---

40

---

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.

|Date: March 26, 2002 |  | VIASYSHEALTHCARE INC.
|-------------------- |  | ---------------------
|                     |  |                      
|                     |  | By:                  

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 26, 2002.

|Signature |                                               | Title
|--------- | --------------------------------------------- | -----
|          |                                               |      
|By:       | /s/RANDY H. THURMANRandy H. Thurman           |      
|By:       | /s/MARTIN P. GALVANMartin P. Galvan           |      
|By:       | /s/RONALD A. AHRENSRonald A. Ahrens           |      
|By:       | /s/DAVID W. GOLDEDavid W. Golde               |      
|By:       | /s/KIRK E. GORMANKirk E. Gorman               |      
|By:       | /s/MARY J. GUILFOILEMary J. Guilfoile         |      
|By:       | /s/ROBERT W. O'LEARYRobert W. O'Leary         |      
|By:       | /s/THOMAS A. VANDERSLICEThomas A. Vanderslice |      

41

---



Report of Independent Auditors

To the Stockholders of VIASYS Healthcare Inc.:

We
have audited the accompanying consolidated balance sheets of VIASYS Healthcare Inc. and subsidiaries as of December 29, 2001 and December 30, 2000 and the related
consolidated statements of income, cash flows and comprehensive income and stockholders' investment for each of the three years in the period ended December 29, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of VIASYS Healthcare Inc. and subsidiaries
as of December 29, 2001 and December 30, 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2001 in
conformity with accounting principals generally accepted in the United States

|                                                                                                                                                           |  |  | Arthur Andersen LLP
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -------------------
|Philadelphia, Pennsylvania
February 6, 2002 (except with respect to the matter discussed in paragraph 3 of Note 8, as to which the date is March 15, 2002) |  |  |                    

F-1

---



VIASYS HEALTHCARE INC.        CONSOLIDATED BALANCE SHEETS

|                                                        |                                                                                                      | 2001 |         | 2000    |  
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---- | ------- | ------- | -
|
|ASSETS                                                  |                                                                                                     
|Current Assets:                                         |                                                                                                      |      |         |         |  
|                                                        | Cash and cash equivalents                                                                            |      | $       | 14,968  |  
|                                                        | Advance to affiliate                                                                                 |      |         |        |  
|                                                        | Accounts receivable, less allowances of $7,365 and $6,913                                            |      |         | 78,210  |  
|                                                        | Inventories                                                                                          |      |         | 74,986  |  
|                                                        | Deferred tax asset (Note 5)                                                                          |      |         | 17,409  |  
|                                                        | Prepaid expenses                                                                                     |      |         | 4,543   |  
|                                                        | Due from parent company and affiliated companies, net                                                |      |         |        |  
|                                                        |                                                                                                      |      |         |         |  
|                                                        |                                                                                                      |      | 190,116 |         |  
|                                                        |                                                                                                      |      |         |         |  
|Property, Plant and Equipment, at Cost, Net             |                                                                                                      |      | 30,070  |         |  
|                                                        |                                                                                                      |      |         |         |  
|Other Assets                                            |                                                                                                      |      | 7,557   |         |  
|                                                        |                                                                                                      |      |         |         |  
|Goodwill, Net (Note 2)                                  |                                                                                                      |      | 177,532 |         |  
|                                                        |                                                                                                      |      |         |         |  
|                                                        |                                                                                                      | $    | 405,275 |         | $
|                                                        |                                                                                                      |      |         |         |  
|LIABILITIES AND STOCKHOLDERS' INVESTMENT                |                                                                                                     
|Current Liabilities:                                    |                                                                                                      |      |         |         |  
|                                                        | Advance from affiliate (Note 2)                                                                      |      | $       |        |  
|                                                        | Notes payable (Note 7)                                                                               |      |         | 33,357  |  
|                                                        | Accounts payable                                                                                     |      |         | 20,656  |  
|                                                        | Accrued payroll and employee benefits                                                                |      |         | 13,527  |  
|                                                        | Deferred revenue                                                                                     |      |         | 8,426   |  
|                                                        | Accrued installation and warranty costs                                                              |      |         | 4,590   |  
|                                                        | Accrued commissions                                                                                  |      |         | 4,316   |  
|                                                        | Other accrued expenses                                                                               |      |         | 15,725  |  
|                                                        |                                                                                                      |      |         |         |  
|                                                        |                                                                                                      |      | 100,597 |         |  
|                                                        |                                                                                                      |      |         |         |  
|Deferred Income Taxes and Other Deferred Items (Note 5) |                                                                                                      |      | 5,010   |         |  
|                                                        |                                                                                                      |      |         |         |  
|Commitments and Contingency (Notes 8 and 11)            |                                                                                                      |      |         |         |  
|Stockholders' Investment (Notes 2, 4 and 9):            |                                                                                                      |      |         |         |  
|                                                        | Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued                            |      |         |        |  
|                                                        | Common stock, $.01 par value, 100,000,000 shares authorized; 26,037,362 and 26,000,000 shares issued |      |         | 260     |  
|                                                        | Capital in excess of par value                                                                       |      |         | 263,171 |  
|                                                        | Retained earnings                                                                                    |      |         | 39,259  |  
|                                                        | Deferred compensation                                                                                |      |         | (158    | )
|                                                        | Accumulated other comprehensive items                                                                |      |         | (2,864  | )
|                                                        |                                                                                                      |      |         |         |  
|                                                        |                                                                                                      |      | 299,668 |         |  
|                                                        |                                                                                                      |      |         |         |  
|                                                        |                                                                                                      | $    | 405,275 |         | $
|                                                        |                                                                                                      |      |         |         |  

The
accompanying notes are an integral part of these consolidated financial statements.

F-2

---



VIASYS HEALTHCARE INC.        CONSOLIDATED STATEMENTS OF INCOME

|                                                               |                                                        | 2001 |         | 2000    |   | 1999    |        
|-------------------------------------------------------------- | ------------------------------------------------------ | ---- | ------- | ------- | - | ------- | -------
|
|Revenues (Notes 3 and 11)                                      |                                                        | $    | 358,433 |         | $ | 345,428 |        
|                                                               |                                                        |      |         |         |   |         |        
|Costs and Operating Expenses:                                  |                                                        |      |         |         |   |         |        
|                                                               | Cost of revenues                                       |      |         | 187,428 |   |         | 179,644
|                                                               | Selling, general and administrative expenses (Note 11) |      |         | 107,000 |   |         | 102,902
|                                                               | Research and development expenses                      |      |         | 28,410  |   |         | 24,791 
|                                                               | Restructuring and other unusual costs (Note 10)        |      |         | 5,833   |   |         | 1,964  
|                                                               |                                                        |      |         |         |   |         |        
|                                                               |                                                        |      | 328,671 |         |   | 309,301 |        
|                                                               |                                                        |      |         |         |   |         |        
|Operating Income                                               |                                                        |      | 29,762  |         |   | 36,127  |        
|Interest Income                                                |                                                        |      | 304     |         |   | 106     |        
|Interest Expense                                               |                                                        |      | (2,002  | )       |   | (2,066  | )      
|Other Income (Expense), Net                                    |                                                        |      | (45     | )       |   | (393    | )      
|                                                               |                                                        |      |         |         |   |         |        
|Income Before Provision for Income Taxes and Minority Interest |                                                        |      | 28,019  |         |   | 33,774  |        
|Provision for Income Taxes (Note 5)                            |                                                        |      | (11,757 | )       |   | (14,690 | )      
|Minority Interest Expense (Note 2)                             |                                                        |      |        |         |   | (191    | )      
|                                                               |                                                        |      |         |         |   |         |        
|Net Income                                                     |                                                        | $    | 16,262  |         | $ | 18,893  |        
|                                                               |                                                        |      |         |         |   |         |        
|Earnings per Share (Note 6):                                   |                                                        |      |         |         |   |         |        
|                                                               | Basic                                                  |      | $       | .63     |   | $       | .73    
|                                                               |                                                        |      |         |         |   |         |        
|                                                               | Diluted                                                |      | $       | .62     |   | $       | .73    
|                                                               |                                                        |      |         |         |   |         |        
|Weighted Average Shares Outstanding (Notes 6 and 9):           |                                                        |      |         |         |   |         |        
|                                                               | Basic                                                  |      |         | 26,002  |   |         | 26,000 
|                                                               |                                                        |      |         |         |   |         |        
|                                                               | Diluted                                                |      |         | 26,076  |   |         | 26,000 
|                                                               |                                                        |      |         |         |   |         |        

The
accompanying notes are an integral part of these consolidated financial statements.

F-3

---



VIASYS HEALTHCARE INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                                   | 2001                                                                |                           | 2000                                      |        | 1999    |        
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------- | ----------------------------------------- | ------ | ------- | -------
|
|Operating Activities:                             |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Net income                                                                        |                                                                     | $                         | 16,262                                    |        | $       | 18,893 
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                     |                           |                                           |        |         |        
|                                                  |                                                                                   | Depreciation and amortization                                       |                           |                                           | 14,965 |         |        
|                                                  |                                                                                   | Provision for losses on accounts receivable                         |                           |                                           | 1,758  |         |        
|                                                  |                                                                                   | Minority interest expense                                           |                           |                                           |       |         |        
|                                                  |                                                                                   | Change in deferred taxes                                            |                           |                                           | (283   | )       |        
|                                                  |                                                                                   | Other noncash items                                                 |                           |                                           | (316   | )       |        
|                                                  |                                                                                   | Changes in current accounts, excluding the effects of acquisitions: |                           |                                           |        |         |        
|                                                  |                                                                                   |                                                                     | Accounts receivable       |                                           |        | (13,525 | )      
|                                                  |                                                                                   |                                                                     | Inventories               |                                           |        | (6,209  | )      
|                                                  |                                                                                   |                                                                     | Other current assets      |                                           |        | (2,229  | )      
|                                                  |                                                                                   |                                                                     | Accounts payable          |                                           |        | 2,449   |        
|                                                  |                                                                                   |                                                                     | Other current liabilities |                                           |        | 4,855   |        
|                                                  |                                                                                   | Other                                                               |                           |                                           | 891    |         |        
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  |                                                                                   |                                                                     |                           | Net cash provided by operating activities |        |         | 18,618 
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Investing Activities:                             |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Acquisition, net of cash acquired (Note 2)                                        |                                                                     |                           |                                          |        |         |       
|                                                  | Purchases of property, plant and equipment                                        |                                                                     |                           | (11,003                                   | )      |         | (7,540 
|                                                  | Proceeds from sale of property, plant and equipment                               |                                                                     |                           | 1,955                                     |        |         | 417    
|                                                  | Advances from (to) affiliate                                                      |                                                                     |                           | 1,517                                     |        |         | (1,385 
|                                                  | Increase in other assets                                                          |                                                                     |                           |                                          |        |         | (279   
|                                                  | Other                                                                             |                                                                     |                           |                                          |        |         |       
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  |                                                                                   |                                                                     |                           | Net cash used in investing activities     |        |         | (7,531 
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Financing Activities:                             |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Proceeds from issuance of short-term obligations to affiliated companies (Note 2) |                                                                     |                           |                                          |        |         |       
|                                                  | Repayment of long-term obligations (Note 8)                                       |                                                                     |                           |                                          |        |         |       
|                                                  | Repayment of notes payable (Note 2)                                               |                                                                     |                           |                                          |        |         |       
|                                                  | Net proceeds from issuance of Company and subsidiary common stock                 |                                                                     |                           | 283                                       |        |         |       
|                                                  | Capital contribution from parent company                                          |                                                                     |                           | 581                                       |        |         |       
|                                                  | Net transfer to parent company                                                    |                                                                     |                           | (1,582                                    | )      |         | (10,919
|                                                  | Increase (decrease) in short-term borrowings                                      |                                                                     |                           | (7,722                                    | )      |         | 2,541  
|                                                  | Other                                                                             |                                                                     |                           | 127                                       |        |         |       
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  |                                                                                   |                                                                     |                           | Net cash used in financing activities     |        |         | (8,313 
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Exchange Rate Effect on Cash and Cash Equivalents |                                                                                   |                                                                     | (417                      | )                                         |        | (941    | )      
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Increase in Cash and Cash Equivalents             |                                                                                   |                                                                     | 2,357                     |                                           |        | 9,599   |        
|Cash and Cash Equivalents at Beginning of Year    |                                                                                   |                                                                     | 12,611                    |                                           |        | 3,012   |        
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Cash and Cash Equivalents at End of Year          |                                                                                   | $                                                                   | 14,968                    |                                           | $      | 12,611  |        
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|Cash Paid For:                                    |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Interest                                                                          |                                                                     | $                         | 2,365                                     |        | $       | 1,822  
|                                                  | Income taxes                                                                      |                                                                     | $                         | 8,898                                     |        | $       | 15,931 
|Noncash Activities (Note 2):                      |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Fair value of assets of acquired company                                          |                                                                     | $                         |                                          |        | $       |       
|                                                  | Cash paid for acquired company                                                    |                                                                     |                           |                                          |        |         |       
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  |                                                                                   | Liabilities assumed of acquired company                             |                           | $                                         |       |         | $      
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        
|                                                  | Transfer of acquired minority interest in subsidiaries from parent company        |                                                                     | $                         |                                          |        | $       | 22,188 
|                                                  |                                                                                   |                                                                     |                           |                                           |        |         |        

The accompanying notes are an integral part of these consolidated financial statements.

F-4

---



VIASYS HEALTHCARE INC.        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  AND STOCKHOLDERS' INVESTMENT

|                                       |                                                                                     | 2001 |         | 2000    |   | 1999    |        
|-------------------------------------- | ----------------------------------------------------------------------------------- | ---- | ------- | ------- | - | ------- | -------
|
|Comprehensive Income:                  |                                                                                     |      |         |         |   |         |        
|                                       | Net Income                                                                          |      | $       | 16,262  |   | $       | 18,893 
|                                       |                                                                                     |      |         |         |   |         |        
|Other Comprehensive Items:             |                                                                                     |      |         |         |   |         |        
|                                       | Foreign currency translation adjustment                                             |      |         | (1,420  | ) |         | (103   
|                                       |                                                                                     |      |         |         |   |         |        
|                                       |                                                                                     | $    | 14,842  |         | $ | 18,790  |        
|                                       |                                                                                     |      |         |         |   |         |        
|Stockholders' Investment:              |                                                                                     |      |         |         |   |         |        
|Common Stock, $.01 Par Value:          |                                                                                     |      |         |         |   |         |        
|                                       | Balance at beginning and end of year                                                |      | $       | 260     |   | $       | 260    
|                                       |                                                                                     |      |         |         |   |         |        
|Capital in Excess of Par Value:        |                                                                                     |      |         |         |   |         |        
|                                       | Balance at beginning of year                                                        |      |         | 262,095 |   |         | 239,907
|                                       | Transfer of acquired minority interest in subsidiaries from parent company (Note 2) |      |         |        |   |         | 22,188 
|                                       | Capital contribution from parent company                                            |      |         | 581     |   |         |       
|                                       | Activity under employees' and directors' stock plans                                |      |         | 464     |   |         |       
|                                       | Tax benefit related to employees' and directors' stock plans                        |      |         | 31      |   |         |       
|                                       |                                                                                     |      |         |         |   |         |        
|                                       | Balance at end of year                                                              |      |         | 263,171 |   |         | 262,095
|                                       |                                                                                     |      |         |         |   |         |        
|Retained Earnings:                     |                                                                                     |      |         |         |   |         |        
|                                       | Balance at beginning of year                                                        |      |         | 24,579  |   |         | 16,605 
|                                       | Net income                                                                          |      |         | 16,262  |   |         | 18,893 
|                                       | Net transfer to parent company                                                      |      |         | (1,582  | ) |         | (10,919
|                                       |                                                                                     |      |         |         |   |         |        
|                                       | Balance at end of year                                                              |      |         | 39,259  |   |         | 24,579 
|                                       |                                                                                     |      |         |         |   |         |        
|Deferred Compensation (Note 4):        |                                                                                     |      |         |         |   |         |        
|                                       | Balance at beginning of year                                                        |      |         |        |   |         |       
|                                       | Conversion of parent restricted stock to Company restricted stock                   |      |         | (212    | ) |         |       
|                                       | Amortization of deferred compensation                                               |      |         | 54      |   |         |       
|                                       |                                                                                     |      |         |         |   |         |        
|                                       | Balance at end of year                                                              |      |         | (158    | ) |         |       
|                                       |                                                                                     |      |         |         |   |         |        
|Accumulated Other Comprehensive Items: |                                                                                     |      |         |         |   |         |        
|                                       | Balance at beginning of year                                                        |      |         | (1,444  | ) |         | (1,341 
|                                       | Other comprehensive items, net                                                      |      |         | (1,420  | ) |         | (103   
|                                       |                                                                                     |      |         |         |   |         |        
|                                       | Balance at end of year                                                              |      |         | (2,864  | ) |         | (1,444 
|                                       |                                                                                     |      |         |         |   |         |        
|                                       |                                                                                     | $    | 299,668 |         | $ | 285,490 |        
|                                       |                                                                                     |      |         |         |   |         |        

The
accompanying notes are an integral part of these consolidated financial statements.

F-5

---



VIASYS HEALTHCARE INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

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

Relationship with Thermo Electron Corporation

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. ("Nicolet Biomedical"), Bird Medical Technologies, Inc. ("Bird Medical Technologies"), SensorMedics Corporation ("SensorMedics"), Medical Data Electronics, Inc.
("Medical Data Electronics") and Bear Medical Systems Inc. ("Bear Medical Systems") subsidiaries to the Company. In September 2000, Thermo Electron contributed its MWW, Corpak LLC
("Corpak") and Tecomet Inc. ("Tecomet") subsidiaries and substantially all of the assets and liabilities of its Thermedics Polymer Products division to the Company. The transfers of these
businesses from Thermo Electron were recorded at historical cost.

On
January 31, 2000, Thermo Electron announced that, as a part of a major reorganization plan, it planned to spin off its equity interest in the Company as a dividend to Thermo
Electron Stockholders. Also in January 2001, Thermo Biomedical Inc. changed its name to VIASYS Healthcare Inc. In February 2001, Thermo Electron received a favorable ruling
from the Internal Revenue Service regarding the spin off. On October 10, 2001, the Thermo Electron board of directors declared a dividend of all of its equity interest in the Company. The
dividend was distributed on November 15, 2001 (the "Spinoff Date") 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.

The
accompanying financial statements include the assets, liabilities, income and expenses of the businesses described above from the dates they were first included in Thermo Electron's
consolidated financial statements. The accompanying financial statements do not include Thermo Electron's general corporate debt, which is used to finance operations of all of its respective business
segments, or an allocation of Thermo Electron's interest expense for any period in which the Company was a subsidiary of Thermo Electron. The Company has had positive cash flows from operations for
all periods presented.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated.

Fiscal Year

The Company has adopted a fiscal year ending the Saturday nearest December 31. References to 2001, 2000 and 1999 are for the fiscal years ended
December 29, 2001, December 30, 2000 and January 1, 2000, respectively.

F-6

---

Revenue Recognition

When complex installation is required, revenue is recognized upon completion of installation. In all other situations the Company recognizes revenue when title is
transferred and there are no further customer obligations.

During
the fourth quarter of 2000, effective as of January 2, 2000, the Company adopted Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements." Under SAB No. 101, revenues for products that require installation for which the installation 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. As the Company's revenues were not materially affected by the adoption of SAB No. 101, the
Company recorded no cumulative effect of the change in accounting principle for periods prior to 2000.

The
Company recognizes service contract revenues ratably over the term of the contract.

The
Company provides a reserve for its estimate of installation and warranty costs at the time of shipment and records the charge to cost of revenue. The amount recorded is the Company's
estimate of the amounts necessary to settle existing and future claims as of the balance sheet date.

Allowance for Doubtful Accounts

The Company also provides an allowance for doubtful accounts for customer returns and estimated losses resulting from the inability of our customers to make
required payments. Any current year charges are recorded in selling, general and administrative expense.

Software Development Costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until technological feasibility has been established and thereafter, amounts are capitalized. Capitalized computer software
development costs totaled $1,027,000 at December 29, 2001. Amortization of capitalized computer software development costs totaled $610,000 in 2001. No amortization was recorded in 2000 or
1999.

Stock-Based Compensation Plans

The Company applies Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for stock-based compensation plans (Note 4). Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. During 2000,
Financial Accounting Standards Board Interpretation ("FIN")
No. 44, "Accounting for Certain Transactions Involving Stock Compensation: an Interpretation of APB Opinion No. 25," was released. The Company's financial statements were not materially
affected by FIN No. 44.

F-7

---

Income Taxes

Through the Spinoff Date, the Company and Thermo Electron had a tax allocation agreement under which the Company was included in Thermo Electron's consolidated
federal and certain state income tax returns. The agreement provided that in years in which the Company had taxable income, it would pay to Thermo Electron amounts comparable to the taxes the Company
would have paid if it had filed separate tax returns. Subsequent to the Spinoff Date, the Company files its own tax returns.

In
accordance with SFAS No. 109, "Accounting for Income Taxes," the Company recognizes deferred income taxes based on the expected future tax consequences of differences between
the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax
return.

Cash and Cash Equivalents

Through the Spinoff Date, the Company's cash receipts and disbursements were combined with other Thermo Electron corporate cash transactions. The Company's cash
and cash equivalents include investments in interest-bearing accounts of the Company's foreign subsidiaries, which have an original maturity of three months or less. Cash equivalents are carried at
cost, which approximates market value. Cash transfers between the Company and Thermo Electron appear in the accompanying statements of cash flows and of comprehensive income and Stockholder's
investment as "Net transfer to parent company."

The
following table presents the cash flows between the Company and Thermo Electron through the Spinoff Date:

|                             |                                                                    | Retained
Earnings |        | Average
Balance
|---------------------------- | ------------------------------------------------------------------ | ----------------- | ------ | ---------------
|
|Balance at January 2, 1999   |                                                                    | $                 | 9,840  |                
|                             | Net income                                                         |                   |        | 28,850         
|                             | Corporate service fee payment                                      |                   |        | (2,868         
|                             | Tax allocation payment to parent company                           |                   |        | (21,000        
|                             | Other cash transfers from parent company                           |                   |        | 1,783          
|                             |                                                                    |                   |        |                
|Balance at January 1, 2000   |                                                                    |                   | 16,605 |                
|                             | Net income                                                         |                   |        | 18,893         
|                             | Corporate service fee payment                                      |                   |        | (2,763         
|                             | Tax allocation payment to parent company                           |                   |        | (15,931        
|                             | Other cash transfers from parent company                           |                   |        | 7,775          
|                             |                                                                    |                   |        |                
|Balance at December 30, 2000 |                                                                    |                   | 24,579 |                
|                             | Net income through November 15, 2001                               |                   |        | 13,026         
|                             | Corporate service fee payment through November 15, 2001            |                   |        | (2,057         
|                             | Tax allocation payment to parent company through November 15, 2001 |                   |        | (8,898         
|                             | Other cash transfers from parent company through November 15, 2001 |                   |        | 9,373          
|                             |                                                                    |                   |        |                
|Balance at November 15, 2001 |                                                                    | $                 | 36,023 |                
|                             |                                                                    |                   |        |                

F-8

---

Advance to/from Affiliate

Through the Spinoff Date certain of the Company's European-based subsidiaries participated in a cash management arrangement with a wholly-owned subsidiary of
Thermo Electron. Under this arrangement, amounts advanced to/from the wholly-owned subsidiary of Thermo Electron by the Company's European-based subsidiaries would bear interest based on Euro market
rates. At December 30, 2000, there was $4,193,000 outstanding under this agreement. The Company also had access to a $1,770,000 line of credit from such wholly-owned subsidiary of Thermo
Electron. Under the line of credit, which was available through Spinoff Date, the Company could borrow on a demand basis amounts bearing interest based on Euro market rates. No borrowings were
outstanding under this arrangement at the Spinoff Date or at December 30, 2000. In addition, as described more fully in Note 2, the Company had acquisition funding outstanding at
December 30, 2000 in the amount of $36,658,000.

Inventories

Inventories are stated at the lower of cost (on a first-in, first-out or weighted-average basis) or net realizable value and include
materials, labor and manufacturing overhead. The components of inventories are as follows:

2001

2000(In thousands)Raw Materials

$
39,173

$
36,518Work in Progress


9,550


11,695Finished Goods


26,263


21,778$
74,986

$
69,991


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

Property, Plant and Equipment

The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The Company provides for depreciation
and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings, 20 to 30 years; machinery and equipment, 2 to 12 years;
and leasehold improvements, the shorter of the term of the lease or the life of the asset. Depreciation was $7,765,000, $7,591,000 and $7,715,000 for 2001, 2000 and 1999, respectively.

F-9

---

Property,
plant and equipment consists of the following:

2001

2000(In thousands)Land

$
2,218

$
2,218Buildings


8,125


8,125Machinery and Equipment


68,839


62,389Leasehold Improvements


9,532


8,59288,714


81,324Less: Accumulated Depreciation and Amortization


58,644


53,443$
30,070

$
27,881


Other Assets

Other assets in the accompanying balance sheets include the cost of acquired patents and trademarks. These assets are being amortized using the
straight-line method over their estimated useful lives, which range from 3 to 17 years. These assets were $5,188,000 and $6,614,000, net of accumulated amortization of $10,397,000
and $9,015,000, at year-end 2001 and 2000, respectively.

Goodwill

Goodwill was amortized using the straight-line method over 40 years through year-end 2001. Accumulated amortization was $30,523,000
and $25,322,000 at year-end 2001 and 2000, respectively. The Company assesses the future useful life of this and other non-current assets whenever events or changes in
circumstances indicate that the current useful life has diminished. Such events or circumstances generally include the occurrence of operating losses or a significant decline in earnings associated
with the acquired business or asset. The Company considers the future undiscounted cash flows of the related assets in assessing the recoverability of these assets. The Company assesses cash flows
before interest charges and when impairment is indicated, writes the asset down to fair value. If quoted market values are not available, the Company estimates fair value by calculating the present
value of estimated future cash flows. If impairment has occurred, any excess of carrying value over fair value is recorded as a loss.

In
July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." The Company will adopt the requirements of SFAS
No. 142 effective December 30, 2001. SFAS No. 142 requires companies to stop amortizing goodwill and other intangible assets deemed to have an indefinite life. SFAS No. 142
also requires companies to annually test goodwill for impairment and to perform an initial test in the year of adoption. The Company has completed this test and determined that there is no impairment
of goodwill. Amortization of goodwill was $5,201,000, $4,963,000 and $4,710,000 in 2001, 2000 and 1999 was, respectively.

Foreign Currency

All assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates and revenues and expenses are translated at
average exchange rates for the year, in accordance with SFAS No. 52, "Foreign Currency Translation." Resulting translation adjustments are reflected as a

F-10

---

separate component of Stockholder's investment titled "Accumulated other comprehensive items." Foreign currency transaction gains and losses are included in the accompanying consolidated statements
of income and are not material for each of the three years presented.

Comprehensive Income

Comprehensive income combines net income and "other comprehensive items, net" which represents foreign currency translation adjustments, reported as a component
of Stockholder's investment in the accompanying balance sheet. At year-end 2001 and 2000, the balance of other comprehensive items represents the Company's cumulative translation
adjustment.

Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and cash equivalents, advance to affiliate, accounts receivable, due from parent company and affiliated
companies, advance from affiliate, notes payable and current maturities of long-term obligations and accounts payable. Their respective carrying amounts in the accompanying balance sheet
approximate fair value due to their short-term nature.

During
1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, requires that all derivatives, including
foreign currency exchange contracts, be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges must be recorded through earnings. If a derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The adoption of SFAS No. 133 in the first quarter of 2001 did not materially affect the Company's financial
statements.

Recent Accounting Pronouncement

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." The Company will adopt
SFAS No. 144 effective December 30, 2001, and does not expect a material effect from adoption.

Use of Estimates

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

Classification

Certain prior year amounts have been reclassified to conform to current year presentation.

F-11

---

2. Acquisition

In July 1999, Thermedics Inc. ("Thermedics"), then a majority-owned subsidiary of Thermo Electron, through its wholly-owned subsidiary, MWW,
acquired Erich Jaeger, GmbH ("Erich Jaeger"), a medical products company based in Germany, for $30,479,000 in cash, including the repayment of certain of Erich Jaeger's indebtedness and the assumption
of $13,401,000 of Erich Jaeger's indebtedness. Erich Jaeger develops and manufactures equipment for lung-function, cardio-respiratory and sleep-disorder diagnosis and monitoring. MWW
financed this acquisition with $30,479,000 of short-term borrowings from a wholly-owned subsidiary of Thermo Electron, which were due on demand and bore interest at prevailing German
market rates, set at the beginning of each month. The interest rate at January 1, 2000, was 3.95%. MWW was subsequently contributed by Thermo Electron to the Company. Of the indebtedness
assumed, the Company refinanced $9,692,000 with additional borrowings from the wholly-owned subsidiary of Thermo Electron and repaid the balance in May 2000. This balance totaled $3,290,000 as
of January 1, 2000, and bore interest at 5.96%. Of the total borrowings from Thermo Electron of $40,171,000 for the acquisition of Erich Jaeger and payment of its indebtedness, $36,658,000 is
included in advance from affiliate in the accompanying 2000 Consolidated Balance Sheet. Indebtedness of the Company to Thermo Electron outstanding as of the Spinoff Date was converted to an unsecured
promissory note that will mature in November 2002 (Note 7).

On
June 30, 2000, Thermo Electron completed a transaction through which it acquired shares representing the minority interest in Thermedics. Goodwill of $12,775,000 arose in this
transaction related to Thermedics' minority Stockholders' ownership of MWW, Corpak and Thermedics Polymer Products. This amount became part of the historical cost of these businesses as of
June 30, 2000. As part of this transaction, the Company's minority interest liability related to these subsidiaries of $9,413,000 was discharged. Subsequent to this date, there are no minority
interests in any of the Company's subsidiaries.

The
acquisition of Erich Jaeger has been accounted for using the purchase method of accounting and Erich Jaeger's results of operations have been included in the accompanying financial
statements from the date of acquisition. The aggregate cost of Erich Jaeger exceeded the estimated fair value of the acquired net assets by $28,169,000, which was amortized over 40 years
through year-end 2001. Allocation of the purchase price for this acquisition was based on an estimate of the fair value of the net assets acquired.

In
connection with the acquisition of Erich Jaeger, the Company has undertaken certain restructuring activities. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement ("EITF") 95-3 "Recognition of Liabilities in Connection with Purchase Business Combination," primarily have included reductions in
staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of the acquisitions, the Company established reserves as detailed
below, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalized its restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet.

F-12

---

A
summary of the changes in accrued acquisition expenses for Erich Jaeger is as follows:

|                             |                                                           | Severance |       | Abandonment
of Excess
Facilities |   | Other |      | Total |    
|---------------------------- | --------------------------------------------------------- | --------- | ----- | -------------------------------- | - | ----- | ---- | ----- | ---
|
|                             | Reserves established                                      |           | $     | 2,335                            |   | $     | 680  |       | $  
|                             | Currency translation                                      |           |       | (146                             | ) |       | (42  | )     |    
|                             |                                                           |           |       |                                  |   |       |      |       |    
|Balance at January 1, 2000   |                                                           |           | 2,189 |                                  |   | 638   |      |       | 404
|                             | Reserves established                                      |           |       | 237                              |   |       |     |       |    
|                             | Payments                                                  |           |       | (1,767                           | ) |       | (43  | )     |    
|                             | (Decrease)/increase recorded as an adjustment to goodwill |           |       | 9                                |   |       | (480 | )     |    
|                             | Currency translation                                      |           |       | (167                             | ) |       | (47  | )     |    
|                             |                                                           |           |       |                                  |   |       |      |       |    
|Balance at December 30, 2000 |                                                           |           | 501   |                                  |   | 68    |      |       | 57 
|                             | Payments                                                  |           |       | (276                             | ) |       |     |       |    
|                             | Currency translation                                      |           |       | (28                              | ) |       | (4   | )     |    
|                             |                                                           |           |       |                                  |   |       |      |       |    
|Balance at December 29, 2001 |                                                           | $         | 197   |                                  | $ | 64    |      | $     | 54 
|                             |                                                           |           |       |                                  |   |       |      |       |    

The
Company restructured the business of Erich Jaeger to reduce costs and promote operational efficiencies. The restructuring actions eliminated redundant functions and excess capacity
in geographical regions where the Company has operations in addition to those of Erich Jaeger. Actions completed in the first half of 2000 included consolidation of Erich Jaeger's U.S. sales and
service function with other Respiratory Care segment operations in the U.S. and the closure of Erich Jaeger's Ohio sales and service office. In addition, Erich Jaeger's assembly and sales and service
facility in the Netherlands was closed and consolidated with existing Respiratory Care segment facilities in the Netherlands and Germany. The principal accrued acquisition expenses for Erich Jaeger
consisted of
severance for 36 employees across all functions and the abandonment of operating facilities in the United States and the Netherlands with original lease terms through 2003. The amounts captioned as
other primarily represent employee relocation costs. The Company negotiated a favorable settlement of lease commitments during 2000 and completed certain employee relocations at less than the amount
originally estimated. As a result, $599,000 of accrued acquisition expenses were reversed to goodwill in 2000. Severance and other costs will primarily be paid through 2002. No unresolved matters
remained at December 30, 2000, related to the restructuring plans for Erich Jaeger.

3. Business Segment Information, Geographic Information and Concentrations of Risk

Business Segment Information

The Company's businesses operate in three segments: Respiratory Care, Neurocare and Medical and Surgical Products. The Respiratory Care segment develops,
manufactures and markets a variety of medical devices for the diagnosis and treatment of respiratory-related disorders. The Neurocare segment principally develops, manufactures and markets a
comprehensive line of neurodiagnostic, vascular and audiology systems. The Medical and Surgical Products segment develops, manufactures and markets critical care disposable devices, a line of wireless
patient monitoring systems, specialty products and materials for sale to original equipment manufacturers. In classifying operations into a

F-13

---

particular segment the Company aggregates businesses with similar economic characteristics, products and services, production processes, customers and methods of distribution.

|                                                                |                                  | 2001 |         | 2000    |   | 1999    |        
|--------------------------------------------------------------- | -------------------------------- | ---- | ------- | ------- | - | ------- | -------
|
|Revenues:                                                       |                                  |      |         |         |   |         |        
|                                                                | Respiratory Care                 |      | $       | 184,357 |   | $       | 172,553
|                                                                | Neurocare                        |      |         | 86,161  |   |         | 90,902 
|                                                                | Medical and Surgical Products    |      |         | 87,915  |   |         | 81,973 
|                                                                |                                  |      |         |         |   |         |        
|                                                                |                                  | $    | 358,433 |         | $ | 345,428 |        
|                                                                |                                  |      |         |         |   |         |        
|Income Before Provision for Income Taxes and Minority Interest: |                                  |      |         |         |   |         |        
|                                                                | Respiratory Care(a)              |      | $       | 19,828  |   | $       | 17,642 
|                                                                | Neurocare(b)                     |      |         | 1,698   |   |         | 7,362  
|                                                                | Medical and Surgical Products(c) |      |         | 13,790  |   |         | 11,883 
|                                                                | Corporate(d)                     |      |         | (5,554  | ) |         | (760   
|                                                                |                                  |      |         |         |   |         |        
|                                                                | Operating Income                 |      |         | 29,762  |   |         | 36,127 
|                                                                | Interest and Other Expense, Net  |      |         | (1,743  | ) |         | (2,353 
|                                                                |                                  |      |         |         |   |         |        
|                                                                |                                  | $    | 28,019  |         | $ | 33,774  |        
|                                                                |                                  |      |         |         |   |         |        
|Total Assets:                                                   |                                  |      |         |         |   |         |        
|                                                                | Respiratory Care                 |      | $       | 201,212 |   | $       | 196,074
|                                                                | Neurocare                        |      |         | 103,918 |   |         | 104,308
|                                                                | Medical and Surgical Products    |      |         | 83,990  |   |         | 84,538 
|                                                                | Corporate(e)                     |      |         | 16,155  |   |         | 5,431  
|                                                                |                                  |      |         |         |   |         |        
|                                                                |                                  | $    | 405,275 |         | $ | 390,351 |        
|                                                                |                                  |      |         |         |   |         |        
|Depreciation and Amortization:                                  |                                  |      |         |         |   |         |        
|                                                                | Respiratory Care                 |      | $       | 7,790   |   | $       | 7,044  
|                                                                | Neurocare                        |      |         | 3,369   |   |         | 3,652  
|                                                                | Medical and Surgical Products    |      |         | 3,773   |   |         | 3,664  
|                                                                | Corporate                        |      |         | 33      |   |         |       
|                                                                |                                  |      |         |         |   |         |        
|                                                                |                                  | $    | 14,965  |         | $ | 14,360  |        
|                                                                |                                  |      |         |         |   |         |        
|Capital Expenditures:                                           |                                  |      |         |         |   |         |        
|                                                                | Respiratory Care                 |      | $       | 5,371   |   | $       | 3,201  
|                                                                | Neurocare                        |      |         | 1,057   |   |         | 2,091  
|                                                                | Medical and Surgical Products    |      |         | 4,031   |   |         | 2,248  
|                                                                | Corporate                        |      |         | 544     |   |         |       
|                                                                |                                  |      |         |         |   |         |        
|                                                                |                                  | $    | 11,003  |         | $ | 7,540   |        
|                                                                |                                  |      |         |         |   |         |        

---

F-14

---

Geographic Information

Export revenues accounted for 24%, 23% and 24% of the Company's total revenues in 2001, 2000 and 1999, respectively. Revenues from countries outside the United
States, based on selling location, accounted for 15%, 12% and 10% of the Company's total revenues in 2001, 2000 and 1999, respectively. Long-lived assets in countries outside the United
States accounted for 10%, 10% and 11% of the Company's long-lived assets at year-end 2001, 2000 and 1999, respectively, and principally consisted of property, plant and
equipment. There was no country outside of the United States in which revenues or long-lived assets exceeded 10% of the Company's total in 2001, 2000 or 1999.

Concentrations of Risk

The Company primarily sells its products to customers in the healthcare industry. The Company does not normally require collateral or other security to support
its accounts receivable. Management does not believe that this concentration of credit risk has, or will have, a significant negative impact on the Company.

F-15

---



4. Employee Benefit Plans

Employee Stock Purchase Program

Substantially all of the Company's full-time employees were eligible to participate in an employee stock purchase program sponsored by Thermo Electron
through October 31, 2001, when the Company's participation ceased. Under this program, shares of Thermo Electron's common stock could be purchased at 85% of the lower of the fair market value
at the beginning or end of the plan year and the shares purchased were subject to a one-year resale restriction. Shares were purchased through payroll deductions of up to 10% of each
participating employee's gross wages.

In
October 2001, the Company adopted an employee stock purchase plan in which substantially all of the Company's full-time U.S. employees will be eligible to
participate in beginning in the second quarter of 2002. Under this program, shares of the Company's common stock may be purchased at 85% of the lower of the fair market value at the beginning or end
of the purchase period and the shares purchased are subject to a one-year resale restriction. Shares are purchased through payroll deductions of up to 10% of each participating employee's
gross wages.

Stock Option Activity

Certain of the Company's employees participated in the stock option plans of Thermo Electron through the Spinoff Date. After the Spinoff Date, outstanding options
of Thermo Electron common stock held by the Company's employees were exchanged for options of the Company's common stock. The intrinsic value of the options exchanged was maintained in accordance with
the methodology set forth in FIN No. 44.

In
September 2001, the Company adopted an equity incentive plan. This plan permits the grant of a variety of stock and stock-based awards as determined by the Company's board of
directors, including restricted stock, stock options, stock bonus shares, or performance-based shares. The Company's officers, employees, directors, consultants and advisors are eligible to receive
awards under the plan. However, incentive stock options may only be granted to the Company's employees. Incentive stock options will have an exercise price of 100% or more of the fair market value of
the Company's common stock on the grant date. Nonstatutory stock options may have an exercise price as low as 85% of the fair market value of the Company's common stock on the grant date.

F-16

---

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

2001Number of Shares

Weighted Average Exercise Price(Shares in thousands)Options Outstanding, Beginning of Year



$
Exchange of Thermo Electron options for Company options

520


13.80Granted

3,365


14.30Exercised

(19
)

13.16Forfeited

(3
)

12.70Options Outstanding, End of Year

3,863

$
13.46Options Exercisable

495

$
13.79Options Available for Grant

798


A
summary of the status of the Company's stock options held by the Company's employees at December 29, 2001, is as follows:

Range of Exercise Prices

Number of Shares

Options Outstanding Weighted Average Remaining Contractual Life

Weighted Average Exercise Price(In thousands)$4.70 - $12.95

372

3.0 years

$
11.2412.96 - 21.20

3,438

6.6 years


14.3421.21 - 29.46

51

4.9 years


26.0529.47 - 99.98

2

6.1 years


99.98$4.70 - $99.98

3,863

6.2 years

$
13.46


Pro Forma Stock-based Compensation Expense

As permitted by SFAS No. 123, "Accounting for Stock-based Compensation," the Company has elected to continue to apply APB No. 25 to account for
stock-based compensation plans.

F-17

---

Had
compensation cost for awards granted after 1994 under stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per share would have been:

2001

2000

1999(In thousands except per share amounts)Net Income:As reported

$
16,262

$
18,893

$
28,850Pro forma


14,290


18,480


27,109Basic Earnings per Share:As reported


.63


.73


1.11Pro forma


.55


.71


1.04Diluted Earnings per Share:As reported


.62


.73


1.11Pro forma


.55


.71


1.04


Because
the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be
representative of the amount
to be expected in future years. Compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are
granted.

The
weighted average fair value per share of Company options granted was $5.30 in 2001. No options were granted in 2000. The weighted average fair value per share of Thermo Electron
options granted was $4.39 in 1999. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

2001

1999Volatility

34
%
31
%Risk-free Interest Rate

4.1
%
5.2
%Expected Life of Options

5.0 years

3.5 yearsDividends






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.

Certain
of the Company's key employees were awarded 32,000 shares of Thermo Electron restricted common stock. The shares had an aggregate value of $1,075,000 at the date of award and
generally vest over 3 years. Following the Spinoff Date, these restricted shares were converted into 18,960 restricted shares of Company common stock with the same terms. The Company is
recognizing the cost of these awards over the vesting period.

F-18

---

401(k) Savings Plans

Effective on the Spinoff Date, substantially all of the Company's employees are eligible to participate in the VIASYS Retirement Savings Plan. Prior to this date
substantially all employees were eligible to participate in the Thermo Electron 401(k) savings plan or a savings plan sponsored by a subsidiary. Contributions to the plans are made by both the
employee and the Company. Company contributions are based upon the level of employee contributions. For these plans, the Company contributed and charged to expense $2,079,000, $1,659,000 and
$1,607,000 in 2001, 2000 and 1999, respectively.

5. Income Taxes

The components of income before provision for income taxes and minority interest are as follows:

2001

2000

1999(In thousands)Domestic

$
25,041

$
30,786

$
46,408Foreign


2,978


2,988


3,704$
28,019

$
33,774

$
50,112


The
components of the provision for income taxes are as follows:

2001

2000

1999(In thousands)Current:Federal

$
8,810

$
11,057

$
16,799State


1,378


2,184


3,306Foreign


1,852


894


1,89312,040


14,135


21,998Deferred:Federal


(146
)

192


(1,195
)State


(92
)

(9
)

(181
)Foreign


(45
)

372


64(283
)

555


(1,312
)$
11,757

$
14,690

$
20,686


F-19

---

The
provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income before
provision for income taxes due to the following:

2001

2000

1999(In thousands)Federal Statutory Rate

$
9,807

$
11,821

$
17,539Increases (Decreases) Resulting From:State income taxes, net of federal tax


836


1,414


2,031Amortization of goodwill


1,127


1,041


1,148Foreign sales corporation benefit


(974
)

(511
)

(1,107
)Foreign tax rate differential and foreign losses not benefited


775


665


555Nondeductible expenses


310


261


511Other


(124
)

(1
)

9$
11,757

$
14,690

$
20,686


Deferred
tax assets and liabilities in the accompanying consolidated balance sheet consist of the following:

2001

2000(In thousands)Deferred Tax Assets (Liabilities):Reserves and accruals

$
6,826

$
6,356Inventory basis difference


5,303


5,470Net operating loss and credit carryforwards


2,978


3,241Accrued compensation


1,845


1,852Depreciation and amortization


(2,039
)

(1,347
)Other, net


755


1,15415,668


16,726Less: Valuation allowance


(2,978
)

(3,241
)$
12,690

$
13,485


The
valuation allowance relates to uncertainty surrounding the realization of U.S. and foreign tax loss and credit carryforwards. At year-end 2001, the Company had U.S. and
foreign net operating loss carryforwards of $8,611,000, which expire at various times over the next 20 years. A provision has not been made for U.S. or additional foreign taxes on $3,612,000 of
undistributed earnings of foreign subsidiaries that could be subject to taxation if remitted to the United States because the Company plans to keep these amounts permanently invested overseas.

F-20

---

6. Earnings per Share

Basic and diluted earnings per share were calculated as follows:

2001

2000

1999(In thousands except per share amounts)Basic:Net Income

$
16,262

$
18,893

$
28,850Weighted Average Shares Outstanding


26,002


26,000


26,000Basic Earnings per Share

$
.63

$
.73

$
1.11Diluted:Net Income

$
16,262

$
18,893

$
28,850Weighted Average Shares Outstanding


26,002


26,000


26,000Effect of Stock Options Outstanding


74





Weighted Average Shares, as Adjusted


26,076


26,000


26,000Diluted Earnings per Share

$
.62

$
.73

$
1.11


7. Short-term Obligations

Notes payable in the accompanying 2001 consolidated balance sheet includes $33,300,000 of outstanding indebtedness to Thermo Electron. This indebtedness is
represented by an unsecured promissory note that bears interest at the prime rate plus 0.5%, (5.25% at December 29, 2001) is payable quarterly and matures in November 2002. In the event
that prior to the maturity of the note the Company receives cash proceeds from a debt financing, the Company must prepay the principal up to the net amount of such proceeds.

8. Commitments and Contingency

Commitments

In addition to the related-party operating leases described in Note 11, the Company leases portions of its office and operating facilities under various
operating lease arrangements. The accompanying consolidated statements of income include expense from these leases of $3,813,000, $5,184,000 and $4,591,000 in 2001, 2000 and 1999, respectively. Future
minimum payments due under these noncancelable operating leases at December 29, 2001, are $8,489,000 in 2002; $7,294,000 in 2003; $6,560,000 in 2004; $2,532,000 in 2005; $1,632,000 in 2006; and
$1,693,000 in 2007 and thereafter. Total future minimum lease payments are $28,200,000.

The
Company has entered into employment arrangements that commenced in the second quarter of 2001 with three principal officers. These agreements expire in the second half of 2004 and
call for aggregate minimum cash compensation of $1,048,000 annually. In addition, under one of the agreements, the Company advanced its chief executive officer $500,000, which will be forgiven ratably
over the four years following execution of the employment agreement, assuming continued employment or in certain other circumstances.

F-21

---



8. Commitments and Contingency (Continued)

Contingency

In July 1999, the Company commenced a lawsuit against a former employee and a related corporation 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 settles all outstanding lawsuits between the companies and related parties. Under the agreement both companies will have access to
certain technologies and rights used in the companies' ventilators and the Company will be paid $4,000,000 in licensing fees over the next three years.

The
Company is involved in various legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and
litigation will not have a material adverse effect on the Company's financial position or results of operations.

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
things, 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.

In
August 2001, the Company effected a stock split through a dividend of approximately 13,332 shares of the Company's common stock for each share of the Company's common stock
then outstanding. In October 2001, the Company effected an approximate one-for-1.54 reverse split of its common stock. All share and per share information in the
accompanying financial statements has been restated to reflect these stock splits.

At
December 29, 2001, the Company had reserved 4,680,000 unissued shares of its common stock for possible issuance under stock-based compensation plans.

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

F-22

---

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.

10. Restructuring and Other Unusual Costs

2000 Plan

The Company recorded restructuring and other unusual costs of $1,964,000 during 2000, including $1,351,000 of employee retention costs in connection with Thermo
Electron's plan to spin off the Company. The retention arrangements were awarded to 23 key employees to help ensure their availability through at least the date of the distribution of the Company's
common shares. The awards totaled approximately $3,000,000, which was accrued ratably through the Spinoff Date, in accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The awards were generally paid upon completion of the distribution.

In
addition, in 2000, the Company recorded cash costs of $613,000 at the Respiratory Care segment. The costs consisted of $346,000 of severance for 54 manufacturing and sales employees,
$222,000 of lease cancellation costs for a facility in Texas that was closed and $45,000 of relocation costs that were incurred in 2000. These charges were incurred to reduce costs in response to a
downturn in sales. The operations of the Texas facility that was closed were consolidated with existing operations in Illinois.

During
2001, the Company recorded an additional $1,868,000 of restructuring and unusual costs associated with the 2000 plan, all of which were cash costs, including $1,601,000 for
employee retention, described above. The remaining costs incurred in 2001 for the plan initiated in 2000, included $252,000 for severance for 13 employees, mostly in sales and service positions, all
of whom were terminated in 2001 and $15,000 of other costs.

2001 Plan

The Company approved and commenced a plan during the third quarter of 2001 to restructure operations in an effort to reduce costs and streamline operations. The
actions include headcount reductions and consolidation of facilities. During 2001, the Company recorded restructuring and other unusual costs of $3,965,000 associated with this plan. Restructuring and
unusual costs consists of cash costs, including $3,697,000 of severance for 154 employees across all functions, $97,000 for abandoned facilities and $171,000 of other costs. Of the employees to be
terminated, 123 had been severed as of December 29, 2001. The actions include closure of the Neurocare segment's operating facility in New Hampshire and consolidation with existing operations
in Wisconsin. In addition, this segment will vacate a sales and service office in France and has appointed a third party distributor. The Respiratory Care segment has closed five sales and service
operations in Germany and Austria and has consolidated

F-23

---

operations in an existing facility in Germany. The Company expects the restructuring actions to be substantially completed by the second quarter of 2002. The Company expects to record $990,000 of
charges in 2002 for costs associated with the 2001 plan that will be recorded in the periods they are incurred.

Subsequent
to year-end, management has committed to an additional plan to restructure operations in the Neurocare segment in an effort to reduce costs and streamline
operations. Estimated costs for this plan are $1,300,000 including severance and facility closure costs. This plan includes the closure of the Neurocare segment's operating facility in Colorado and
its consolidation with existing operations in Wisconsin. The associated costs will be recognized and the cash outlays will occur over the remainder of 2002. In addition, management is considering
further opportunities within its European operations to reduce costs and streamline operations by consolidating facilities and eliminating duplicate functions.

The
following table summarizes accrued restructuring costs, which are included in other accrued expenses in the accompanying balance sheet.

|                             |                          | Severance |       | Employee
Retention |   | Abandoned
Facilities |        | Other |    | Total |  
|---------------------------- | ------------------------ | --------- | ----- | ------------------ | - | -------------------- | ------ | ----- | -- | ----- | -
|
|2000 Restructuring Plan      |                          |           |       |                    |   |                      |        |       |    |       |  
|                             | Costs accrued in 2000(a) |           | $     | 346                |   | $                    | 1,351  |       | $  | 222   |  
|                             | 2000 Payments            |           |       | (346               | ) |                      | (241   | )     |    | (222  | )
|                             |                          |           |       |                    |   |                      |        |       |    |       |  
|Balance at December 30, 2000 |                          |           |      |                    |   | 1,110                |        |       |   |       |  
|                             | Costs accrued in 2001(b) |           |       | 252                |   |                      | 1,601  |       |    |      |  
|                             | 2001 Payments            |           |       | (255               | ) |                      | (2,391 | )     |    |      |  
|                             | Currency translation     |           |       | 3                  |   |                      |       |       |    |      |  
|                             |                          |           |       |                    |   |                      |        |       |    |       |  
|Balance at December 29, 2001 |                          | $         |      |                    | $ | 320                  |        | $     |   |       | $
|                             |                          |           |       |                    |   |                      |        |       |    |       |  
|2001 Restructuring Plan      |                          |           |       |                    |   |                      |        |       |    |       |  
|                             | Costs accrued in 2001(c) |           | $     | 3,697              |   | $                    |       |       | $  | 97    |  
|                             | 2001 Payments            |           |       | (1,462             | ) |                      |       |       |    | (51   | )
|                             | Currency translation     |           |       | (31                | ) |                      |       |       |    |      |  
|                             |                          |           |       |                    |   |                      |        |       |    |       |  
|Balance at December 29, 2001 |                          | $         | 2,204 |                    | $ |                     |        | $     | 46 |       | $
|                             |                          |           |       |                    |   |                      |        |       |    |       |  

---

F-24

---

11. Related-party Transactions

Corporate Services Arrangement

The Company and Thermo Electron were parties to a corporate services arrangement under which Thermo Electron's corporate staff provided certain administrative
services, including certain legal advice and services, risk management, certain employee benefit administration, tax advice and preparation of tax returns, centralized cash management and certain
financial and other services, for which the Company paid Thermo Electron annually an amount equal to 0.8% of the Company's consolidated revenues. Effective April 2001, the fee under this
agreement was reduced to 0.6% through the Spinoff Date. For these services the Company was charged $2,057,000, $2,763,000 and $2,868,000 in 2001, 2000 and 1999, respectively. Management believes that
the service fees charged by Thermo Electron were reasonable and that such fees were representative of the expenses the Company would have incurred on a stand-alone basis. For additional items such as
employee benefit plans, insurance coverage and other identifiable costs, Thermo Electron charged the Company based upon costs attributable to the Company. The corporate services agreement was
terminated as of the Spinoff Date and was replaced by a transition services agreement, discussed below.

Transition Services Agreement

In connection with the spin off, the Company and Thermo Electron entered into a transition services agreement. The agreement provides that Thermo Electron will
continue to provide the Company with certain administrative services until June 29, 2002. The Company will pay a fee under this agreement equal to 0.6%, 0.4% and 0.1% of the Company's
consolidated revenues for the period from November 16, 2001 through December 29, 2001 and for quarters ending March 30, 2002 and June 29, 2002, respectively, plus
out-of-pocket and third party expenses. The Company was charged $271,000 in 2001 for the services provided under this agreement.

Operating Lease

The Company leases office space from an affiliate which is controlled by Thermo Electron under an operating lease arrangement that expires in 2004. The
accompanying statement of income includes expense from this lease of $731,000, $768,000 and $772,000 in 2001, 2000 and 1999, respectively. Future minimum payments due under this noncancelable
operating lease at December 29, 2001, are $751,000 in 2002; $749,000 in 2003; and $756,000 in 2004. Total future minimum lease payments are $2,256,000.

Other Related-party Transactions

The Company provided metal fabrication services to Thermo Cardiosystems Inc., a majority-owned subsidiary of Thermo Electron through February 2001,
when Thermo Cardiosystems was sold. The Company was paid $443,000, $3,283,000 and $3,622,000 in 2001, 2000 and 1999, respectively, for these services.

The
Company sold products resulting in revenues of $49,000, $810,000 and $1,446,000 during 2001, 2000 and 1999, respectively, to affiliates controlled by Thermo Electron.

F-25

---

12. Unaudited Quarterly Information

|2001                |         | First(a) |        | Second(b) |   | Third(c) |     | Fourth(d)
|------------------- | ------- | -------- | ------ | --------- | - | -------- | --- | ---------
|
|Revenues            |         | $        | 88,458 |           | $ | 88,832   |     | $        
|Gross Profit        |         |          | 40,827 |           |   | 42,351   |     |          
|Net Income          |         |          | 3,871  |           |   | 4,369    |     |          
|Earnings per Share: |         |          |        |           |   |          |     |          
|                    | Basic   |          |        | .15       |   |          | .17 |          
|                    | Diluted |          |        | .15       |   |          | .17 |          

|2000                |         | First(e) |        | Second(f) |   | Third(g) |     | Fourth(h)
|------------------- | ------- | -------- | ------ | --------- | - | -------- | --- | ---------
|
|Revenues            |         | $        | 90,958 |           | $ | 85,524   |     | $        
|Gross Profit        |         |          | 44,418 |           |   | 41,717   |     |          
|Net Income          |         |          | 7,413  |           |   | 5,573    |     |          
|Earnings per Share: |         |          |        |           |   |          |     |          
|                    | Basic   |          |        | .29       |   |          | .21 |          
|                    | Diluted |          |        | .29       |   |          | .21 |          

---

Amounts
reflect aggregate restructuring and unusual costs, as follows:



F-26

---



EXHIBIT INDEX

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                        
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2*           |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                                                                             
|3.3*           |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company.                                                                                                                                 
|3.5*           |  | Amended and Restated By-laws of the Company.                                                                                                                                                                                  
|10.1*          |  | Plan and Agreement of Distribution between Thermo Electron Corporation and the Company.                                                                                                                                       
|10.2*          |  | Tax Matters Agreement between Thermo Electron Corporation and the Registrant.                                                                                                                                                 
|10.3*          |  | Transition Services Agreement between Thermo Electron Corporation and the Company.                                                                                                                                            
|10.4*          |  | Rights Agreement between the Rights Agent and the Company.                                                                                                                                                                    
|10.5*          |  | Indemnification Agreement between the Company and its directors and officers.                                                                                                                                                 
|10.6*          |  | Equity Incentive Plan of the Company (maximum number of shares issuable in the aggregate under this plan is 4,680,000 shares, after adjustment to reflect the one-for-1.5384615 reverse stock split effected in October 2001).
|10.7*          |  | Deferred Compensation Plan for Directors of the Company.                                                                                                                                                                      
|10.8*         |  | Employment Agreement dated as of April 2, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                    
|10.9*         |  | Letter Agreement dated as of September 24, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                   
|10.10*        |  | Executive Retention Agreement dated as of April 16, 2001 by and between the Company and Randy H. Thurman.                                                                                                                     
|10.11*         |  | Term Note dated as of April 19, 2001 issued by Randy H. Thurman to the Company.                                                                                                                                               
|10.12*        |  | Employment Agreement dated as of June 8, 2001 by and between the Company and Martin P. Galvan.                                                                                                                                
|10.13*        |  | Executive Retention Agreement dated as of June 11, 2001 by and between the Company and Martin P. Galvan.                                                                                                                      
|10.14*         |  | Promissory Note issued by the Company to Thermo Electron Corporation.                                                                                                                                                         
|10.15*         |  | 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.                                                                        
|10.16*        |  | Form of Executive Retention Agreement by and between the Company, entered into with the following executive officers: Gerald G. Brew, Stephen P. Connelly and William B. Ross.                                                
|10.17**       |  | Employment Agreement dated as of August 27, 2001 by and between the Company and Stephen P. Connelly.                                                                                                                          
|21.1**         |  | Subsidiaries of the Company.                                                                                                                                                                                                  
|23.1**         |  | Independent Auditor's Report on Schedule.                                                                                                                                                                                     
|23.2**         |  | Consent of Independent Public Accountants.                                                                                                                                                                                    
|99.1**         |  | Letter of Arthur Andersen Representations.                                                                                                                                                                                    

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