SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934

|(Mark One) |                                                                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|ý          | Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended January 3, 2004                
|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(State or Other Jurisdiction of Incorporation or Organization) |  | 04-3505871(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- |  | ----------------------------------------------
|227 Washington Street, Suite 200                                       |  | 19428                                         
|Conshohocken, Pennsylvania                                             |  |                                               
|(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: None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least
the past 90 days. Yes ý    No o

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 27, 2003, was approximately $626,000,000
based upon the New York Stock Exchange Composite Tape of $20.95 per common share.

As
of March 5, 2004, the registrant had 30,657,712 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 5, 2004, are incorporated by reference into
Part III of this report. Copies of these documents can be obtained at no cost by calling the company's Investor Relations Department at (610) 862-0799 or by accessing the
investor relations section of the company's website at www.viasyshealthcare.com.



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

Item 1.Business

Overview

We are a healthcare technology company engaged in developing, manufacturing, marketing and servicing a variety of medical devices, instruments and medical and
surgical products for use in the respiratory, critical care, neurocare and medical and surgical product markets. We were incorporated in Delaware in August 1995 as a wholly-owned subsidiary of
Thermo Electron Corporation ("Thermo Electron" or "former parent company"). Our business was formed from the combination of a number
of enterprises separately acquired or originated by Thermo Electron, including Bird Medical Systems, Bear Medical Technologies, SensorMedics and Nicolet Biomedical. On November 15, 2001
("Spin-off Date"), as part of its reorganization plan, Thermo Electron spun off its equity interest in our company by distribution of a dividend to its stockholders of record as of
November 7, 2001. References to our Company for periods before the Spin-off Date are to the combined businesses of our former parent company from which we were formed.

Our
businesses are combined into four segments through which we operate:



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 from continuing operations in 2003 totaled $394.9 million. Revenue, operating income from continuing operations and total assets by segment are set forth in
the Notes to the Consolidated Financial Statements, which are included herein.

Our Strategy

We focus our development and marketing activities on growth segments of the healthcare industry. We seek to capitalize on our research, development and marketing
expertise, as well as our relationships with physicians and other medical caregivers in these markets to expand our business into high-value opportunities, including disposables, therapy
and service-based products. We have augmented our internal research by in-licensing technologies. In addition to new in-licensing opportunities, we are working to enhance and
extend our existing product lines into next-generation products and to develop new products to broaden our existing respiratory technologies, critical care,

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neurocare
and medical and surgical product offerings. Products that we have recently introduced include:



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Principal Businesses and Products

Principal Businesses

Principal Products

Commenced OperationsRespiratory TechnologiesErich Jaeger

Pulmonary function testing and metabolic equipment; sleep diagnostic and therapy equipment

1954SensorMedics

Pulmonary function testing and metabolic equipment; sleep diagnostic and therapy equipment

1983VIASYS Clinical Services

Contract research services used in the investigation of respiratory illness

1998Critical CareBear Medical

Adult, pediatric and infant mechanical ventilators

1972Bird Medical

Adult, pediatric and infant mechanical ventilators

1954EME

Infant nasal CPAP

1978SensorMedics Critical Care

Specialized high frequency oscillatory mechanical ventilators

1983NeuroCareGrason-Stadler

Hearing screening and diagnostic equipment

1949Nicolet Biomedical

Neurodiagnostic equipment

1967Nicolet Vascular

Peripheral vascular diagnostic systems, transcranial Doppler systems, fetal and vascular small Doppler systems

1976Medical and Surgical ProductsCorpak

Disposable enteral access and airway management devices

1980Stackhouse

Surgical barrier control systems

1936Tecomet

Orthopedic and spinal implants,
X-ray grids for mammography and left ventricular assist components

1964


Respiratory Technologies

Our Respiratory Technologies group develops, manufactures, markets and services products for the diagnosis and treatment of respiratory, pulmonary and
sleep-related disorders. These products are used in a variety of settings, from intensive care to homecare, but generally share a common diagnostic focus on breathing and the availability of oxygen
throughout the body. We market our respiratory technology products throughout the world to a variety of customers including hospitals, clinics, private physicians and research centers under the brand
names Erich Jaeger and SensorMedics. Our Respiratory Technologies business is comprised of the following product lines:



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Lung Function Testing Equipment

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

We
market our lung function diagnostic equipment 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 wide range of heart, lung and metabolic functions. Our
principal pulmonary function testing products are:



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

Sleep Diagnostic and Therapeutic Equipment

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

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



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

VIASYS Clinical Services ("VCS")

Our clinical services business provides technology and services including VIAPAD, our proprietary electronic data capture device, to several major pharmaceutical
and biotechnology companies and clinical research organizations. We assist these companies and organizations in the monitoring of subjects in clinical studies which investigate treatments for
respiratory illnesses. VCS provides customers with high quality data during the clinical study, resulting in the need for fewer patients for their clinical studies and accelerated data capture. VCS'
competence is true paperless data collection in

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clinical
trials worldwide and reliable data capture with centralized data management and reporting for diagnostic and home monitoring equipment (including electronic diaries).

We
believe the clinical services market offers significant opportunity for growth within our respiratory technology group, as well as in other areas of our company, such as in our
NeuroCare group.

Critical Care

Our Critical Care group develops, manufactures, markets and services life support products to treat respiratory insufficiency caused by illness, injury or
premature birth. These products are used in a variety of settings, from intensive care to homecare. We market our critical care products throughout the world to a variety of customers including
hospitals, clinics, private physicians, research centers and original equipment manufacturers. Our Critical Care business is comprised of the following product lines:



Mechanical Ventilators

Mechanical ventilators are used by patients who are unable to breathe adequately without assistance due to disease or injury. These devices pump heated,
humidified, oxygen-enriched air into the lungs at regulated pressures, volumes and times in order to approximate normal breathing or to modify breathing to treat disorders. They are typically
configured either for adult, pediatric or neonatal use and are marketed globally under the BIRD®, BEAR®, EME®, SENSORMEDICS and VIASYS®
Critical Care brand names. We believe our Critical Care business is a market leader in the pediatric and neonatal conventional ventilation markets, as well as the high frequency ventilator markets.

Our
principal mechanical ventilators are:

|                                                                                                               |  | Usage
|-------------------------------------------------------------------------------------------------------------- |  | -----
|
|
|AVEA,a high-end volume/pressure ventilator                                                                     |  |      
|VELA,a conventional volume/pressure ventilator                                                                 |  |      
|TBIRD® and TBIRD Legacy,a full-feature ventilator that can be used in both hospital and alternative care sites |  | X    
|BEAR 1000,a mid-range full-featured ventilator for critical care applications                                  |  |      
|BIRD 8400 STI,a basic ventilator for critical care applications                                                |  |      
|V.I.P. BIRD® & BEAR CUB® 750,ventilators for neonatal and pediatric intensive care units                       |  |      

Other Products

In addition, we offer high frequency oscillatory ventilators ("HFOV"), which are specialized ventilators designed to provide superior gas exchange within the
lung, while protecting the patient's lung from damage that may be caused by the cyclic expansion and contraction characteristic of conventional ventilators and other types of high frequency
ventilators. Our primary HFOV products which are marketed under the SensorMedics brand name are:

3100A HFOV,for use in children and premature infants who suffer acute respiratory failure; and

3100B HFOV,for use in adults for the treatment of acute respiratory distress syndrome ("ARDS").

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We also offer a variety of related products, including:



NeuroCare

Our NeuroCare group develops, manufactures, markets and services a comprehensive line of neuro, vascular and audiology diagnostic systems that are used by
physicians and medical technologists to assist in the diagnosis and monitoring of neurological, vascular, brain and auditory disorders. We market our portfolio of products globally to a variety of
customers under brand names such as Grason-Stadler, Nicolet Biomedical and Nicolet Vascular. Our NeuroCare business is comprised of the following product lines:





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 carpal tunnel syndrome, Lou Gehrig's (ALS) disease, multiple sclerosis and spinal cord injury. Our principal EMG and EP diagnostic products are
the Nicolet Viking and Toennies Neuroscreen, which offer high quality signals to distinguish electrical impulses within the body from background noise.



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 the diagnosis of epilepsy and the monitoring of surgical and
pharmaceutical treatments. Our principal EEG diagnostic product is the Nicolet AllianceWorks digital EEG system, which allows screening of brain wave abnormalities.

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Our BMSI 6000 epilepsy monitoring system combines EEG data with digital video of a patient to enable a physician to assess the frequency and severity of epileptic
and non-epileptic seizures over a multiple day period, typically three or four days. Our system helps the physician to locate the site of epileptic seizures in the brain for surgical
intervention, to determine the proper dosage of drug therapies, or to determine other courses of treatment for a particular patient.



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 Biomedical brand name. AUDIOSCREENER®is an infant hearing screener for early detection of hearing disorders that
could affect the development of speech and language abilities in children. In 2003, we introduced an enhanced version of AUDERA, a device which assists physicians in fitting cochlear implants and
hearing aids especially in children.



Our intra-operative monitoring products assist surgeons in preserving the functional integrity of a patient's circulatory and nervous systems during and after
complex surgical procedures, such as vascular reconstruction and tumor removal. NeuroCare's primary products in this area are the Endeavor, a sophisticated 16-channel intra-operative
monitoring system that provides simultaneous EEG, EP and EMG monitoring for use in the operating room and intensive care units, and our Pioneer and Companion transcranial Doppler systems, which
monitor blood flow to the brain in a non-invasive manner.



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

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





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

In
contrast to many other neurodiagnostic instrument providers, VIASYS NeuroCare is a leader in providing in-field system repair service, and excels in training and
applications support by staffing credentialed employees in all application areas. We believe that we are market leaders in the neurodiagnostic, peripheral vascular diagnostic and audiologist focused
audio diagnostic market.

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Medical and Surgical Products

Our Medical and Surgical group develops, manufactures and markets disposable products and specialty medical products. In 2003, we divested our patient monitoring
and our polyurethane businesses. The Medical and Surgical group is now focused on medical disposable products, orthopedic and spinal implants as well as a number of components for various medical
devices. We market our disposable products, such as our feeding tube systems, disposable airway management devices and surgical barrier control systems to hospitals, homecare, long-term
care and industrial customers globally. We market our specialty products and materials, such as our surgical implant components, to original equipment manufacturers for inclusion in their products.
Our Medical and Surgical Products business is comprised of the following businesses:



MedSystems Disposables

In 2002, we created a strategic business unit called MedSystems through the combination of our Corpak and Stackhouse businesses. This strategic business unit
develops, manufactures and markets a variety of disposable products, including:



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Orthopedic, Specialty Products and Materials

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



VIASYS Customer Care

VIASYS Customer Care provides warranty, technical support and long-term service contract options for our products. In addition, our customer care
professionals provide the training, installation, contract administration, parts and product upgrades to support both our direct customers and our worldwide distributor network. We provide these
services through an organization of 220 experienced biomedical engineers and technicians to ensure the highest level of quality and support to the care providers and patients who rely on our products.

New Products, Research and Development

We seek to combine research and development spending with our significant knowledge base and key industry relationships to develop a robust pipeline of new
products. We have a very active product development portfolio that we believe will be substantially more productive than past efforts due to the implementation of several disciplined processes. In
2002, we instituted a process that benchmarks each major research and development project against others throughout the company. We measure numerous parameters including relative risks, time to
market, competitive landscape, resource constraints and return on invested capital. This benchmarking process helps senior management decide on the level of investment in a project and ensures that
worthy projects are adequately funded while those with inadequate returns are reevaluated.

Our
Respiratory Technologies Group has broad initiatives to continue the growth of VCS, our clinical services business, improve our sleep diagnostic and therapy franchise, and develop
applications for nitric oxide, a therapeutic gas with broad clinical efficacy. VCS leverages our competencies in respiratory medicine, pulmonary mechanics and telemedicine to assist in the management
of pharmaceutical trials. We are adding both software and hardware engineering capabilities to the group in order to improve our value to the pharmaceutical and biotechnology industries and assist
them in bringing better documented and better understood products to market faster than in the past. We are continuing to develop new products for the sleep therapy market. We expect to introduce a
novel new patient interface in 2004 and are actively pursuing both humidification systems and new products in different modes of CPAP. We are also conducting research into potentially significant
areas for utilization of nitric oxide. While we are in the early phases, clinical results on a relatively small number of patients have been promising and we intend to increase our focus in this area.

Our
Critical Care Group is working on a number of initiatives to enhance and expand the capabilities of our flagship mechanical ventilator platforms, AVEA and Vela. We intend to
incorporate several new software modalities in the future and will continue to develop these product platforms as long term projects. We are also expanding the use of Heliox medical gas on our AVEA
ventilator. AVEA is the only ventilator approved for use with Heliox gas in the United States. Heliox is a mixture of medical grade air and helium and its lighter than air qualities make the work of
breathing easier for patients with obstructive breathing disorders such as Asthma or Chronic Obstructive Pulmonary Disease. In 2004, we expect to introduce a new generation of our patented Infant Flow
noninvasive ventilation product.

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Our
NeuroCare Group is expected to launch a number of new products in 2004, including a much lighter and smaller system for Intra-Operative Monitoring ("IOM"). IOM systems are used to
monitor the integrity of nerve pathways during an increasing number of surgical procedures. The use of this equipment requires an experienced technician; therefore it is not uncommon to move both the
technician and equipment into numerous surgical suites. The new IOM system meets this emerging need with a full-featured, rugged and durable solution that is one-third lighter
and smaller than conventional systems. In addition, we expect the group's investments in core EEG, EMG, sleep and information technologies will surface this year in multi-modality solutions that
support the new dynamic workflow requirements of diagnostic clinicians. Advanced signal processing, clinical reporting, database and interfacing tools are expected to enhance the quality and access of
patient information, reducing costs and improving productivity and quality of care. Advances in audio diagnostics have also been realized with the successful Audera system, which is expected to be
enhanced this year with important new diagnostic test features. The vascular technologies group continues to advance with new state-of-the-art operating system
platforms and signal processing advances for trans-cranial monitoring.

Our
Medical and Surgical Group is preparing to launch products to support its enteral feeding line. We believe, and independent clinical data supports, that enteral feeding has
significant advantages over IV feeding for most patients including decreased infection rates, less expensive treatment, and reduced length of stay in the hospital. MedSystems also expects to introduce
several products to revitalize our barrier protection systems, including a new helmet system for protecting physicians and patients in the surgical suite.

Raw Materials

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

Government Regulation

United States

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

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



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

A
medical device may be marketed in the United States only if: (1) the FDA gives prior authorization; (2) the device is subject to a specific exemption; or (3) the
device was marketed prior to May 28, 1976, the effective date of the Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. Depending on the type of medical device, FDA
authorization typically takes one of the following two forms:



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



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

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The
Federal Food, Drug and Cosmetic Act regulates our quality control and manufacturing procedures by requiring us to demonstrate and maintain compliance with the Quality System
Regulation ("QSR"). The QSR sets forth the FDA's current good manufacturing practices requirements, which cover the methods used in, and the facilities and controls used for, the design, manufacture,
packaging, labeling, storage, installation and servicing of all finished devices intended for human use. The QSR covers quality management and organization, device design, buildings, equipment,
purchase and handling of components, production and process controls, packaging and labeling control, device evaluation, distribution, installation, complaint handling, servicing and records. These
requirements include, among other things, that:



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

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

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

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

Other Regulations

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

International

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

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A
medical device may only be marketed in the European Union (EU) if it complies with the Medical Devices Directive (MDD) and bears the CE mark as evidence of that compliance. To achieve
this the medical devices in question must meet the "essential requirements" defined under the MDD relating to safety and performance and we, as manufacturer of the devices, must undergo a verification
of our regulatory compliance by a third party standards certification provider, a so-called "Notified Body". The nature of the assessment depends upon the regulatory class of products
concerned, which in turn determines the precise form of testing undertaken by the Notified Body. Similar to the system in the United States, medical devices in the EU are classified according to the
risks posed by their use, with class I being low risk devices, class IIa medium risk, class IIb medium/high risk and class III being high risk devices. Our devices fall
into the medium and high risk categories and require a higher level of regulatory assessment. As of January 3, 2004, our key respiratory technologies, critical care and neurocare products bore
the CE mark.

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

Geographic
information is discussed in the Notes to the Consolidated Financial Statements, which are included herein.

Third Party Reimbursement

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

The
federal government and various state governments are currently considering proposals to reform the Medicare and Medicaid systems. We are unable to evaluate what legislation may be
drafted and whether or when any such legislation will be enacted and implemented. Some of these proposals, if adopted, could have 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 health care reimbursement costs.
Medicare reimbursement for inpatient hospital services is based on a fixed amount per admission based on the patient's specific diagnosis. As a result, any illness to be treated or procedure to be
performed will be reimbursed only at a prescribed rate set by the government that is known in advance to the health care provider. If the treatment costs less, the provider keeps the overage; if it
costs more, the provider cannot bill the patient for the difference. No separate payment is made in most cases for products such as our medical devices when they are furnished or used in connection
with inpatient

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care.
Many private third party payors and some state Medicaid programs have also adopted similar prospective payment systems.

Third
party payors have recently increased their emphasis on managed care, which has led to an increased emphasis on the use of cost-effective medical devices by health care
providers. In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical product suppliers.

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

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

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

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

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

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Patents, Licenses and Trademarks

We pursue patent protection of our technology, products and product improvements both in the United States and in selected foreign countries. We also rely on
trade secrets and technological innovations to develop and maintain our competitive position. In an effort to protect our trade secrets, we generally require our employees, consultants and advisors to
execute confidentiality and invention assignment agreements upon commencement of employment or consulting relationships with us.

We
have entered into a number of license and other arrangements under which we have obtained rights to manufacture and market some products or potential products. For instance, a number
of the therapeutic-based products that we are developing incorporate proprietary technologies that we have licensed from third parties. Under our existing licenses, we are subject to commercialization
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.

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

Competition

The respiratory technologies, critical 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 Technologies and Critical Care segments compete with products from firms such as Siemens AG, Tyco Healthcare Group, Dragerwork AG and Respironics, Inc. The
principal competitors of our NeuroCare segment 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 Products segment include the Ross Products Division of Abbott Laboratories,
The Dow Chemical Company and J. P. Stevens Company.

Employees

As of January 3, 2004, we had a total of 1,859 full-time employees, consisting of 1,475 employees based in the United States and 384 employees
based outside of the United States. We have no collective bargaining agreements with our United States employees. Some of our operating locations outside the United States have work council agreements
as mandated by law. The Company believes that it has good employee relations.

Available Information

We maintain a website at www.viasyshealthcare.com and make available free of charge on this website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

VIASYS
also makes available on its website the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of its board of directors, and
its Code of Conduct. Such information is also available in print to stockholders upon request.

17

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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 factors can have a
significant effect on the demand for our products. For example, a reduction in funding to major government research supported agencies, such as the National Institutes of Health or the National
Science Foundation, could adversely affect sales of our sleep diagnostic testing equipment.

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

Sales of medical products largely depend on the reimbursement of patients' medical expenses by government healthcare programs and private health insurers. The
cost of some of our products, 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 both favorable coverage determinations by, and the financial support of, government and third party insurers, the market for some of our
products could be limited.

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

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

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

We currently have cash and cash equivalents of $97.9 million and a $60.0 million revolving credit facility under which we have no outstanding debt
as of January 3, 2004. Both cash and the credit facility are available to expand our business, either through acquisitions or development of new products. Our ability to access the credit
facility is dependent on complying with the debt covenants that are part of that agreement. These covenants include a maximum ratio of debt to earnings before interest, taxes and depreciation and
amortization ("EBITDA") of 2.5, a minimum ratio of EBITDA to interest expense of 4.0, maximum annual capital expenditures of $20 million and a minimum level of stockholders' equity. While we
are in compliance with these restrictions and expect to be able to meet these requirements in the future, failure to satisfy any of the conditions would require us to renegotiate the facility on terms
that may not be favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to fund our operations from other financial institutions, we cannot
assure you that we would be successful, or if we were successful that the new credit would be on terms that would be attractive in financing our business plans.

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

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

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

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

VIASYS and its former parent company have paid substantial premiums over the fair value of the net assets of some of the companies that comprise our business. We
have acquired significant intangible assets, including approximately $182.4 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of
January 3, 2004. This represents approximately 36% of our total assets as of that date. Our ability to realize the value of this asset will depend on future cash flows of the acquired
businesses. Cash flow, in turn, depends on how well we have identified these acquired businesses as desirable acquisition candidates and how well we can integrate these acquired businesses.

The complexity 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 43% of our total revenues in 2003 and 41% of our total revenues in 2002. While we plan to continue

19

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expanding
our presence in international markets, our international operations present a number of risks, including the following:



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

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

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

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

20

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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
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 and compliance 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, total
or partial suspension of production, operating restrictions or limitations on marketing, refusal of the government to grant new clearances or approvals, withdrawal of marketing clearances or approvals
and civil and criminal penalties. Companies may also voluntarily conduct a recall of a problem product. For a summary of government regulations applicable to our business, see
"BusinessGovernment Regulation."

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

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

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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 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 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.

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

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Executive Officers of the Company

Our executive officers are as follows:

|Name                |  | Age |  | Position                                                                                    
|------------------- |  | --- |  | --------------------------------------------------------------------------------------------
|Randy H. Thurman    |  | 54  |  | Chairman of the Board and Chief Executive Officer                                           
|Stephen P. Connelly |  | 52  |  | President and Chief Operating Officer                                                       
|Martin P. Galvan    |  | 52  |  | Senior Vice President, Chief Financial Officer, Director of Investor Relations and Secretary
|Frank J. McCaney    |  | 49  |  | Senior Vice President, Business Development                                                 
|Matthew M. Bennett  |  | 33  |  | Corporate Vice President and General Counsel                                                
|Rebecca A. Mabry    |  | 47  |  | Corporate Vice President, Global Marketing                                                  
|Gary F. Mathern     |  | 60  |  | Corporate Vice President, Human Resources                                                   
|Lori J. Cross       |  | 43  |  | Group President, NeuroCare                                                                  
|Thomas I. Kuhn      |  | 50  |  | Group President, MedSystems                                                                 
|William V. Murray   |  | 43  |  | Group President, Respiratory Technologies                                                   
|Giulio A. Perillo   |  | 57  |  | Group President, Operations and Corporate Quality                                           
|Edward Pulwer       |  | 57  |  | Group President, Critical Care                                                              
|Mahboob H. Raja     |  | 44  |  | Group President, International                                                              

Randy H. Thurman; Chairman of the Board and Chief Executive Officer

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

Stephen P. Connelly; President and Chief Operating Officer

Mr. Connelly joined VIASYS Healthcare Inc. in September 2001. Prior to becoming President and Chief Operating Officer in
November 2002, Mr. Connelly served as Group President of VIASYS International and as Group President of VIASYS Medical and Surgical Products. Previously at Rhone-Poulenc Rorer
Pharmaceuticals, Inc., Mr. Connelly held the following positions: Senior Vice President, North and South
America; Senior Vice President, RPR Japan & Asia; President, Dermik Laboratories; Vice President, Hospital Marketing and Sales; Vice President, Pharmaceutical Marketing and Sales; and Director,
Product Management.

Martin P. Galvan; Senior Vice President, Chief Financial Officer, Director of Investor Relations and Secretary

Mr. Galvan joined VIASYS Healthcare Inc. in June 2001. From 1999 to 2001, Mr. Galvan was Chief Financial Officer for Rodel Inc.
From 1979 to 1998, Mr. Galvan held several positions at Rhone-Poulenc Rorer Pharmaceuticals, Inc., including Vice President, Finance Worldwide; President & General Manager, RPR
Mexico & Central America; Vice President, Finance, Europe/Asia Pacific and Chief Financial Officer, United Kingdom & Ireland.

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Frank J. McCaney; Senior Vice President, Business Development

Mr. McCaney had been with VIASYS Healthcare Inc. since 1998 as Vice President of Global Marketing and Business Development. Mr. McCaney is
currently Senior Vice President of Business Development and has principal responsibility for coordinating all merger and acquisition activity, a position he has held since April 2001. From
October 1998 to April 2001, Mr. McCaney served as Vice President, Global Marketing. Mr. McCaney was instrumental in taking VIASYS public in 2001, being a contributor to the
meetings with investment groups. Mr. McCaney is also the head of the VIASYS Technical Advisory Board.

Matthew M. Bennett; Corporate Vice President and General Counsel

Mr. Bennett joined VIASYS Healthcare Inc. in October 2003 from the law firm Morgan, Lewis and Bockius LLP. While at Morgan, Lewis and Bockius
LLP, Mr. Bennett represented VIASYS Healthcare Inc. since its spin-off in 2001. Mr. Bennett has experience in all areas of business and finance law. He has represented
companies in the medical devices, pharmaceuticals and life sciences areas. Mr. Bennett's previous experience also includes working as a litigator at Stradley Ronon Stevens & Young LLP
and as a clerk for the Superior Court of New Jersey.

Rebecca A. Mabry; Corporate Vice President, Global Marketing

Ms. Mabry originally joined VIASYS Healthcare Inc. in 1983. In November 2002, she was named Corporate Vice President, Global Marketing.
Ms. Mabry held various marketing positions within the SensorMedics and Bird business units of the company. Prior to her current position, she was Product Specialist and Marketing Manager for
SensorMedics Corporation. From 1993 until 1996, Ms. Mabry was Marketing Manager, Advanced Product Development and Director of Marketing/Strategic Planning for Bird Products Corporation. From
April 1996 to May 1998, Ms. Mabry was Vice President, Marketing with Healthdyne Technologies before rejoining Bird Products Corporation.

Gary F. Mathern; Corporate Vice President, Human Resources

Mr. Mathern joined VIASYS Healthcare Inc. in June 2001. From 1995 to 2001, Mr. Mathern was a human resources consultant to various
start-up companies. From 1986 to 1995, Mr. Mathern was Senior Vice President at QVC, Inc., a televised shopping service. From 1984 to 1986, Mr. Mathern served as
Executive Director of Human Resources for CITAlcatel Inc.

Lori J. Cross; Group President, NeuroCare

Ms. Cross joined VIASYS Healthcare Inc. in November 2003. Her background is a combination of R&D, manufacturing, sales, marketing and senior
level international executive management. Ms. Cross joined VIASYS from General Electric- Datex-Ohmeda, Inc. where from 1998 to November 2003 she was President of Datex-Ohmeda
U.S., responsible for the Anesthesia and Drug Delivery and Ventilation business areas and the U.S. Anesthesia Care selling organization. From 1997 to 1998, Ms. Cross was General Manager, Global
Information Solutions business for Datex-Engstrom in Karlsruhe, Germany and held previous positions in Smith & Nephew Dyonics and Baxter Edwards.

Thomas I. Kuhn; Group President, MedSystems

Mr. Kuhn originally joined VIASYS Healthcare Inc. in 1983. He served as President of Corpak from 1992 to 2002 and currently holds the title of Group
President, MedSystems. He served as Controller from 1983 to 1985; Vice President, Operations from 1987 to 1989; and Senior Vice President from 1989 to 1992.

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William V. Murray; Group President, Respiratory Technologies

Mr. Murray joined VIASYS Healthcare Inc. in July 2003. Prior to joining VIASYS Healthcare Inc., from October 1985 to July 2003
Mr. Murray worked for Medtronic Inc. From 1992 to 2003, Mr. Murray held a variety of key general management positions. Most recently, from 2002 to 2003 Mr. Murray was Vice
President and General Manager of EP Systems with Medtronic. From 1998 to 2002, Mr. Murray was Vice President and General Manager of the $1.5 billion pacemaker business. Early in his
career, Mr. Murray was an IC Design Engineer and also held various positions of greater responsibility in the Engineering and Product Development departments.

Giulio A. Perillo; Group President, Operations and Corporate Quality

Mr. Perillo joined VIASYS Healthcare Inc. in March 2003 as Corporate Vice President, Operations Management & Systems. In
October 2003, he was named Group President, Operations and Corporate Quality. Prior to joining VIASYS Healthcare Inc., Mr. Perillo worked for Cardinal Health Inc. as Vice
President and General Manager for Cardinal Health's contract pharmaceutical and development business. From 1998 to 2000, Mr. Perillo was President of Omnicare Pharmaceutics. From 1997 to 1998,
he held the position of President & Chief Operating Officer of USA Detergents Inc. From 1994 to 1997, Mr. Perillo was Vice President and General Manager of Conteon
Bio-Services, a global plasma collection company and, from 1990 to 1994 he was Vice President, Worldwide Manufacturing for Rhone-Poulenc Rorer Pharmaceuticals, Inc.

Edward Pulwer; Group President, Critical Care

Mr. Pulwer originally joined VIASYS Healthcare Inc. in 1983. In November 2002, Mr. Pulwer was promoted to Group President, Critical
Care from Group President, Respiratory Technologies, a position he held since July 2001.    After holding several sales marketing positions with SensorMedics, Mr. Pulwer
served as their General Manager from 1999 to 2001 and Vice President of Sales from 1996 to 1999. Prior to joining VIASYS Healthcare Inc., from 1977 to 1983 Mr. Pulwer spent six years as Group
Product Manager for Respiratory Care products at American Hospital Supply CorporationScientific Products Division, which is currently a Cardinal Health Company.

Mahboob H. Raja; Group President, International

Mr. Raja originally joined VIASYS Healthcare Inc. in 1992. In April 2003, Mr. Raja was named Group President, International. He was
named Vice President, European Sales in October 2001. Prior to that,
Mr. Raja held several positions for Nicolet Biomedical. He was named Vice President, Worldwide Sales & Marketing in 2000; Vice President, International Sales from 1999 to 2000; Managing
Director, International Sales from 1997 to 1999; and worked in sales from 1992 to 1997.

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Item 2.Properties

We own or lease properties in the United States and internationally, which generally consist of administrative and sales offices, manufacturing, assembly and
distribution facilities, and warehouse facilities. 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.

|Business Unit                 |  | Location                   |  | Square Footage |  | Ownership
|----------------------------- |  | -------------------------- |  | -------------- |  | ---------
|Respiratory Technologies      |  | Yorba Linda, CA            |  | 119,500        |  | Lease    
|Respiratory Technologies      |  | Hoechburg, Germany         |  | 91,134         |  | Lease    
|Respiratory Technologies      |  | Bilthoven, The Netherlands |  | 17,100         |  | Lease    
|Critical Care                 |  | Palm Springs, CA           |  | 133,312        |  | Own      
|Critical Care                 |  | Riverside, CA              |  | 7,460          |  | Lease    
|Critical Care                 |  | El Paso, TX                |  | 22,600         |  | Lease    
|Critical Care                 |  | Juarez, Mexico             |  | 12,929         |  | Lease    
|Critical Care                 |  | Brighton, England          |  | 17,078         |  | Lease    
|Critical Care                 |  | Anaheim, CA                |  | 8,000          |  | Lease    
|NeuroCare                     |  | Madison, WI                |  | 66,800         |  | Lease    
|NeuroCare                     |  | Fitchburg, WI              |  | 34,000         |  | Lease    
|NeuroCare                     |  | Verona, WI                 |  | 31,000         |  | Lease    
|NeuroCare                     |  | Fitchburg, WI              |  | 6,670          |  | Lease    
|NeuroCare                     |  | Golden, CO                 |  | 2,400          |  | Lease    
|NeuroCare                     |  | Bristol, England           |  | 10,665         |  | Lease    
|NeuroCare                     |  | Warwick, England           |  | 18,000         |  | Lease    
|NeuroCare                     |  | Osaka, Japan               |  | 1,600          |  | Lease    
|NeuroCare                     |  | Tokyo, Japan               |  | 1,030          |  | Lease    
|Medical and Surgical Products |  | Woburn, MA                 |  | 39,500         |  | Lease    
|Medical and Surgical Products |  | Wilmington, MA             |  | 54,000         |  | Own      
|Medical and Surgical Products |  | El Paso, TX                |  | 20,800         |  | Lease    
|Medical and Surgical Products |  | Wheeling, IL               |  | 76,000         |  | Lease    
|Corporate Office              |  | Conshohocken, PA           |  | 12,722         |  | Lease    

Item 3.Legal Proceedings

In February 2004, we reached agreement with INO Therapeutics, Inc. and AGA AB on the material terms of a settlement of litigation directed to the
sale and use of nitric oxide gas and devices. The settlement terms were approved by the appropriate senior management or boards of directors of the parties to the litigation. We expect that the final
settlement documents will be executed during the first half of 2004. Following dismissal of the litigation, we anticipate receiving payments in 2004 totaling approximately $7.5 million. We also
expect INO and AGA will submit future purchase orders for nitric oxide devices totaling approximately $6.3 million. When completed, the final settlement documents will include provisions
regarding the development and distribution of nitric oxide gas, the transfer of certain VIASYS nitric oxide technology, the payment of royalties to us upon our achieving certain milestones, the
license of rights to intellectual property and the acknowledgment by the parties of certain nitric oxide intellectual property rights.

Other
than as described above 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.

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, Related Stockholder Matters and Issue Purchases of Equity Securities

VIASYS common stock began trading on a when-issued basis on the New York Stock Exchange, Inc. under the symbol "VAS" on November 7,
2001. The high and low closing prices of our common stock as reported in the consolidated transaction reporting system are as follows:

COMMON STOCK MARKET PRICE

High

Low2003First Quarter

15.51

12.00Second Quarter

21.14

14.00Third Quarter

23.15

19.74Fourth Quarter

21.16

18.052002First Quarter

24.09

20.21Second Quarter

22.50

17.45Third Quarter

17.40

14.00Fourth Quarter

17.00

14.47


As of March 5, 2004, we estimate that we had approximately 7,693 holders of record of our common stock. The closing market price on the New
York Stock Exchange for our common stock on March 5, 2004 was $21.62.

Item 6.Selected Financial Data

|                                                      |  | Year Ended
|----------------------------------------------------- |  | ----------
|
|
|Statement of Income Data                              |  |           
|Revenues                                              |  | $         
|Income from Continuing Operations                     |  | $         
|Basic Earnings Per Share from
Continuing Operations   |  | $         
|Diluted Earnings Per Share from
Continuing Operations |  | $         
|Balance Sheet Data                                    |  |           
|Total Assets                                          |  | $         
|Long-term Obligations                                 |  |           
|Minority Interest                                     |  |           
|Other Financial Data                                  |  |           
|Cash Dividends**                                      |  |           

---

27

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

Critical Accounting Policies

The Company has identified a number of its accounting polices that it has determined to be critical. These critical accounting policies primarily relate to
financial statement assertions that are based on the estimates and assumptions of management and the effect of changing those estimates and assumptions could have a material effect on our financial
statements. The following is a summary of those critical accounting policies.

Revenue Recognition

We derive revenues primarily from the sale of products and to a lesser extent the provision of services and rental equipment. Revenue from the sale of products is
recognized when title is transferred to the customer. Where installation either is essential to functionality or is not deemed inconsequential or perfunctory, such as equipment sales under contracts
that require us to install the product at the customer location, revenue is recognized when the equipment has been delivered to and installed at the customer location. Revenues for products sold where
installation is not essential to functionality and is deemed inconsequential or perfunctory, such as revenue from customer installable products, is recognized upon transfer of title with estimated
installation costs accrued.

Our
service revenues are derived from parts and supplies, in-house and field repairs, service contracts and customer education. We sell service contracts on our products when
the warranty period expires. We recognize revenues from these service contracts ratably over the terms of the contracts due to the lack of historical data available regarding the timing of when the
actual services were provided. In the future, we may compile this information which could cause us to recognize service revenue over a different period.

Inventory

We write-down the value of our inventory by our estimate of the difference between the cost of the inventory and its net realizable value. Our
estimate takes into account projected sales of the inventory on hand and the age of the inventory in stock. In addition, we assess the value of older model products when new product introductions may
reduce their net realizable value. If actual future
demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The provision for write-down of inventory is recorded
in cost of revenues.

Goodwill Impairment

We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective
December 30, 2001. SFAS No. 142 requires companies to perform a transitional test and an annual test to determine whether there was any impairment of goodwill. These tests involve
determining the estimated fair value of the Company's reporting units by measuring the net present value of their future cash flows. If the net present value of estimated cash flows is less than the
book value of the reporting unit we would perform additional analysis, which could result in the write-down of goodwill.

We
determined our reporting units for purposes of assessing goodwill impairment under SFAS No. 142 by evaluating our four operating segments: Respiratory Technologies, Critical
Care, NeuroCare and Medical and Surgical Products. Each of these operating segments is comprised of several components. While the components of Respiratory Technologies, Critical Care and NeuroCare
have similar economic characteristics, products and services, production processes, customers and methods of distribution, the components of the Medical and Surgical Products segment do not.
Therefore, the components have been aggregated at the operating segment level for Respiratory Technologies, Critical

28

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Care
and NeuroCare and each of these segments was treated as a reporting unit. Since the components of Medical and Surgical Products cannot be aggregated, each component was treated as a separate
reporting unit.

As
part of the impairment testing, the Company allocated its goodwill to its reporting units. Goodwill from an acquisition that is specifically associated with a single reporting unit is
recorded on the books of that reporting unit. However, when goodwill from a transaction is associated with multiple reporting units it is allocated to the reporting units based upon relative revenues
at the time of the acquisition.

We
performed the annual test in 2003 and have determined that there is no impairment of goodwill. In performing this test, we used our internal operating and capital budgets, which are
based on such assumptions as new product introductions, growth in sales of existing products, margin improvements, operating cost control, savings from past restructuring efforts, equipment
replacement dates and building capacity needs. We discounted our estimated cash flows using our estimated cost of capital. If any of our assumptions change, such as an increase of our cost of capital,
it could result in an impairment of goodwill, which would require a charge to earnings.

Stock-Based Compensation

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

SFAS
No. 123, "Accounting for Stock-Based Compensation," permits companies either to continue accounting for stock options under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," or to adopt a fair-value-based method to measure compensation cost. Under APB No. 25, which we have elected to continue
using, there is no compensation cost if, on the date of grant, the option's exercise price is equal to or greater than the share price. Under SFAS No. 123, an option's fair value is estimated
on the date of grant, and the value is expensed evenly over the vesting period. If we had accounted for stock-based compensation under the SFAS No. 123 fair-value-based method, net
income would have been reduced by $4.5 million, $4.2 million and $1.5 million for 2003, 2002 and 2001, respectively.

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

Operations

In September 2003, we decided to sell certain assets of our Thermedics Polymer business ("Thermedics"). The consolidated financial statements have been
restated to present Thermedics, which was divested in October 2003, as well as Medical Data Electronics ("MDE"), which was divested in April 2003, as discontinued operations.

We
derive revenues primarily from the sale of products and to a lesser extent the provision of services and rental of equipment. When complex installation is required, revenue from
products is recognized upon completion of the installation. In all other situations, revenue is recognized when title

29

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is
transferred and there is no further obligation to the customer. Our service revenues are derived from parts and supplies, in-house and field repairs, service contracts and customer
training. We sell service contracts on our products that cover the products for periods after the warranty expires. We recognize revenues from these service contracts ratably over the terms of the
contracts. We rent our products, primarily in the Critical Care and Respiratory Technologies segments, to hospitals and other customers for periods ranging from two weeks to over a year. We recognize
rental revenues ratably over the term of the rental contract.

The
Respiratory Technologies segment develops, manufactures, markets, services and rents products for the diagnosis and treatment of respiratory, pulmonary and sleep-related disorders.
The Critical Care segment develops, manufactures, markets, services and rents products to treat respiratory insufficiency caused by illness, injury or premature birth. The NeuroCare segment develops,
manufactures, markets and services a comprehensive line of neurodiagnostic, vascular diagnostic and audiology testing systems. The Medical and Surgical Products segment develops, manufactures and
markets disposable medical products and specialty metal components for orthopedic products, medical-imaging equipment and cardio-vascular implants.

Results of Operations

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

Year EndedJanuary 3,
2004

December 28,
2002

December 29,
2001Revenues

100%

100%

100%Costs and Operating Expenses:Cost of revenues

54%

53%

53%Selling, general and administrative expenses

29%

28%

29%Research and development expenses

7%

8%

9%Restructuring costs

%

2%

2%Purchased in-process research and development

%

%

%90%

91%

93%Operating Income

10%

9%

7%Other Expenses, Net

%

%

%Provision for Income Taxes

(3)%

(3)%

(3)%Income from Continuing Operations

7%

6%

4%


Year Ended January 3, 2004 Compared with Year Ended December 28, 2002

Revenues

Revenues increased $52.5 million, or 15.3%, to $394.9 million. Of this increase, $16.9 million was contributed by Respiratory Technologies,
$35.6 million by Critical Care and $1.9 million by Medical and Surgical Products. These increases were partially offset by a decrease of $1.9 million in NeuroCare. The revenue
increase resulted primarily from $57.3 million in sales of new products, principally in the Critical Care segment. Our clinical services business contributed $4.6 million of increased
revenue, while the weakening of the dollar against the euro contributed $13.4 million. Partially offsetting these increases was a reduction in sales in our base business primarily due to the
replacement of mature products by new products.

30

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Cost of Revenues and Gross Margin

Cost of revenues increased $31.2 million, or 17.2%, over 2002 to $212.8 million. Gross margin percentage decreased 0.9 percentage points to
46.1% from 47.0% in 2002. This decrease was due to several factors, including reengineering costs related to AVEA. In addition, market conditions in 2003 lead to the write-off of inventory
we acquired as a result of the spin-off from our former parent company. Also contributing to the decrease were increased sales of lower margin products and higher installation and warranty
expense. Partially offsetting the decreases in gross margin percentage were increased sales of new higher margin products.

The
provision for excess and obsolete inventory was $4.2 million in 2003 compared with $4.4 million in 2002. Reserved inventory is scrapped, sold or utilized as repair
parts. Sales of reserved product and the gross margin thereon were not significant in 2003 and 2002.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $17.5 million, or 18.3%, over 2002 to $112.9 million. As a percentage of revenues, selling,
general and administrative expenses were 28.6% in 2003 compared with 27.9% in 2002. The increase was due to negative currency impacts as a result of the weakening of the dollar against the euro,
incremental investment in NeuroCare's sales force and marketing, higher incentive compensation and increased legal expenses, mainly due to the litigation with INO Therapeutics. Selling, general and
administrative expenses also increased due to the inclusion of a full year of expenses for EME and SciMed, which were companies acquired in the fourth quarter of 2002.

Research and Development Expenses

Research and development expense was $26.5 million in both 2003 and 2002. As a percentage of revenues, research and development expense was 6.7% in 2003
compared with 7.7% in 2002.

Restructuring Costs

We incurred $1.8 million and $5.7 million of restructuring costs in 2003 and 2002, respectively. The 2003 restructuring costs were incurred in our
NeuroCare, Critical Care and Respiratory Technologies segments.

The
restructuring plan in NeuroCare included the termination of 55 employees from general and administrative, service and manufacturing. The plan was carried out in the third and fourth
quarters of 2003 and severance of $0.6 million was expensed and paid. The annual savings expected to be realized as a result of this plan are approximately $3.5 million beginning in
2004, much of which will be reinvested into more productive areas in NeuroCare, such as sales and research and development.

The
restructuring plan in our Critical Care segment will eliminate redundant functions in the United Kingdom through a reduction in staffing of 48 employees across all functions. As of
January 3, 2004, $0.9 million of retention payments have been expensed and paid for approximately 45 employees. Severance for the remaining employees will be expensed and paid in the
first quarter of 2004. We expect to realize annual savings beginning in 2004 of approximately $2.0 million in personnel costs due to the reduction in force.

Restructuring
plans in our Respiratory Technologies segment include the closure of a machine shop and the reduction in the number of customer service positions in Germany. Due to German
labor regulations, certain positions cannot be eliminated immediately. Therefore, 24 positions will be eliminated over the next five years. As of January 3, 2004, 7 of these positions have been
eliminated and $0.2 million of severance has been paid. Retention expense for the remaining 17 employees will be recorded ratably over their remaining employment and total approximately
$1.6 million. As of January 3, 2004, approximately $0.1 million of this amount has been accrued. The annual savings are

31

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expected
to total approximately $1.3 million, which will be realized ratably over the next five years as the positions are terminated.

Restructuring
expenses in 2002 included a non-cash charge of $1.1 million to write-down the value of a vacated facility in our NeuroCare segment. Other
restructuring expenses in 2002 included $2.3 million for the consolidation of manufacturing facilities in New Hampshire and Colorado with our main NeuroCare manufacturing facility in Wisconsin.
Associated with these consolidations were employee terminations, retention bonuses, employee relocations, recruiting costs and facility closing costs, as well as inventory and asset relocations. We
also incurred restructuring costs of $0.3 million related to employee terminations in our Medical and Surgical Products segment. Additional restructuring costs included $0.4 million for
the cost of exiting long-term leases in Europe and $1.1 million for the severance of former executives.

Provision for Income Taxes

Our effective tax rate was 34.0% in 2003 compared to 37.9% in 2002. The effective tax rate in 2003 was less than the statutory federal income tax rate of 35.0%
primarily because of the tax benefit attributable to U.S. export sales and U.S. research and development tax credits. These benefits were partially offset by the impact of state income taxes. The
effective tax rate in 2002 exceeded the statutory federal income tax rate of 35.0% primarily because of the impact of state income taxes and the nondeductible purchased in-process research
and development ("IPRD") associated with our acquisition of EME, partially offset by the tax benefit attributable to U.S. export sales. The impact of IPRD on our 2002 effective tax rate was
0.9 percentage points.

Discontinued Operations

On October 3, 2003, we sold substantially all of the assets of Thermedics, which was reported in the Medical and Surgical Products segment. As part of the
sale, we recorded a loss on disposal, including expenses, of approximately $2.6 million, after taxes in discontinued operations. Discontinued operations include an after-tax
write-down of MDE of $1.0 million and $14.3 million in 2003 and 2002, respectively.

Segment Information

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 Segment

January 3, 2004

December 28, 2002

December 29, 2001Respiratory Technologies

$114,128

29%

$
97,225

28%

$
88,214

27%Critical Care

132,897

34%


97,296

28%


91,155

28%NeuroCare

91,964

23%


93,880

28%


90,076

28%Medical and Surgical Products

55,958

14%


54,051

16%


53,058

17%Total Revenues

$394,947

100%

$
342,452

100%

$
322,503

100%


Respiratory Technologies

Revenues increased $16.9 million, or 17.4%, over 2002 to $114.1 million. The increase is attributable to a $9.8 million favorable impact from
foreign currency and increased revenue of $4.6 million in our clinical services business. In addition, there were increased sales of nitric oxide and sleep therapy products. Operating income
increased 13.2% over 2002 due to the increased revenues, partially offset by increased legal expenses related to our litigation with INO Therapeutics, an inventory write-off of a
discontinued product line, increased incentive compensation and higher installation and warranty expense.

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Critical Care

Revenues increased $35.6 million, or 36.6%, over 2002 to $132.9 million. The increase resulted from the sale of new products, including AVEA, Vela
and Infant Flow, which totaled $48.7 million. In addition, increased sales of our earlier model T-Bird ventilators to Asia in the second quarter due to the SARS outbreak contributed
$2.5 million to the increase. Partially offsetting these increases were lower volume and pricing pressures on some of our mature product lines. Operating income more than doubled due to the
increased volume.

NeuroCare

Revenues decreased $1.9 million, or 2.0%, over 2002 to $92.0 million. This decrease was a result of lower sales of our EMG and EEG products,
partially offset by increased sales of our audiology and peripheral vascular products. Operating income decreased 4.3% primarily due to the revenue decrease, incremental investment in the sales force
and marketing, and SciMed expenses, a business which was acquired in 2002. Partially offsetting these increases was a reduction in restructuring and research and development expenses as well as
savings from efficiencies obtained in our restructuring efforts.

Medical and Surgical Products

Revenues increased $1.9 million, or 3.5%, over 2002 to $56.0 million. This increase is a result of higher sales in our medical disposable and
orthopedic implant businesses. Partially offsetting these increases were decreased sales of our medical imaging and heart device components. Operating income decreased 13.0%. The decrease was
primarily due to an inventory write-off for a discontinued product line and lower sales of higher margin products in our specialty metals business.

Year Ended December 28, 2002 Compared with Year Ended December 29, 2001

Revenues

Revenues increased 6.2% in 2002 to $342.5 million. Of this increase $9.0 million was contributed by Respiratory Technologies, $6.1 million
from Critical Care, $3.8 million from NeuroCare and $1.1 million from Medical and Surgical Products. Our revenue increases were driven by a number of factors including increased volume,
sales of new products, the weakening of the dollar against the euro and a fourth quarter acquisition. Offsetting these increases were a higher percentage of products sold to lower price markets,
primarily homecare and international, and decreased sales to Latin America caused by the economic climate in that region.

Cost of Revenues and Gross Margin

Cost of revenues increased 7.0% over 2001 to $181.6 million. Gross margin percentage decreased 0.3 percentage points to 47.0% from 47.3% in 2001.
Our decrease in gross margin percentage points was due to a combination of factors including a higher percentage of total sales to lower price channels, and the consolidation of some our manufacturing
operations in 2002 which temporarily resulted in duplicate labor costs. We also recorded additional write-downs of inventory in 2002 based on our projections of a higher percentage of our future sales
coming from new products, which in some cases will displace sales of older products. Increases in property and earthquake insurance, which are included in manufacturing overhead, also had an impact on
gross margin. In addition, a larger percentage of our total labor costs were attributable to health insurance benefits in 2002 and we expect the increase in health insurance premiums to continue.
Offsetting these decreases were synergies achieved in our manufacturing operations, partially due to the consolidations of our manufacturing operations in 2001, a weakening of the dollar against the
euro and the impact of the licensing revenue related to Pulmonetics.

33

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The
provision for excess and obsolete inventory was $4.4 million in 2002 compared with $2.6 million in 2001. Reserved inventory is scrapped, sold or utilized as repair
parts. Sales of reserved product and the gross margin thereon were not significant in 2002.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 2.4% over 2001 to $95.4 million. As a percentage of revenues, selling, general and administrative
expenses were 27.9% in 2002 compared with 28.9% in 2001. Increases in selling, general and administrative expenses were due to the inclusion of EME expenses from their acquisition in
October 2002 and the impact of the first full year of being an independent public company. This included the establishment of a separate and independent corporate function and all the
associated costs such as a management team, a board of directors, annual report preparation, printing and mailing, as well as legal, audit and listing fees. In addition, increases in all insurance
expenses, including our first full year of Directors and Officers liability insurance, contributed to the increase in selling, general and administrative expenses. We expect this increase in insurance
expense to continue in the near-term. Offsetting these increases were the absence of goodwill amortization, reduced expenses from the termination of the corporate services arrangement with
Thermo Electron and lower incentive compensation expense.

Research and Development Expenses

Research and development expense decreased 9.1% to $26.5 million. As a percentage of revenues, research and development expense was 7.7% in 2002 compared
with 9.0% in 2001. The decrease can be attributed to the movement of several large projects from the development stage into commercialization and a reimbursement from the European Union for a
completed research and development project at Erich Jaeger. In addition, a large payment to a third party contract research organization in 2001 did not recur in 2002.

Restructuring Costs

We incurred $5.7 million in restructuring costs in both 2002 and 2001. Restructuring expenses in 2002 included a non-cash charge of
$1.1 million to write-down the value of a vacated facility in our NeuroCare segment. Other restructuring expenses in 2002 included $2.3 million for the consolidation of
manufacturing facilities in New Hampshire and Colorado with our main NeuroCare manufacturing facility in Wisconsin. Associated with these consolidations were employee terminations, retention bonuses,
employee relocations, recruiting costs, facility closing costs, as well as inventory and asset relocations. We also incurred restructuring costs of $0.2 million related to employee terminations
in our Medical and Surgical Products segment. Additional restructuring costs included $0.4 million for the cost of exiting long-term leases in Europe and $1.1 million for the
severance of former executives. In 2001, restructuring expenses were primarily employee severance costs connected with the consolidation of our European facilities and expense reduction programs in
the U.S. Also included in these expenses was a retention program put in place by our former parent company and the termination of former executives.

Purchased In-Process Research and Development

The Company recorded $0.9 million in expense for purchased in-process research and development ("IPRD") related to the acquisition of EME and
engaged an internationally recognized independent appraiser in order to determine the fair value of in-process technology. The approach used to identify IPRD distinguishes IPRD from
developed technology based upon whether "technological feasibility" has been achieved. The technological feasibility of a product is established when the enterprise has completed all planning,
designing, testing, and sampling activities that are necessary to establish that the product can be produced to meet its design specifications including functions, applications, and technical
performance requirements. The value assigned to these projects was determined using a discounted cash flow approach.

34

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As
of the acquisition date, significant development efforts were underway related to developing two new technologies. Both projects were finalized by the end of 2003. The additional cost
to complete these projects totaled approximately $0.6 million.

Provision for Income Taxes

Our effective tax rate was 37.9% in 2002 compared to 42.4% in 2001. The reduction in tax rate is attributable to the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets," on December 30, 2001. The adoption eliminates goodwill amortization in calculating pre-tax income. Because most of our goodwill amortization is
nondeductible, the impact of implementing SFAS No. 142 is a reduction in our effective tax rate. The effective tax rate in 2002 exceeded the statutory federal income tax rate of 35.0% primarily
because of the impact of state income taxes and the nondeductible purchased IPRD associated with our acquisition of EME, partially offset by the tax benefit attributable to export sales. The impact of
IPRD on our 2002 effective tax rate was 0.9 percentage points. The effective tax rate in 2001 exceeded the statutory federal income tax rate primarily because of the impact of state income
taxes and nondeductible amortization of goodwill, partially offset by the tax benefit attributable to export sales.

Discontinued Operations

In the third quarter of 2002, we decided to exit the patient monitoring business and divest our MDE business unit. We recorded a $22.5 million
($14.3 million after-tax) charge to write-down the value of MDE. MDE, which was previously reported in the Medical and Surgical Products segment, is now recorded as a
discontinued operation in all years presented.

Segment Information

Respiratory Technologies

Revenues increased 10.2% to $97.2 million. This increase was a result of increased volume across all product lines as well as a weakening of the dollar
against the euro. Also increasing revenues were sales of new products such as the VMAX Spectra, which was launched in late 2001, and the ORION CPAP and HiOx 80, both launched in 2002. In
addition, VIASYS Clinical Services ("VCS"), our clinical service business, had significant revenue gains. Operating income increased to $12.4 million primarily due to increased gross profits on
higher sales. Also contributing to the increase, were lower research and development expenses due to the movement of several large 2001 research projects, such as the VMAX Spectra, into
commercialization in 2002, and lower restructuring costs in 2002. Offsetting these increases in operating income were increased selling, general and administrative expenses due to additional
commissions on increased sales, higher insurance expense, and an increase in the provision for bad debts offset by the absence of goodwill amortization and lower incentive compensation expense.

Critical Care

Revenues increased 6.7% to $97.3 million. This increase was driven by the acquisition of EME in the fourth quarter of 2002 and by sales of our new
products, AVEA and Vela, in the second half of 2002. In the case of AVEA, the sales were primarily to international distributors for use as demonstration equipment to solicit new orders. In addition,
we shipped a higher percentage of sales to lower price markets. Operating income decreased 15.2% to $12.3 million. The decrease was due primarily to a larger percentage of our sales being made
to lower price channels and write-downs on excess and obsolete inventory. These write-downs were based on lower sales projections for certain older model products. The decrease in operating income was
also due to higher selling, general and administrative expenses due to the inclusion of EME expenses in the fourth quarter, increased insurance expense, and an increased provision for bad debts offset
by the absence of goodwill amortization and lower incentive compensation in 2002. Also contributing to the decrease in operating

35

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income
were increased research and development expenses in the first three quarters of 2002 due to AVEA and Vela.

NeuroCare

Revenues increased 4.2% to $93.9 million due to the introduction of several new products during 2002 including Audera and AUDIOscreener. Offsetting this
increase was a decrease in sales to Latin America, traditionally a strong market for the segment and a decrease in the sales of older product lines being replaced by Audera and AUDIOscreener.
Operating income more than doubled in 2002 to $4.0 million primarily due to lower selling, general and administrative expenses resulting from our restructuring efforts and the absence of
goodwill amortization in 2002. In addition, our research and development expense decreased due to lower overhead expense attributable to the consolidation of research facilities in Wisconsin. In
addition, we licensed technologies from third parties for two of our new products, as opposed to internally developing the technology.

Medical and Surgical Products

Revenue from continuing operations decreased 1.9% to $54.1 million. The decrease was due to a number of factors including lower sales of clean suits to a
large semiconductor manufacturer. The decrease was partially offset by increases in sales of enteral feeding tubes, other disposable medical products and orthopedic implants. Operating income
increased 22.3% to $10.7 million as a result of restructuring efforts, as well as the absence of goodwill amortization in 2001. Offsetting these factors were higher selling, general and
administrative expenses due to increased insurance.

Liquidity and Capital Resources

Cash generated from operating activities was $46.2 million for 2003. Our primary source of cash was net income of $21.6 million and
non-cash charges totaling $16.2 million. Also contributing to the increased cash was a reduction in inventory of $11.8 million as a result of a reduction in our
build-to-ship time, therefore requiring less inventory to be held. Cash flow was also positively impacted by increases in accounts payable and accrued expenses, which was
offset by an increase in accounts receivable resulting from high December sales.

Cash
provided by investing activities was $9.2 million for 2003. The cash provided was primarily attributable to the disposition of MDE and Thermedics. Cash expended for 2002
acquisitions in 2003 was $3.5 million. The payments made in 2003 included the installment payment for SciMed of $1.8 million and $1.7 million for the working capital settlement
and additional expenses for EME. Expenditures for the purchase of property, plant and equipment totaled $6.0 million. In addition, we purchased $3.9 million of licenses and custom
software used in our products.

Net
cash provided by financing activities consists primarily of $72.4 million in proceeds from the issuance of common stock under the follow-on offering completed in
June 2003 and our stock option plans, partially offset by repayments of $47.3 million under our revolving credit facility.

Our
consolidated working capital was $210.9 million at January 3, 2004, compared to $105.3 million at December 28, 2002. Our cash and cash equivalents totaled
$97.9 million at January 3, 2004 and $15.0 million at December 28, 2002.

We
currently have a three year, $60.0 million revolving credit facility (the "Facility") with a syndicate of seven banks, which expires in May 2005. Under the Facility,
there are options under which we can borrow funds that determine the interest rate charged. These options include borrowings at LIBOR plus a spread or at the prime rate plus a spread. Under the LIBOR
option, the interest rate depends on the term selected which can be no more than one year, and is fixed for that term. Under the prime rate option, the interest rate fluctuates based on the prime rate
during the period which any amount is outstanding under that option. In July 2003, we repaid the full amount outstanding under the Facility and no amount was outstanding at January 3,
2004.

36

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Our
ability to access the credit facility is dependent on complying with the debt covenants that are part of that agreement. The covenants include a maximum ratio of debt to earnings
before interest taxes and depreciation and amortization (EBITDA) of 2.5, a minimum ratio of EBITDA to interest expense of 4.0, maximum annual capital expenditures of $20.0 million and a minimum
level of stockholders' equity. We believe that the credit facility and cash flow from operations will generate capital resources sufficient to meet the capital requirements of our business for at
least the next twelve months. While we are currently in compliance with the debt covenants under the credit facility and expect to be able to meet the requirements in the future, failure to satisfy
any of the conditions would require us to renegotiate the facility on terms that may not be as favorable and could require us to repay any outstanding principal balance.

Our
ability to maintain the existing credit facility or to obtain 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 that we will have sufficient capital resources and we may be required to revise our business plan to reduce expenditures, including
curtailment of our growth strategies, product development strategies and acquisition strategies.

Beyond
the next twelve 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, the success of our product development efforts, capital spending policies of our customers, government spending policies and general economic conditions. Our expected capital
expenditures in 2004 are $10 million. Although we are not a party to any binding agreement or letter of intent with respect to a potential material acquisition transaction, we may enter into
acquisitions or strategic arrangements in the future that may require us to seek additional debt or equity financing.

Contractual ObligationsThe table below sets forth amounts due under the credit facility which expires in May 2005, as
well as purchase obligations and future minimum annual rentals attributable to noncancellable operating leases:

Payment Due Dates2004

2005-2007

Thereafter

Total(Millions of Dollars)Short-Term Credit Facility

$


$


$


$
Purchase Obligations


6.0








6.0Operating Leases


4.9


5.1


2.7


12.7Total Contractual Obligations

$
10.9

$
5.1

$
2.7

$
18.7


Relationship with Former Parent Company

In connection with the spin-off distribution, we entered into a transition services agreement under which Thermo Electron's corporate staff provided
us with certain administrative services. In return, we paid 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.

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 Spin-off Date. For these services we were charged $2.1 million in 2001. These amounts were recorded as selling, general and administrative expenses.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for a complete description of the effect of recent accounting pronouncements.

37

---



Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect our future results of operations and
financial condition. 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 denominated principally 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 income "component of stockholder equity. A 10% reduction
in year-end 2003 functional currency exchange rates, relative to the U.S. dollar, would result in a $12.9 million reduction of stockholder equity.

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. Our market risk exposure for interest rates is immaterial.

Item 8.Financial Statements and Supplementary Data

Our Consolidated Financial Statements as of January 3, 2004, 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.

On
May 9, 2002, the Board of Directors of VIASYS Healthcare Inc. (the "Company") and its Audit Committee decided to no longer engage Arthur Andersen LLP ("Andersen") as the
Company's independent auditors and to engage Ernst & Young LLP to serve as the Company's independent public accountants for 2002.

Andersen's
reports on the Company's consolidated financial statements for the 2001 and 2000 fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's 2001 and 2000 fiscal years and through May 9, 2002 (the date of the Company's change in
independent public accountants), there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if
not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such
periods; and there were no reportable events of the type listed in Item 304(a)(1)(v) of Regulation S-K.

The
Company filed a Form 8-K on May 16, 2002 to report these events and filed an amendment to the Form 8-K that is consistent with this
amendment to the Annual Report. The Company was unable to refurnish a copy of the amendment to the Form 8-K to Andersen prior to its filing with the Securities and Exchange
Commission, as Andersen has ceased operations. Accordingly, Andersen did not provide us with a letter to file as an exhibit to the amendment to the Form 8-K.

Since
the Spin-off Date and prior to engaging Ernst & Young LLP, the Company did not consult Ernst & Young LLP with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or
reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.

38

---

Item 9A.Controls and Procedures

(a) An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this
report was carried out by the Company
under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. A control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b)
No change in our internal control over financial reporting occurred during the fourth fiscal quarter of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.

39

---

PART III

Item 10.Directors and Executive Officers of the Registrant

(a)
Identification of Directors

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.

(b)
Identification of Executive Officers

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 and Related Stockholder Matters

Information with respect to security ownership of certain beneficial owners and management 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.

The
table below provides information as of January 3, 2004, with respect to compensation plans under which equity compensation is authorized, as well as individual compensatory
arrangements.

Equity Compensation Plan Information

|Plan Category                                              |  | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights |  | Weighted-average exercise
price of outstanding options,
warrants and rights |       | Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected
in column (a))
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |  | 4,785,000                                                                                   |  | $                                                                           | 15.44 |                                                                                                                                            
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |      |                                                                                                                                            
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            
|Total                                                      |  | 4,785,000                                                                                   |  | $                                                                           | 15.44 |                                                                                                                                            
|                                                           |  |                                                                                             |  |                                                                             |       |                                                                                                                                            

40

---

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.

Item 14.Principal Accounting Fees and Services

Information required under this item is set forth under the caption "Principal Accounting Fees and Services" 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.

41

---



PART IV

Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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

Report of Independent Auditors

F-1Consolidated Balance Sheets

F-2Consolidated Statements of Income

F-3Consolidated Statements of Cash Flows

F-4Consolidated Statements of Changes in Stockholders' Equity

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.



None.

|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.                                                                                                                                                 
|10.4*          |  | 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 6,680,000 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*         |  | Amended and restated Employment Agreement dated as of November 19, 2002 by and among the Company and Randy H. Thurman.                                                                                                        
|10.9*         |  | Letter Agreement dated as of September 24, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                   
|10.10         |  | Amended and restated Executive Retention Agreement dated as of November 19, 2002 by and between the Company and Randy H. Thurman.                                                                                             
|               |  |                                                                                                                                                                                                                               

42

---

|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.                                                    
|10.15*   |  | 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.      
|10.17   |  | Employment Agreement dated as of August 27, 2001 by and between the Company and Stephen P. Connelly.                                                        
|10.18*   |  | Credit Agreement by and among the Company, the Banks party thereto and certain other parties, dated May 31, 2002.                                           
|10.19   |  | Employment agreement dated as of November 1, 2003 by and between the Company and Lori Cross.                                                                
|10.20   |  | Employment agreement dated as of October 1, 2003 by and between the Company and Giulio Perillo.                                                             
|10.21   |  | Employment agreement dated as of July 1, 2003 by and between the Company and Edward Pulwer.                                                                 
|10.22   |  | Employment agreement dated as of July 1, 2003 by and between the Company and Frank McCaney.                                                                 
|10.23   |  | Employment agreement dated as of July 1, 2003 by and between the Company and Thomas Kuhn.                                                                   
|10.24** |  | Employment agreement dated as of July 1, 2003 by and between the Company and Mahboob Raja.                                                                  
|10.25** |  | Employment agreement dated as of June 9, 2003 by and between the Company and William Murray.                                                                
|14.0**   |  | Code of Conduct                                                                                                                                             
|21.1**   |  | Subsidiaries of the Company.                                                                                                                                
|23.1**   |  | Independent Auditor's Report on Schedule.                                                                                                                   
|23.2**   |  | Consent of Independent Auditors.                                                                                                                            
|31.1**   |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2**   |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1**   |  | Certification of Chief Executive Officer and Chief Financial Officer of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

43

---



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 January 3, 2004      |  | $                            | 6,113 |                              | $ | 464                |  | $                    | 148 |          | $ | (1,420                
|Year Ended December 28, 2002    |  | $                            | 7,050 |                              | $ | 2,066              |  | $                    | 500 |          | $ | (3,879                
|Year Ended December 29, 2001    |  | $                            | 6,524 |                              | $ | 1,747              |  | $                    | 202 |          | $ | (1,338                

---

44

---

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 15, 2004 |  | VIASYS HEALTHCARE 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 15, 2004.

|    |  | Signature                             |  | Title                                                                          
|--- |  | ------------------------------------- |  | -------------------------------------------------------------------------------
|    |  |                                       |  |                                                                                
|By: |  | /s/RANDY H. THURMANRandy H. Thurman   |  | Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
|By: |  | /s/MARTIN P. GALVANMartin P. Galvan   |  | Chief Financial Officer (Principal Financial Officer)                          
|By: |  | /s/RONALD A. AHRENSRonald A. Ahrens   |  | Director                                                                       
|By: |  | /s/SANDER A. FLAUMSander A. Flaum     |  | Director                                                                       
|By: |  | /s/DAVID W. GOLDEDavid W. Golde       |  | Director                                                                       
|By: |  | /s/MARY J. GUILFOILEMary J. Guilfoile |  | Director                                                                       
|By: |  | /s/ROBERT W. O'LEARYRobert W. O'Leary |  | Director                                                                       

45

---



REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of VIASYS Healthcare Inc. as of January 3, 2004 and December 28, 2002, and the
related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended January 3, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIASYS Healthcare Inc. at
January 3, 2004 and December 28, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 2004, in
conformity with accounting principles generally accepted in the United States.

As
discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill in accordance with SFAS No. 142.

| |  |                     
| |  | --------------------
| |  | /s/ERNST & YOUNG LLP

Philadelphia,
Pennsylvania
February 13, 2004

F-1

---



VIASYS HEALTHCARE INC.        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                      | 2003                                       |         | 2002    |        
|------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | -------
|
|ASSETS                               |                                                                                                     
|Current Assets:                      |                                                                                                      |                                            |         |         |        
|                                     | Cash and cash equivalents                                                                            |                                            | $       | 97,902  |        
|                                     | Accounts receivable, less allowances of $5,955 and $6,113                                            |                                            |         | 95,544  |        
|                                     | Inventories                                                                                          |                                            |         | 66,733  |        
|                                     | Assets of discontinued operations                                                                    |                                            |         |        |        
|                                     | Deferred tax asset                                                                                   |                                            |         | 13,163  |        
|                                     | Prepaid expenses                                                                                     |                                            |         | 5,489   |        
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | Total Current Assets                       |         |         | 278,831
|                                     |                                                                                                      |                                            |         |         |        
|Property, Plant and Equipment, Net   |                                                                                                      |                                            | 23,791  |         |        
|Goodwill, Net                        |                                                                                                      |                                            | 182,436 |         |        
|Intangible Assets, Net               |                                                                                                      |                                            | 15,569  |         |        
|Deferred Tax Asset                   |                                                                                                      |                                            | 1,830   |         |        
|Other Assets                         |                                                                                                      |                                            | 4,325   |         |        
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | TOTAL ASSETS                               |         | $       | 506,782
|                                     |                                                                                                      |                                            |         |         |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                     
|Current Liabilities:                 |                                                                                                      |                                            |         |         |        
|                                     | Short-term obligations                                                                               |                                            | $       | 1,096   |        
|                                     | Accounts payable                                                                                     |                                            |         | 20,586  |        
|                                     | Accrued payroll and employee benefits                                                                |                                            |         | 12,474  |        
|                                     | Deferred revenue                                                                                     |                                            |         | 10,647  |        
|                                     | Accrued installation and warranty costs                                                              |                                            |         | 4,911   |        
|                                     | Accrued commissions                                                                                  |                                            |         | 3,835   |        
|                                     | Deferred tax liability                                                                               |                                            |         | 627     |        
|                                     | Income taxes payable                                                                                 |                                            |         | 1,349   |        
|                                     | Liabilities of discontinued operations                                                               |                                            |         |        |        
|                                     | Other accrued expenses                                                                               |                                            |         | 12,431  |        
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | Total Current Liabilities                  |         |         | 67,956 
|                                     |                                                                                                      |                                            |         |         |        
|Deferred Tax Liability               |                                                                                                      |                                            | 4,777   |         |        
|Other Long-Term Liabilities          |                                                                                                      |                                            | 2,392   |         |        
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | Total Liabilities                          |         | $       | 75,125 
|                                     |                                                                                                      |                                            |         |         |        
|Stockholders' equity:                |                                                                                                      |                                            |         |         |        
|                                     | Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued                            |                                            |         |        |        
|                                     | Common stock, $.01 par value, 100,000,000 shares authorized; 30,415,615 and 26,250,698 shares issued |                                            |         | 303     |        
|                                     | Additional paid-in capital                                                                           |                                            |         | 340,040 |        
|                                     | Treasury stock, 5,597 shares                                                                         |                                            |         | (111    | )      
|                                     | Retained earnings                                                                                    |                                            |         | 66,169  |        
|                                     | Accumulated other comprehensive income                                                               |                                            |         | 25,256  |        
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | Total Stockholders' Equity                 |         |         | 431,657
|                                     |                                                                                                      |                                            |         |         |        
|                                     |                                                                                                      | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |         | $       | 506,782
|                                     |                                                                                                      |                                            |         |         |        

See
accompanying notes to consolidated financial statements.

F-2

---



VIASYS HEALTHCARE INC.        CONSOLIDATED STATEMENTS OF INCOME

|                                                                             |                                               | 2003 |         | 2002    |   | 2001    |        
|---------------------------------------------------------------------------- | --------------------------------------------- | ---- | ------- | ------- | - | ------- | -------
|
|Revenues                                                                     |                                               | $    | 394,947 |         | $ | 342,452 |        
|                                                                             |                                               |      |         |         |   |         |        
|Costs and Operating Expenses:                                                |                                               |      |         |         |   |         |        
|                                                                             | Cost of revenues                              |      |         | 212,787 |   |         | 181,625
|                                                                             | Selling, general and administrative expenses  |      |         | 112,856 |   |         | 95,384 
|                                                                             | Research and development expenses             |      |         | 26,455  |   |         | 26,459 
|                                                                             | Restructuring costs                           |      |         | 1,797   |   |         | 5,731  
|                                                                             | Purchased in-process research and development |      |         |        |   |         | 900    
|                                                                             |                                               |      |         |         |   |         |        
|                                                                             |                                               |      | 353,895 |         |   | 310,099 |        
|                                                                             |                                               |      |         |         |   |         |        
|Operating Income                                                             |                                               |      | 41,052  |         |   | 32,353  |        
|Interest Expense, Net                                                        |                                               |      | (656    | )       |   | (1,586  | )      
|Other Expense, Net                                                           |                                               |      | (1,252  | )       |   | (434    | )      
|                                                                             |                                               |      |         |         |   |         |        
|Income from Continuing Operations Before Provision for
Income Taxes          |                                               |      | 39,144  |         |   | 30,333  |        
|Provision for Income Taxes                                                   |                                               |      | (13,306 | )       |   | (11,485 | )      
|                                                                             |                                               |      |         |         |   |         |        
|Income from Continuing Operations                                            |                                               |      | 25,838  |         |   | 18,848  |        
|Discontinued Operations (net of income taxes of ($665), ($7,821) and $2,006) |                                               |      | (4,252  | )       |   | (13,524 | )      
|                                                                             |                                               |      |         |         |   |         |        
|Net Income                                                                   |                                               | $    | 21,586  |         | $ | 5,324   |        
|                                                                             |                                               |      |         |         |   |         |        
|Earnings per Share:                                                          |                                               |      |         |         |   |         |        
|Basic:                                                                       |                                               |      |         |         |   |         |        
|                                                                             | Continuing Operations                         |      |         | .91     |   |         | .72    
|                                                                             | Discontinued Operations                       |      |         | (.15    | ) |         | (.52   
|                                                                             |                                               |      |         |         |   |         |        
|                                                                             |                                               | $    | .76     |         | $ | .20     |        
|                                                                             |                                               |      |         |         |   |         |        
|Diluted:                                                                     |                                               |      |         |         |   |         |        
|                                                                             | Continuing Operations                         |      |         | .89     |   |         | .71    
|                                                                             | Discontinued Operations                       |      |         | (.14    | ) |         | (.51   
|                                                                             |                                               |      |         |         |   |         |        
|                                                                             |                                               | $    | .75     |         | $ | .20     |        
|                                                                             |                                               |      |         |         |   |         |        
|Weighted Average Shares Outstanding:                                         |                                               |      |         |         |   |         |        
|                                                                             | Basic                                         |      |         | 28,284  |   |         | 26,080 
|                                                                             |                                               |      |         |         |   |         |        
|                                                                             | Diluted                                       |      |         | 28,905  |   |         | 26,603 
|                                                                             |                                               |      |         |         |   |         |        

See
accompanying notes to consolidated financial statements.

F-3

---



VIASYS HEALTHCARE INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                                   | 2003                                                                |                                                                  | 2002    |        | 2001    |        
|------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------------------- | ------- | ------ | ------- | -------
|
|Operating Activities:                             |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  | Net income                                                                        |                                                                     | $                                                                | 21,586  |        | $       | 5,324  
|                                                  | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                     |                                                                  |         |        |         |        
|                                                  |                                                                                   | (Income) loss from discontinued operations                          |                                                                  |         | 4,252  |         |        
|                                                  |                                                                                   | Depreciation and amortization                                       |                                                                  |         | 12,774 |         |        
|                                                  |                                                                                   | Provision for write-down of asset                                   |                                                                  |         |       |         |        
|                                                  |                                                                                   | Provision for losses on accounts receivable                         |                                                                  |         | 464    |         |        
|                                                  |                                                                                   | Purchased in-process research and development                       |                                                                  |         |       |         |        
|                                                  |                                                                                   | Deferred income taxes                                               |                                                                  |         | 3,070  |         |        
|                                                  |                                                                                   | Other noncash items                                                 |                                                                  |         | (166   | )       |        
|                                                  |                                                                                   | Changes in current accounts, excluding the effects of acquisitions: |                                                                  |         |        |         |        
|                                                  |                                                                                   |                                                                     | Accounts receivable                                              |         |        | (11,056 | )      
|                                                  |                                                                                   |                                                                     | Inventories                                                      |         |        | 11,830  |        
|                                                  |                                                                                   |                                                                     | Prepaid expenses and other                                       |         |        | (2,225  | )      
|                                                  |                                                                                   |                                                                     | Accounts payable                                                 |         |        | 3,380   |        
|                                                  |                                                                                   |                                                                     | Other current liabilities                                        |         |        | 7,501   |        
|                                                  |                                                                                   | Other                                                               |                                                                  |         | (762   | )       |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  |                                                                                   |                                                                     | Net cash provided by continuing operating activities             |         |        | 50,648  |        
|                                                  |                                                                                   |                                                                     | Net cash (used in) provided by discontinued operating activities |         |        | (4,403  | )      
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  |                                                                                   |                                                                     | Net cash provided by operating activities                        |         |        | 46,245  |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Investing Activities:                             |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  | Acquisitions, net of cash acquired                                                |                                                                     |                                                                  | (3,504  | )      |         | (18,194
|                                                  | Purchases of property, plant and equipment                                        |                                                                     |                                                                  | (5,965  | )      |         | (11,396
|                                                  | Proceeds from sale of property, plant and equipment                               |                                                                     |                                                                  | 2,020   |        |         | 2,783  
|                                                  | Advances from affiliate                                                           |                                                                     |                                                                  |        |        |         |       
|                                                  | Increase in other assets                                                          |                                                                     |                                                                  | (3,851  | )      |         | (3,115 
|                                                  | Investing activities of discontinued operations                                   |                                                                     |                                                                  | 20,468  |        |         | (4,365 
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  |                                                                                   | Net cash provided by (used in) investing activities                 |                                                                  |         | 9,168  |         |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Financing Activities:                             |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  | Net proceeds from issuance of Company common stock                                |                                                                     |                                                                  | 72,403  |        |         | 907    
|                                                  | Purchase of treasury stock                                                        |                                                                     |                                                                  |        |        |         | (111   
|                                                  | Capital contribution from former parent company                                   |                                                                     |                                                                  |        |        |         |       
|                                                  | Net transfer from former parent company                                           |                                                                     |                                                                  |        |        |         |       
|                                                  | Increase (decrease) in short-term borrowings                                      |                                                                     |                                                                  | (47,319 | )      |         | 13,798 
|                                                  | Financing activities of discontinued operations                                   |                                                                     |                                                                  |        |        |         |       
|                                                  | Other                                                                             |                                                                     |                                                                  | (8      | )      |         | (336   
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  |                                                                                   | Net cash provided by (used in) financing activities                 |                                                                  |         | 25,076 |         |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Exchange Rate Effect on Cash and Cash Equivalents |                                                                                   |                                                                     | 2,377                                                            |         |        | 3,747   |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Increase in Cash and Cash Equivalents             |                                                                                   |                                                                     | 82,866                                                           |         |        | 68      |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Cash and Cash Equivalents at Beginning of Year    |                                                                                   |                                                                     | 15,036                                                           |         |        | 14,968  |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Cash and Cash Equivalents at End of Year          |                                                                                   | $                                                                   | 97,902                                                           |         | $      | 15,036  |        
|                                                  |                                                                                   |                                                                     |                                                                  |         |        |         |        
|Cash Paid For:                                    |                                                                                   |                                                                     |                                                                  |         |        |         |        
|                                                  | Interest                                                                          |                                                                     | $                                                                | 1,023   |        | $       | 1,698  
|                                                  | Income taxes                                                                      |                                                                     | $                                                                | 8,421   |        | $       | 9,412  

See accompanying notes to consolidated financial statements.

F-4

---



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

|                                                                      |  | Common
Stock |     | Deferred
Compensation |   | Additional
Paid-in
Capital |   | Treasury
Stock |         | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |   | Total
Stockholders'
Equity |       
|--------------------------------------------------------------------- |  | ------------ | --- | --------------------- | - | -------------------------- | - | -------------- | ------- | ----------------- | - | --------------------------------------------- | - | -------------------------- | ------
|
|Balance at December 30, 2000                                          |  | $            | 260 |                       | $ |                           |   | $              | 262,095 |                   | $ |                                              |   | $                          | 24,579
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Net income                                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            | 16,262
|Foreign currency translation adjustment                               |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Comprehensive incometotal                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Conversion of former parent stock
to Company restricted stock         |  |              |     |                       |   | (212                       | ) |                |         |                   |   |                                               |   |                            |       
|Amortization of deferred compensation                                 |  |              |     |                       |   | 54                         |   |                |         |                   |   |                                               |   |                            |       
|Net transfer to former parent company                                 |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            | (1,582
|Capital contribution from former parent company                       |  |              |     |                       |   |                            |   |                | 581     |                   |   |                                               |   |                            |       
|Tax benefit from stock option plan                                    |  |              |     |                       |   |                            |   |                | 31      |                   |   |                                               |   |                            |       
|Stock issued under employee stock purchase plan and stock option plan |  |              |     |                       |   |                            |   |                | 464     |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Balance at December 29, 2001                                          |  | $            | 260 |                       | $ | (158                       | ) | $              | 263,171 |                   | $ |                                              |   | $                          | 39,259
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Net income                                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            | 5,324 
|Foreign currency translation adjustment                               |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Comprehensive incometotal                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Amortization of deferred compensation                                 |  |              |     |                       |   | 158                        |   |                |         |                   |   |                                               |   |                            |       
|Tax benefit from stock option plan                                    |  |              |     |                       |   |                            |   |                | 147     |                   |   |                                               |   |                            |       
|Stock issued under employee stock purchase plan and stock option plan |  |              | 1   |                       |   |                            |   |                | 907     |                   |   |                                               |   |                            |       
|Purchase of treasury stock                                            |  |              |     |                       |   |                            |   |                |         |                   |   | (111                                          | ) |                            |       
|Stock issued for purchase of EME                                      |  |              | 2   |                       |   |                            |   |                | 2,249   |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Balance at December 28, 2002                                          |  | $            | 263 |                       | $ |                           |   | $              | 266,474 |                   | $ | (111                                          | ) | $                          | 44,583
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Net income                                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            | 21,586
|Foreign currency translation adjustment                               |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Comprehensive incometotal                                            |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Stock issued in equity offering                                       |  |              | 35  |                       |   |                            |   |                | 62,654  |                   |   |                                               |   |                            |       
|Tax benefit from stock option plan                                    |  |              |     |                       |   |                            |   |                | 1,203   |                   |   |                                               |   |                            |       
|Stock issued under employee stock purchase plan and stock option plan |  |              | 5   |                       |   |                            |   |                | 9,709   |                   |   |                                               |   |                            |       
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       
|Balance at January 3, 2004                                            |  | $            | 303 |                       | $ |                           |   | $              | 340,040 |                   | $ | (111                                          | ) | $                          | 66,169
|                                                                      |  |              |     |                       |   |                            |   |                |         |                   |   |                                               |   |                            |       

See accompanying notes to 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, markets and services medical devices and products, including respiratory care equipment,
neurodiagnostic systems, disposable products and other specialty products and materials. In September 2003, the Company decided to sell certain assets of its Thermedics Polymer business
("Thermedics"). The consolidated financial statements have been restated to present Thermedics, which was divested in October 2003, as well as Medical Data Electronics ("MDE"), which was
divested in April 2003, as discontinued operations.

Relationship with Thermo Electron Corporation

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

In
early 2000, Thermo Electron announced that, as a part of a major reorganization, it planned to spin off its equity interest in the Company as a dividend to Thermo Electron
stockholders. In January 2001, Thermo Biomedical Inc. changed its name to VIASYS Healthcare Inc. Subsequently, Thermo Electron received a favorable ruling from the Internal
Revenue Service regarding the planned spin off. On October 10, 2001, 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 "Spin-off 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 was used to finance operations of all of its respective business
segments, or an allocation of Thermo Electron's interest expense for the 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 on the Saturday nearest December 31. References to 2003, 2002 and 2001 are as of and for the fiscal years
ended January 3, 2004, December 28, 2002 and December 29, 2001, respectively.

F-6

---

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.

Revenue Recognition

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

Service
revenues are derived from parts and supplies, in-house and field repairs, service contracts and customer education. The Company sells service contracts on products
when the warranty period expires. The Company recognizes revenues from these service contracts ratably over the terms of the contracts, while the cost is recognized when incurred.

The
Company rents products, primarily in the Respiratory Technologies segment, to hospitals and other customers for periods ranging from two weeks to over a year. The Company recognizes
rental revenues ratably over the terms of the rental contract.

Costs and Operating Expenses

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

Shipping and Handling Cost

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

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The allowance is
determined by analyzing historical data and trends. Past due or delinquency status is based on contractual terms. Charges for doubtful accounts are recorded in selling, general and administrative
expenses.

F-7

---

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 8). Accordingly, no accounting recognition is given to stock options granted at fair market value.

Had
compensation cost for awards granted 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:

2003

2002

2001(In thousands, except per share amounts)Net Income:As reported

$
21,586

$
5,324

$
16,262Pro forma compensation costs, net of tax


(4,525
)

(4,249
)

(1,489
)Pro forma

$
17,061

$
1,075

$
14,773Basic Earnings per Share:As reported

$
.76

$
.20

$
.63Pro forma

$
.60

$
.04

$
.57Diluted Earnings per Share:As reported

$
.75

$
.20

$
.62Pro forma

$
.59

$
.04

$
.56


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 $5.63 and $6.57 in 2003 and 2002, respectively. 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:

2003

2002Volatility

34.0%

34.0%Risk-free Interest Rate

3.0%

3.7%Expected Life of Options

5.0 years

5.0 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.

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

F-8

---

using
enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return.

Through
the Spin-off 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 Spin-off Date, the Company files its own tax returns.

Cash and Cash Equivalents

The Company's cash and cash equivalents include investments in interest-bearing accounts which have an original maturity of three months or less. Cash equivalents
are carried at cost, which approximates market value. Through the Spin-off Date, the Company's cash receipts and disbursements were combined with other Thermo Electron corporate cash
transactions. Cash transfers between the Company and Thermo Electron appear in the accompanying statements of cash flows and changes in Stockholder's equity as "Net transfer from former parent
company." The average balance outstanding with our former parent company was $30,301,000 during 2001 through the Spin-off Date.

Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, short-term obligations and accounts payable.
Their respective carrying amounts approximate fair value due to their short-term nature.

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:

2003

2002(In thousands)Raw Materials

$
39,036

$
44,736Work in Process


6,868


8,777Finished Goods


20,829


22,222$
66,733

$
75,735


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 a
charge to cost of revenues for the amount required to reduce the carrying value of the inventories to estimated net realizable value.

F-9

---

Property, Plant and Equipment

The costs of additions and improvements are capitalized, while maintenance and repair costs 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 expense was $7,111,000, $7,628,000 and $6,925,000 for 2003, 2002 and 2001,
respectively.

Property,
plant and equipment consist of the following:

2003

2002(In thousands)Land

$
990

$
1,617Buildings


6,892


7,623Machinery and Equipment


71,150


70,036Leasehold Improvements


8,264


6,230Construction in Progress


1,485


770Property, plant and equipment, at cost


88,781


86,276Less: Accumulated Depreciation


64,990


58,315Property, Plant and Equipment, Net

$
23,791

$
27,961


Intangible Assets

Intangible assets include the cost of acquired patents, software and technology. These assets are being amortized using the straight-line method over
their estimated useful lives, which range from 3 to 17 years. See Note 10 to the Consolidated Financial Statements.

Goodwill

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. The
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on December 30, 2001. Goodwill and certain other intangible assets having indefinite lives, which were previously
amortized on a straight-line basis over 40 years, are no longer permitted to be amortized to earnings, but instead are subject to periodic testing for impairment. The Company tests
goodwill for impairment using the two-step process prescribed by SFAS No. 142. The first step tests for potential impairment, while the second step measures the amount of
impairment, if any. The Company uses a discounted cash flow analysis to complete the first step in this process. The Company conducted the required annual impairment review as of December 1,
2003 and also determined that there was no goodwill impairment as of that date. Amortization of goodwill was $4,377,000 in 2001.

F-10

---

The
following table reflects consolidated results adjusted as though the adoption of SFAS 142 occurred as of the beginning of the year ended December 29, 2001:

|                                                       |  | 2003 |        | 2002 |   | 2001  
|------------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|
|Income from Continuing Operations, after tax:          |  |      |        |      |   |       
|As reported                                            |  | $    | 25,838 |      | $ | 18,848
|Goodwill amortization (net of tax of $0, $0 and $263)  |  |      |       |      |   |      
|                                                       |  |      |        |      |   |       
|As adjusted                                            |  | $    | 25,838 |      | $ | 18,848
|                                                       |  |      |        |      |   |       
|Basic Earnings Per Share from Continuing Operations:   |  |      |        |      |   |       
|As reported                                            |  | $    | .91    |      | $ | .72   
|Goodwill amortization (net of tax of $0, $0 and $.01)  |  |      |       |      |   |      
|                                                       |  |      |        |      |   |       
|As adjusted                                            |  | $    | .91    |      | $ | .72   
|                                                       |  |      |        |      |   |       
|Diluted Earnings Per Share from Continuing Operations: |  |      |        |      |   |       
|As reported                                            |  | $    | .89    |      | $ | .71   
|Goodwill amortization (net of tax of $0, $0 and $.01)  |  |      |       |      |   |      
|                                                       |  |      |        |      |   |       
|As adjusted                                            |  | $    | .89    |      | $ | .71   
|                                                       |  |      |        |      |   |       

The
following table presents the activity in Goodwill:

|                             |  | Respiratory
Technologies |        | Critical Care |   | NeuroCare |  | Medical and
Surgical
Products |        | Total
|---------------------------- |  | ------------------------ | ------ | ------------- | - | --------- |  | ----------------------------- | ------ | -----
|December 29, 2001            |  | $                        | 26,572 |               | $ | 65,128    |  | $                             | 52,509 |      
|Acquisition Related          |  |                          |       |               |   | 15,273    |  |                               | 1,918  |      
|Foreign Currency Translation |  |                          | 3,517  |               |   | 429       |  |                               |       |      
|                             |  |                          |        |               |   |           |  |                               |        |      
|December 28, 2002            |  | $                        | 30,089 |               | $ | 80,830    |  | $                             | 54,427 |      
|                             |  |                          |        |               |   |           |  |                               |        |      
|Acquisition Related          |  |                          |       |               |   | 1,968     |  |                               |       |      
|Foreign Currency Translation |  |                          | 7,820  |               |   | 1,947     |  |                               | 206    |      
|                             |  |                          |        |               |   |           |  |                               |        |      
|January 3, 2003              |  | $                        | 37,909 |               | $ | 84,745    |  | $                             | 54,633 |      
|                             |  |                          |        |               |   |           |  |                               |        |      

Warranty and Installation Reserve

The Company offers warranties on some products for various periods of time. At the time of the sale, a reserve is established for the estimated cost of warranties
based on the Company's 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. A reserve for installation is recorded at the time title transfers when installation is not essential to
functionality and is deemed inconsequential or perfunctory. The Company records warranty and installation expense in cost of revenues.

F-11

---

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
weighted average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of "Accumulated other comprehensive income (loss)." Transaction gains (losses),
recorded in Other Expense, Net, totaled $(1,410,000), ($438,000) and $188,000 in 2003, 2002 and 2001, respectively.

Comprehensive Income

Comprehensive income combines net income and foreign currency translation adjustments, reported as a component of Stockholders' Equity in the accompanying balance
sheet.

Recent Accounting Pronouncements

Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146
replaces previous accounting guidance provided by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and is effective for the Company for exit or disposal activities initiated after December 31, 2002. Adoption of
this statement caused certain expenses related to our restructuring plans initiated in 2003 to be deferred into future periods. The adoption of this statement had no impact on the Company's liquidity.

Effective
January 1, 2003, the Company adopted the Financial Accounting Standards Board's ("FASB") Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34" ("FIN 45"). The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll-forward of the entity's product warranty liabilities. This interpretation is intended
to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified
consideration. Adoption of this Interpretation was not material to the Company's consolidated financial position, consolidated results of operations, or liquidity.

Effective
July 1, 2003, the Company adopted the FASB's consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This
issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus of this issue is
applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Adoption of this issue was not material to the Company's consolidated financial position, consolidated
results of operations, or liquidity.

In
January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51." The primary objectives of
this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to
determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model

F-12

---

for
consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as
all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements
issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to
address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to
February 1, 2003. The company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period
ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The company is required to adopt FIN 46-R at the end of the first interim
or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN
46 were applicable for variable interests in entities obtained after January 31, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after
January 31, 2003 had no impact on the Company's consolidated financial position, consolidated results of operations, or liquidity. The company is currently evaluating the impact of adopting FIN
46-R applicable to Non-SPEs created prior to February 1, 2003 but does not expect a material impact.

2. Earnings per Share

The following table sets forth the reconciliation of the weighted average number of common shares used to compute basic earnings per share (EPS) to those used to
compute diluted EPS for 2003, 2002 and 2001:

2003

2002

2001Weighted Average Number of Common Shares OutstandingBasic

28,284

26,080

26,002Dilutive Effect of Stock Options Outstanding

621

523

74Weighted Average Number of Dilutive Shares

28,905

26,603

26,076


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

Business Segment Information

The Company's businesses operate in four segments: Respiratory Technologies, Critical Care, NeuroCare and Medical and Surgical Products. The Respiratory
Technologies segment develops, manufactures, markets and services products for the diagnosis and treatment of respiratory, pulmonary and sleep-related disorders. The Critical Care segment develops,
manufactures, markets and services products to treat respiratory insufficiency caused by illness, injury or premature birth. The NeuroCare segment principally develops, manufactures, markets and
services a comprehensive line of neurodiagnostic, vascular and audiology systems. The Medical and Surgical Products segment develops, manufactures and markets disposable medical products and specialty
metal components for orthopedics, medical imaging equipment and cardio-vascular implants. In classifying operations into a particular

F-13

---

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

|                                                                     |                                              | 2003                          |         | 2002    |         | 2001    |        
|-------------------------------------------------------------------- | -------------------------------------------- | ----------------------------- | ------- | ------- | ------- | ------- | -------
|
|Revenues:                                                            |                                              |                               |         |         |         |         |        
|                                                                     | Respiratory Technologies                     |                               | $       | 114,128 |         | $       | 97,225 
|                                                                     | Critical Care                                |                               |         | 132,897 |         |         | 97,296 
|                                                                     | NeuroCare                                    |                               |         | 91,964  |         |         | 93,880 
|                                                                     | Medical and Surgical Products                |                               |         | 55,958  |         |         | 54,051 
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     |                                              | $                             | 394,947 |         | $       | 342,452 |        
|                                                                     |                                              |                               |         |         |         |         |        
|Income from Continuing Operations Before Provision for Income Taxes: |                                              |                               |         |         |         |         |        
|                                                                     | Operating Income:                            |                               |         |         |         |         |        
|                                                                     |                                              | Respiratory Technologies      |         | $       | 14,073  |         | $      
|                                                                     |                                              | Critical Care                 |         |         | 26,636  |         |        
|                                                                     |                                              | NeuroCare                     |         |         | 3,798   |         |        
|                                                                     |                                              | Medical and Surgical Products |         |         | 9,316   |         |        
|                                                                     |                                              | Corporate(a)                  |         |         | (12,771 | )       |        
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     | Operating Income from Continuing Operations  |                               |         | 41,052  |         |         | 32,353 
|                                                                     | Interest and Other Expense, Net              |                               |         | (1,908  | )       |         | (2,020 
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     | Income from Continuing Operations before tax |                               | $       | 39,144  |         | $       | 30,333 
|                                                                     |                                              |                               |         |         |         |         |        
|Total Assets:                                                        |                                              |                               |         |         |         |         |        
|                                                                     | Respiratory Technologies                     |                               | $       | 126,594 |         | $       | 105,820
|                                                                     | Critical Care                                |                               |         | 159,188 |         |         | 148,284
|                                                                     | NeuroCare                                    |                               |         | 103,647 |         |         | 108,933
|                                                                     | Medical and Surgical Products                |                               |         | 33,417  |         |         | 29,340 
|                                                                     | Corporate(b)                                 |                               |         | 83,936  |         |         | 13,562 
|                                                                     | Assets of Discontinued Operation             |                               |         |        |         |         | 35,561 
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     |                                              | $                             | 506,782 |         | $       | 441,500 |        
|                                                                     |                                              |                               |         |         |         |         |        
|Depreciation and Amortization:                                       |                                              |                               |         |         |         |         |        
|                                                                     | Respiratory Technologies                     |                               | $       | 3,925   |         | $       | 4,434  
|                                                                     | Critical Care                                |                               |         | 3,095   |         |         | 1,732  
|                                                                     | NeuroCare                                    |                               |         | 3,041   |         |         | 1,604  
|                                                                     | Medical and Surgical Products                |                               |         | 2,201   |         |         | 1,899  
|                                                                     | Corporate                                    |                               |         | 512     |         |         | 201    
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     |                                              | $                             | 12,774  |         | $       | 9,870   |        
|                                                                     |                                              |                               |         |         |         |         |        
|Capital Expenditures:                                                |                                              |                               |         |         |         |         |        
|                                                                     | Respiratory Technologies                     |                               | $       | 885     |         | $       | 5,785  
|                                                                     | Critical Care                                |                               |         | 1,530   |         |         | 470    
|                                                                     | NeuroCare                                    |                               |         | 536     |         |         | 1,259  
|                                                                     | Medical and Surgical Products                |                               |         | 2,496   |         |         | 3,054  
|                                                                     | Corporate                                    |                               |         | 518     |         |         | 828    
|                                                                     |                                              |                               |         |         |         |         |        
|                                                                     |                                              | $                             | 5,965   |         | $       | 11,396  |        
|                                                                     |                                              |                               |         |         |         |         |        

---

F-14

---



Geographic Information

Export revenues accounted for 22%, 23% and 25% of the Company's total revenues in 2003, 2002 and 2001, respectively. Revenues from countries outside the United
States, based on selling location, accounted for 21%, 18% and 17% of the Company's total revenues in 2003, 2002 and 2001, respectively. Long-lived assets in countries outside the United
States accounted for 39%, 25% and 14% of the Company's long-lived assets at year-end 2003, 2002 and 2001, respectively, and principally consisted of goodwill and property,
plant and equipment. Long-lived assets held in Germany account for 28%, 15% and 14% of our total long-lived assets in 2003, 2002 and 2001, respectively. Long-lived
assets held in the United Kingdom account for 11% of our total long-lived assets in 2003. There was no country outside of the United States in which revenues exceeded 10% of the Company's
total revenues in 2003, 2002 or 2001.

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.

4.    Income Taxes

The components of income from continuing operations before provision for income taxes are as follows:

2003

2002

2001(In thousands)Domestic

$
29,106

$
24,122

$
20,004Foreign


10,038


6,211


2,978$
39,144

$
30,333

$
22,982


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

2003

2002

2001(In thousands)Current:Federal

$
5,399

$
8,143

$
7,661State


1,352


1,296


1,123Foreign


3,485


2,071


1,852Total current


10,236


11,510


10,636Deferred:Federal


2,492


(716
)

(659
)State


227


133


(182
)Foreign


351


558


(44
)Total deferred


3,070


(25
)

(885
)Total provision for income taxes

$
13,306

$
11,485

$
9,751


F-15

---

The
provision for income taxes 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:

2003

2002

2001(In thousands)Federal Statutory Rate

$
13,700

$
10,617

$
8,044Increases (Decreases) Resulting From:State income taxes, net of federal tax


1,026


929


612Amortization of goodwill








1,122Export sales benefit


(1,750
)

(634
)

(953
)Foreign tax rate differential and operating loss benefits (net)


324


455


775Nondeductible expenses


315


243


282Other


(309
)

(125
)

(131
)$
13,306

$
11,485

$
9,751


Deferred
tax assets and liabilities consist of the following:

2003

2002(In thousands)Deferred Tax Assets (Liabilities):Reserves and accruals

$
4,032

$
3,956Inventory basis difference


5,736


5,715Net operating loss and credit carryforwards


3,615


3,292Accrued compensation


1,217


1,319Depreciation and amortization


(3,264
)

(1,696
)Deferred Credits


2,110


2,296Other, net


(534
)

332$
12,912

$
15,214Less: Valuation allowance


(3,323
)

(2,951
)$
9,589

$
12,263


The
valuation allowance relates to uncertainty surrounding the realization of U.S. and foreign tax net operating loss and credit carryforwards. At January 3, 2004, the Company had
U.S. and foreign net operating loss carryforwards of approximately $10,100,000 which expire at various times over the next 20 years. Deferred taxes have not been provided on approximately
$13,400,000 of undistributed earnings
of foreign subsidiaries that could be subject to taxation if remitted to the United States because the Company currently plans to keep these amounts permanently invested overseas.

5.    Restructuring

The Company has engaged in various restructuring efforts over the last three years to reduce costs, achieve synergies and streamline operations. As a result of
these efforts, the Company incurred costs to close and consolidate facilities, retain certain employees and terminate employees. As of January 3, 2004, substantially all of the intended
employees had been severed.

F-16

---



On August 6, 2003, the Company commenced a plan to restructure its NeuroCare segment. The restructuring plan included the termination of 55 people from
general and administrative, service and manufacturing. The plan was carried out in the third and fourth quarters of 2003 and as a result severance of $551,000 was expensed and paid.

As
a result of the acquisition of EME, the Company has begun implementation of certain planned restructuring activities to reduce costs and promote operational efficiencies. These
actions will eliminate redundant functions through a reduction in staffing of 48 people across all functions, including sales, service, finance and research and development. As of January 3,
2004, $906,000 of retention payments have been expensed and paid for approximately 45 people. The remaining restructuring payments are expected to be made by the end of the first quarter of 2004.

In
the fourth quarter of 2003, the Company commenced plans to close a machine shop and reduce the number of customer service positions at Erich Jaeger in Germany. Due to German labor
regulations certain positions cannot be eliminated immediately. Therefore, 24 positions will be eliminated over the next five years. As of January 3, 2004, seven of these positions had been
eliminated and $215,000 of severance has been paid. In addition, retention expense for the remaining 17 employees will be recorded ratably over their remaining employment. This expense is expected to
total approximately $1,700,000. As of January 3, 2004, approximately $125,000 of this amount has been accrued.

Included
in the restructuring costs in 2002 and 2001 were charges for the closure of certain facilities. The facilities affected by these actions included the Company's New Hampshire and
Colorado facilities which were consolidated with the Company's NeuroCare operations in Wisconsin. In addition, the Company vacated several sales and service offices, mainly in Germany and Austria, and
consolidated those operations into one facility in Germany.

The
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  |  
|---------------------------- | --------------------------------------------- | --------- | ----- | ------------------ | - | -------------------- | ------ | ----- | --- | ------ | -
|
|Balance at December 30, 2000 |                                               | $         |      |                    | $ | 1,110                |        | $     |    |        | $
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|                             | Costs accrued(a)                              |           |       | 3,864              |   |                      | 1,601  |       |     | 97     |  
|                             | Payments                                      |           |       | (1,632             | ) |                      | (2,391 | )     |     | (51    | )
|                             | Currency translation                          |           |       | (28                | ) |                      |       |       |     |       |  
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|Balance at December 29, 2001 |                                               | $         | 2,204 |                    | $ | 320                  |        | $     | 46  |        | $
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|                             | Costs accrued(b)                              |           |       | 2,905              |   |                      |       |       |     | 2,272  |  
|                             | Non-cash write-down of New Hampshire facility |           |       |                   |   |                      |       |       |     | (1,102 | )
|                             | Payments                                      |           |       | (4,026             | ) |                      | (320   | )     |     | (708   | )
|                             | Currency translation                          |           |       | 340                |   |                      |       |       |     |       |  
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|Balance at December 28, 2002 |                                               | $         | 1,423 |                    | $ |                     |        | $     | 508 |        | $
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|                             | Costs accrued(c)                              |           |       | 891                |   |                      | 899    |       |     |       |  
|                             | Payments                                      |           |       | (1,502             | ) |                      | (848   | )     |     | (351   | )
|                             | Currency translation                          |           |       | 196                |   |                      | (51    | )     |     | (17    | )
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  
|Balance at January 3, 2004   |                                               | $         | 1,008 |                    | $ |                     |        | $     | 140 |        | $
|                             |                                               |           |       |                    |   |                      |        |       |     |        |  

---

F-17

---

6. Short-term Obligations

On May 31, 2002, the Company entered into a three-year syndicated $60,000,000 Senior Revolving Credit Facility (the "Facility") which expires
in May 2005. Under the Facility, there are options under which the Company can borrow funds which determine the interest rate that will be charged. These options include borrowings at LIBOR
plus a spread or at the prime rate plus a spread. Under the LIBOR option, the interest rate depends on the term selected which can be no more than one year, and is fixed for that term. Under the prime
rate option, the interest rate fluctuates based on the prime rate during the period which any amount is outstanding under that option.

Under
the terms of the Facility, the Company is subject to certain debt covenants which limit debt to a maximum of 2.5 times earnings before interest, taxes and depreciation and
amortization ("EBITDA"), require a minimum EBITDA to interest expense ratio of 4.0, limit aggregate annual capital expenditures to $20,000,000 and require a minimum stockholder's equity balance. The
Company is in compliance with these debt covenants as of January 3, 2004. Certain of the Company's assets are pledged as collateral under the Facility. The Company is also subject to commitment
fees on the unused portion of the Facility, the amounts of which are not material.

In
July 2003, we repaid the full amount outstanding under the Facility and no amount was outstanding at January 3, 2004.

7. Capital Stock

In August 2001, the Company's Board of Directors and sole stockholder approved an amendment to the Company's Certificate of Incorporation to, among other
items, authorize 5,000,000 shares of preferred stock, $.01 par value per share, for issuance by the Company's Board of Directors without future stockholder approval. The amendment also increased the
number of authorized shares of common stock, $.01 par value per share, for issuance from 3,000 shares to 100,000,000 shares.

In
August 2001, the Company effected a stock split through a distribution 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.

The
Company has reserved 6,680,000 shares of its common stock for possible issuance under stock-based compensation plans. As of January 3, 2004, 5,433,000 shares had been granted
and 1,247,000 shares were available for grant.

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

F-18

---

Acquisition
Date), or (ii) 10 business days following the commencement of a tender offer or exchange offer for 15% or more of the outstanding shares of common stock.

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

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

8. Employee Benefit Plans

Employee Stock Purchase Program

In October 2001, the Company adopted an employee stock purchase plan in which substantially all of the Company's full-time U.S. employees
became eligible to participate effective July 1, 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. Shares are purchased through payroll deductions of up to 10% of each participating employee's gross wages.

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.

Stock Option Activity

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-19

---

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

Number of
Shares
(in thousands)

Weighted Average
Exercise PriceOutstanding, December 30, 2000



$
Exchange of Thermo Electron Options for Company Options

520


13.80Granted

3,365


14.30Exercised

(19
)

13.16Forfeited

(3
)

12.70Outstanding, December 29, 2001

3,863

$
14.24Granted

702


18.06Exercised

(73
)

12.74Forfeited

(271
)

15.14Outstanding, December 28, 2002

4,221

$
14.84Granted

1,642


16.08Exercised

(557
)

13.47Forfeited

(521
)

14.50Outstanding, January 3, 2004

4,785

$
15.44ExercisableDecember 29, 2001

495

$
13.79December 28, 2002

1,363

$
14.07January 3, 2004

1,977

$
14.74Available for GrantDecember 29, 2001

798December 28, 2002

2,367January 3, 2004

1,247


A
summary of the status of the Company's stock options held by the Company's employees at January 3, 2004, is as follows:

Number of Shares
(in thousands)

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise PriceRange of Exercise Prices$  4.70$5.77

2

2.8

$
5.138.8012.67

97

1.6


11.4513.9920.27

4,627

8.0


15.4023.9029.46

58

5.9


24.5599.9899.98

1

4.1


99.98$  4.70$99.98

4,785

7.8

$
15.44


F-20

---



VIASYS HEALTHCARE INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company's exercisable stock options held by the Company's employees at January 3, 2004, is as follows:

Number of
Shares
(in thousands)

Weighted
Average Exercise
PriceRange of Exercise Prices$  4.70$5.77

1

$
5.778.8012.67

87


11.4113.9920.27

1,858


14.7023.9029.46

30


25.1599.9899.98

1


99.98$  4.70$99.98

1,977

$
14.74


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 $978,000 at the date of award and
vested over 3 years. Following the Spin-off Date, these restricted shares were converted into 18,960 restricted shares of Company common stock with the same terms. The Company
recognized the cost of these awards over their vesting period, which ended in 2002.

401(k) Savings Plans

Effective on the Spin-off Date, substantially all of the Company's U.S. employees are eligible to participate in the VIASYS Retirement Savings Plan.
Prior to this date, substantially all U.S. 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 $2,464,000,
$2,529,000 and $1,898,000 in 2003, 2002 and 2001, respectively.

9.    Commitments and Contingencies

Commitments

In addition to the related-party operating leases described in Note 12, the Company leases portions of its office and operating facilities under various
operating lease arrangements. Rent expense under these leases was $4,637,000, $3,937,000 and $2,293,000 in 2003, 2002 and 2001, respectively. Future annual minimum lease payments under all
noncancelable operating leases at January 3 2004, are as follows (in thousands):

2004

$
4,9162005


2,1802006


1,6462007


1,2712008


1,189Thereafter


1,475$
12,677


F-21

---

Contingencies

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 settled all outstanding lawsuits between the companies and related parties. Under the agreement both companies have access to certain
technologies and rights used in the companies' ventilators and the Company will be paid $4,000,000 in licensing fees over the three years ending March 2005. The licensing fees are being
recognized ratably over a four-year period.

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.

10.    Intangible Assets

Other amortizable intangible assets have an average life of 3-17 years and consist of the following:

2003

|                     |  | Gross
Intangible Assets |        | Accumulated
Amortization |   | Net Intangible
Assets
|-------------------- |  | ----------------------- | ------ | ------------------------ | - | ---------------------
|Software             |  | $                       | 18,627 |                          | $ | (9,921               
|Patents              |  |                         | 1,559  |                          |   | (219                 
|Purchased Technology |  |                         | 3,748  |                          |   | (325                 
|Other Intangibles    |  |                         | 2,724  |                          |   | (624                 
|                     |  |                         |        |                          |   |                      
|                     |  | $                       | 26,658 |                          | $ | (11,089              
|                     |  |                         |        |                          |   |                      

2002

|                     |  | Gross
Intangible Assets |        | Accumulated
Amortization |   | Net Intangible
Assets
|-------------------- |  | ----------------------- | ------ | ------------------------ | - | ---------------------
|Software             |  | $                       | 14,131 |                          | $ | (6,575               
|Patents              |  |                         | 750    |                          |   | (170                 
|Purchased Technology |  |                         | 3,632  |                          |   | (56                  
|Other Intangibles    |  |                         | 2,809  |                          |   | (1,161               
|                     |  |                         |        |                          |   |                      
|                     |  | $                       | 21,322 |                          | $ | (7,962               
|                     |  |                         |        |                          |   |                      

Amortization
expense of intangible assets other than goodwill for 2003, 2002 and 2001 was $3,843,000, $2,242,000 and $1,992,000, respectively. Estimated amortization expense of
intangible assets other than goodwill for the next five years is as follows (in thousands):

For the year ended January 1, 2005

$
3,897For the year ended December 31, 2005

$
3,731For the year ended December 30, 2006

$
3,690For the year ended December 29, 2007

$
3,496For the year ended January 3, 2009

$
3,489


F-22

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11.    Acquisitions

On October 16, 2002, the Company completed the acquisition of E.M.E. (Electro Medical Equipment) Limited ("EME") of Brighton, U.K. and its related U.S.
operations for $21,377,000, of which approximately $18,230,000 was in cash, $897,000 was in loan notes and $2,250,000 was in 146,535 shares of restricted VIASYS common stock. The cash portion of the
purchase price was financed by the Company's $60,000,000 credit facility. EME is a manufacturer and supplier of devices and disposables for the non-invasive treatment of newborns with
respiratory problems and is reported as part of our Critical Care segment. In connection with this acquisition $19,616,000 of goodwill has been recognized.

As
a result of the acquisition of EME, the Company has begun implementation of certain planned restructuring activities to reduce costs and promote operational efficiencies. These
actions will eliminate redundant functions and excess capacity through the closure of a facility and a reduction in staffing of 48 people across all functions, including sales, service, finance and
research and development.

In
connection with these restructuring activities, the Company established reserves totaling $1,290,000, including $750,000 for severance and employee related costs, $243,000 for lease
cancellation and other costs of $297,000. These costs have been accounted for as additional purchase price. The reserves established are included in other accrued expenses in the accompanying balance
sheet. The majority of the restructuring activities are scheduled to be completed early in 2004. As of January 3, 2004, $506,000 of severance has been paid to 45 people.

On
December 18, 2002, the Company purchased SciMed, Limited ("SciMed") of Bristol U.K. for $3,468,000 of which approximately $1,627,000 was paid in cash at closing. The remainder
of the purchase price totaling $1,841,000 was paid in the third quarter of 2003. In addition, contingent payments of up to $1,000,000 may also be paid based on the operating profit of SciMed. If the
contingent payment is distributed, the amount will be accounted for as additional purchase price. In relation to this acquisition, $1,879,000 of goodwill has been recorded in the Company's NeuroCare
segment.

12.    Related-party Transactions

Operating Lease

The Company leases office space from a former affiliate, which is controlled by Thermo Electron, under an operating lease arrangement that expires in 2004. Rent
expense under this lease was $735,000, $686,000 and $731,000 in 2003, 2002 and 2001, respectively.

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 would provide the Company with certain administrative services through June 29, 2002. The Company paid 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 $457,000 and $271,000 in 2002 and 2001 for the services provided under this agreement.

F-23

---

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 Spin-off Date. For these services the Company was charged $2,057,000 in 2001. 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 Spin-off Date and was replaced by a transition
services agreement, discussed above.

Advance to Chief Executive Officer

In 2001, the Company advanced its chief executive officer $500,000, which is being forgiven ratably over the four years following execution of the employment
agreement, assuming continued employment or in certain other circumstances. The balance of the advance was $166,000 at January 3, 2004.

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 in 2001 for these services.

13.    Discontinued Operations

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

On
April 3, 2003, the Company sold MDE to Invivo Corporation ("Invivo") for $9,257,000. As of January 3, 2004, the Company has received $8,307,000 of the purchase price.
The remaining $950,000 will remain in escrow until April 3, 2004, in accordance with the sale agreement to secure the Company's indemnification obligations to Invivo. The Company recorded in
2003 and 2002 respectively, an after-tax charge of $958,000 ($1,511,000 pre-tax) and $14,285,000 ($22,513,000 pre-tax), to write-down the assets of MDE
to their estimated net realizable value less the costs to sell. The total goodwill used in determining the loss was $27,000,000.

On
October 3, 2003, the Company sold Thermedics to Noveon Inc. for $14,632,000 in cash. In connection with the sale, the Company provided for an after-tax loss
on disposal, including expenses,

F-24

---

totaling
$2,600,000. Included in this loss was $2,459,000 of goodwill. The amount has been provided for on the Discontinued Operations line in the accompanying Consolidated Statements of Income.

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

2003

2002

2001(In thousands)Revenues

$
12,513

$
27,860

$
34,857Income (loss) before income taxes


(4,917
)

(21,345
)

5,037Net Income (loss)


(4,252
)

(13,524
)

3,031


The
net assets of MDE and Thermedics which were reclassified out of the Medical and Surgical Products segment and into discontinued operations are as follows:

January 3,
2004

December 28,
2002(In thousands)Inventories and other current assets

$


$
23,054Property, plant and equipment, net





5,901Other assets





6,606Liabilities





(6,272
)Net assets of discontinued operations

$


$
29,289


14.    Unaudited Quarterly Information

|2003                              |                         | First(1) |        | Second(1) |   | Third  |      | Fourth |       
|--------------------------------- | ----------------------- | -------- | ------ | --------- | - | ------ | ---- | ------ | ------
|
|Revenues                          |                         | $        | 93,683 |           | $ | 99,825 |      | $      | 87,131
|Gross Profit                      |                         | $        | 43,440 |           | $ | 47,125 |      | $      | 38,631
|Income from Continuing Operations |                         | $        | 6,144  |           | $ | 6,637  |      | $      | 4,538 
|Discontinued Operations           |                         |          | (1,199 | )         |   | (71    | )    |        | (2,226
|                                  |                         |          |        |           |   |        |      |        |       
|Net Income                        |                         | $        | 4,945  |           | $ | 6,566  |      | $      | 2,312 
|                                  |                         |          |        |           |   |        |      |        |       
|Earnings per Share:               |                         |          |        |           |   |        |      |        |       
|Basic:                            |                         |          |        |           |   |        |      |        |       
|                                  | Continuing Operations   |          | $      | .23       |   | $      | .25  |        | $     
|                                  | Discontinued Operations |          |        | (.04      | ) |        |     |        |       
|                                  |                         |          |        |           |   |        |      |        |       
|                                  |                         | $        | .19    |           | $ | .25    |      | $      | .08   
|                                  |                         |          |        |           |   |        |      |        |       
|Diluted:                          |                         |          |        |           |   |        |      |        |       
|                                  | Continuing Operations   |          | $      | .23       |   | $      | .25  |        | $     
|                                  | Discontinued Operations |          |        | (.04      | ) |        | (.01 | )      |       
|                                  |                         |          |        |           |   |        |      |        |       
|                                  |                         | $        | .19    |           | $ | .24    |      | $      | .08   
|                                  |                         |          |        |           |   |        |      |        |       

F-25

---

|2002                              |                         | First(1)(2) |        | Second(1)(2) |   | Third(1) |     | Fourth(1) |       
|--------------------------------- | ----------------------- | ----------- | ------ | ------------ | - | -------- | --- | --------- | ------
|
|Revenues                          |                         | $           | 82,933 |              | $ | 81,752   |     | $         | 83,538
|Gross Profit                      |                         | $           | 39,109 |              | $ | 39,049   |     | $         | 38,502
|Income from Continuing Operations |                         | $           | 4,405  |              | $ | 3,653    |     | $         | 4,591 
|Discontinued Operations           |                         |             | 812    |              |   | 520      |     |           | (9,634
|                                  |                         |             |        |              |   |          |     |           |       
|Net Income (Loss)                 |                         | $           | 5,217  |              | $ | 4,173    |     | $         | (5,043
|                                  |                         |             |        |              |   |          |     |           |       
|Earnings per Share:               |                         |             |        |              |   |          |     |           |       
|Basic:                            |                         |             |        |              |   |          |     |           |       
|                                  | Continuing Operations   |             | $      | .17          |   | $        | .14 |           | $     
|                                  | Discontinued Operations |             |        | .03          |   |          | .02 |           |       
|                                  |                         |             |        |              |   |          |     |           |       
|                                  |                         | $           | .20    |              | $ | .16      |     | $         | (.19  
|                                  |                         |             |        |              |   |          |     |           |       
|Diluted:                          |                         |             |        |              |   |          |     |           |       
|                                  | Continuing Operations   |             | $      | .17          |   | $        | .14 |           | $     
|                                  | Discontinued Operations |             |        | .02          |   |          | .02 |           |       
|                                  |                         |             |        |              |   |          |     |           |       
|                                  |                         | $           | .19    |              | $ | .16      |     | $         | (.19  
|                                  |                         |             |        |              |   |          |     |           |       

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F-26

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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.                                                                                                                                                 
|10.4*          |  | 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 6,680,000 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          |  | Amended and restated Employment Agreement dated as of November 19, 2002 by and among the Company and Randy H. Thurman.                                                                                                        
|10.9*         |  | Letter Agreement dated as of September 24, 2001 by and among the Company, Randy H. Thurman and Thermo Electron Corporation.                                                                                                   
|10.10         |  | Amended and restated Executive Retention Agreement dated as of November 19, 2002 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.                                                                                                                      
|10.15*         |  | 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.                                                                        
|10.17         |  | Employment Agreement dated as of August 27, 2001 by and between the Company and Stephen P. Connelley.                                                                                                                         
|10.18          |  | Credit Agreement by and among the Company, the Banks party thereto and certain other parties, dated May 31, 2002.                                                                                                             
|10.19         |  | Employment agreement dated as of November 1, 2003 by and between the Company and Lori Cross.                                                                                                                                  
|10.20         |  | Employment agreement dated as of October 1, 2003 by and between the Company and Giulio Perillo.                                                                                                                               
|10.21         |  | Employment agreement dated as of July 1, 2003 by and between the Company and Edward Pulwer.                                                                                                                                   
|10.22         |  | Employment agreement dated as of July 1, 2003 by and between the Company and Frank McCaney.                                                                                                                                   
|10.23         |  | Employment agreement dated as of July 1, 2003 by and between the Company and Thomas Kuhn.                                                                                                                                     
|               |  |                                                                                                                                                                                                                               

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|10.24** |  | Employment agreement dated as of July 1, 2003 by and between the Company and Mahboob Raja.                                                                  
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25** |  | Employment agreement dated as of June 9, 2003 by and between the Company and William Murray.                                                                
|14.0**   |  | Code of Conduct                                                                                                                                             
|21.1**   |  | Subsidiaries of the Company.                                                                                                                                
|23.1**   |  | Independent Auditor's Report on Schedule.                                                                                                                   
|23.2**   |  | Consent of Independent Auditors.                                                                                                                            
|31.1**   |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|31.2**   |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                         
|32.1**   |  | Certification of Chief Executive Officer and Chief Financial Officer of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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