Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 001-16121

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

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

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

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 July 2, 2004 (the last business day of the Registrant's most recently completed second fiscal quarter), computed by reference to $20.15, the price at which the stock was last sold, was approximately $484,000,000. Shares of the Registrant's Common Stock held by the Registrant's executive officers and directors and by each entity that owns 10% or more of the Registrant's outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. In making such calculations, the Registrant is not making a determination as to affiliate or non-affiliate status of any holders of shares of Common Stock.

        As of March 9, 2005, the Registrant had 31,140,828 shares of Common Stock outstanding. This number excludes 5,597 shares held by the Registrant as treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive Proxy Statement to be filed no later than May 1, 2005, in connection with the 2005 Annual Meeting of Stockholders to be held on May 10, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Information Concerning Forward-Looking Statements

        The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission, reports to our shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The forward-looking statements contained in this report include but are not limited to statements regarding our 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, our ability to obtain a new credit facility 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:

•

our projected growth of the neurocare market and the demand for respiratory technologies and critical care equipment and disposables;



•

our ability to capitalize on our existing installed equipment base in the respiratory technologies, critical care, neurocare and medical and surgical product markets and our research, development and marketing expertise to expand our business;



•

our ability to obtain and maintain regulatory approvals for our products in development, including 510(k) clearance under the Federal Food, Drug and Cosmetic Act;



•

our ability to obtain a sufficient supply of raw materials from current suppliers, or, if necessary, in developing alternative sources of supply, including internal capability to produce raw materials or components, at prices competitive with our current sources;



•

spending policies of our customers;



•

government funding policies;



•

reimbursement of patients' medical expenses by government healthcare programs and private health insurers;



•

our ability to maintain a competitive position in our industry;



•

our ability to increase our revenues and profits;



•

our ability to realize the value of the goodwill and other intangible assets recorded on our financial statements;



•

our ability to adapt and respond to uncertain and difficult global market conditions, including fluctuations in currency exchanges rates and unforeseen changes in foreign governmental rules and regulations;



•

our ability to develop brand recognition of our products and services;

2

•

our ability to protect our intellectual property rights;



•

our ability to maintain our rights to products and technology licensed from external sources;



•

our ability to integrate acquisitions;



•

our ability to introduce new products as planned; and



•

market acceptance of our new products.

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

        Our business is organized and operated through four segments:

Our Respiratory Technologies group, which develops, manufactures, markets and services products for the diagnosis and treatment of pulmonary and sleep-related disorders, as well as providing services to support pharmaceutical companies and clinical research organizations.

Our Critical Care group, which develops, manufactures, markets and services life support products to treat respiratory insufficiency caused by illness, injury or premature birth.

Our NeuroCare group, which develops, manufactures, markets and services a comprehensive line of neurodiagnostic, vascular diagnostic and audiology testing systems.

Our Medical and Surgical Products group, which develops, manufactures and markets disposable medical products and specialty metal components for orthopedic products, medical-imaging equipment and cardio-vascular implants.

        We 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 2004 totaled $393.2 million. Revenue, operating income and total assets by segment are set forth in Note 17 to the Consolidated Financial Statements.

Recent Developments

        On July 28, 2004, we acquired substantially all of the assets of Taugagreining, hf. ("Taugagreining"), an Icelandic company that develops and markets electroencephalography ("EEG") technology for the diagnosis and monitoring of neurological function, for a cash purchase price of $5.6 million.

3

        On January 24, 2005, we acquired substantially all of the assets of Navion Biomedical Corporation, a company that develops, manufactures and markets a device used to facilitate the placement of peripherally inserted central catheters ("PICCs") and central venous catheters ("CVCs"), for a cash purchase price of $3.5 million, of which $0.2 million will be paid in the first quarter of 2006.

        On March 1, 2005, we acquired the medical division of Oxford Instruments plc ("Oxford Medical") for a cash purchase price of approximately $46 million subject to certain working capital adjustments. Oxford Medical is based in the United Kingdom and manufactures, develops, designs and markets medical diagnostic and monitoring products as well as related disposables and accessories. Neurophysiology comprises the largest of Oxford Medical's several business components. Neurophysiology's principal product lines include electromyography ("EMG") equipment and EMG needles and neurological disposables. The business also contains an obstetrics range of antenatal and fetal monitors and an ambulatory cardiology range of products. Oxford Medical had 2004 global revenues of approximately $57 million.

        On March 15, 2005, we acquired all of the outstanding capital stock of Micro Medical Limited ("Micro Medical"), a company based in the United Kingdom that develops, manufactures and markets a range of respiratory diagnostic products, for an aggregate purchase price of approximately $40.4 million. The purchase price consisted of approximately $36.6 million in cash (net of cash acquired) and approximately $3.8 million in assumed debt. In addition, we may also be required to pay additional consideration upon the achievment of certain criteria. Micro Medical had 2004 global revenues of approximately $16 million.

Our Strategy

        We focus our development and marketing activities on growth segments of the healthcare industry. We seek to capitalize on our research, development and marketing expertise, as well as our relationships with physicians and other medical caregivers in these markets to expand our business into high-value opportunities, including disposables, therapy and service-based products. We have augmented our internal research by acquiring companies with strong research capabilities and in-licensing technologies. In addition to acquisitions and new in-licensing opportunities, we are working to enhance and extend our existing product lines into next-generation products and to develop new products to broaden our existing respiratory technologies, critical care, neurocare and medical and surgical product offerings. Products that we introduced and upgraded during 2004 include:

•

VMAX® Encore ("VMAX") with Impulse Oscillatory Spirometry ("IOS")  –  an upgraded version of our successful VMAX line that allows for complete pulmonary function testing under normal breathing conditions;



•

LYRA™ Nasal CPAP Interface  –  a proprietary nasal mask used as part of a continuous positive airway pressure ("CPAP") system for treating sleep apnea;



•

AVEA®  –  significant hardware and software enhancements that provide a highly unique feature set, including an advanced respiratory mechanics monitoring capability that has been proven in clinical studies to reduce the patient's length of stay in the intensive care unit ("ICU");



•

VELA®  –  significant hardware and software enhancements, including the addition of non-invasive ventilation and improvements to battery function;



•

FLOW SCREEN® II  –  a feature rich spirometry product targeted to the primary care market;



•

MasterScope™ PC  –  a new modular device for the Master Screen family of pulmonary function testing products that offers key diagnostic features;



•

SiPAP™  –  An enhanced version of our INFANT FLOW® product that uses bi-level nasal CPAP for the non-invasive treatment of spontaneously breathing infants with hypoxemia;

4

•

NicoletOne™  –  a new multi-modality neurodiagnostic and monitoring system that combines clinical EEG, EMG, Evoked Potential ("EP") and Long-Term Monitoring ("LTM") capabilities. Other modules are being developed to add capabilities in Sleep, Vascular and other modalities;



•

NICOLET® ENDEAVOR™ CR  –  a smaller and more portable version of our intra-operative monitoring system that measures the integrity of nerve pathways during surgery and supports the remote monitoring needs of today's busy neurology practice;



•

NicoletOne Monitor  –  a new product as a result of the Taugagreining acquisition specifically developed to monitor neurological functioning of patients in neonatal ICUs, neurological ICUs or any general acute care setting where neurological deficit or impairment could occur. With the numerous neurological drugs and therapies now available, monitoring at-risk patients can guide therapy and improve outcomes;



•

NicoletOne Solutions  –  a new suite of NicVue database and V-Link connectivity solutions that provide the ability to seamlessly review, archive, sort and search clinical data from multiple locations. HL7, DICOM and other standard interfaces allow the NicoletOne systems (neuro and vascular) to send and receive data from hospital information systems to improve caregiver productivity;



•

TELOCIN™ Ultrasound System  –  a compact, easy-to-use diagnostic vascular ultrasound system that provides one of the most effective screening tests for at-risk stroke patients: the carotid ultrasound scan; and



•

VikingQuest™  –  a new neurodiagnostic monitoring system that brings together Nerve Conduction Studies, EMG, EP, Single Fiber Electromyography, Multiple Modality Programs and Autonomic Nervous System testing capabilities.

Principal Businesses and Products

5

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 JAEGER™ and SENSORMEDICS®.

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

•

Lung function testing, equipment used to diagnose pulmonary disorders;



•

Sleep diagnostic and therapeutic, systems for the diagnosis and treatment of sleep-related disorders; and



•

VIASYS Clinical Services, products and services to support pharmaceutical and biotechnology companies and clinical research organizations.

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 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:

•

SENSORMEDICS VMAX Encore, a portable pulmonary function and metabolic diagnostic system designed for use by healthcare providers. VMAX is a modular system that allows end-users to configure a system to their specific needs and to add diagnostic functions as those needs change. VMAX may be configured in a variety of ways, ranging from a simple spirometry system to a full-featured pulmonary function and metabolic diagnostic lab. In 2004, we added IOS, a proprietary technology that allows complete pulmonary function testing under normal breathing conditions. This is especially useful in sick, young and elderly patients that have difficulty with forced expiration;



•

JAEGER MasterScreen, a full-function, pulmonary function and metabolic diagnostic system for use primarily by healthcare providers. Our MasterScreen series of products are similar to the VMAX system, but are constructed in a single configuration with fully integrated features; and

6

•

Micro Medical Micro Series, respiratory measurement devices used to diagnose and monitor Chronic Obstructive Pulmonary Disease ("COPD"), asthma, bronchitis, emphysema, cystic fibrosis, lung cancer and other respiratory system diseases.

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

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

•

SOMNOTRAC®PRO, SOMNOSTAR®PRO and SLEEPSCREEN™, sleep diagnostic systems that monitor respiratory and neurological functions to assist in the diagnosis of sleep disorders;



•

ORION®, PEGASUS®, DORADO™ and DELPHINUS™ CPAPs, sleep therapy products with various monitoring capabilities which use a gentle stream of air to encourage a patient's airway to remain open while sleeping; and



•

LYRA Nasal CPAP Interface, sleep therapy products that are worn to allow delivery of mild positive pressure to treat sleep apnea.

        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 research studies which investigate treatments for respiratory illnesses. VCS provides customers with high quality data during their clinical studies, which can result in the need for fewer patients and accelerated data capture. VCS' competence is true paperless data collection in global clinical trials and reliable data capture with centralized data management and reporting for diagnostic and home monitoring equipment (including electronic diaries).

        We believe the clinical services market offers a significant opportunity for growth within our Respiratory Technologies group, as well as in other segments 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 insufficiencies caused by illness, injury or premature birth. These products are used in a variety of settings, from intensive care units to homecare. We market 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, products for patients who need assistance with breathing; and



•

Other Products, such as specialized ventilators, treatment devices, blenders and monitoring devices.

7

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® and VIASYS™ Critical Care brand names.

        Our principal mechanical ventilators are:

Other Products

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

•

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").

        We also offer a variety of related products including:

•

INFANT FLOW and SiPAP, proprietary forms of nasal CPAP;



•

air/oxygen blenders, which regulate, in specific concentrations, the oxygen delivered by a mechanical ventilator or oxygen delivery device;



•

ventilator accessories, such as air compressors, heated humidifiers and mounting stands; and



•

monitoring devices that measure the volume of gas entering and exiting a patient's lungs during mechanical ventilation.

        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 market.

NeuroCare

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

8

such as GRASON-STADLER® ("GSI"), NICOLET Biomedical and NICOLET Vascular. Our NeuroCare business is comprised of the following product lines:

•

Electromyography and Evoked Potential ("EP"), equipment that measures electrical activity in nerves and muscles;



•

Electroencephalography, equipment that monitors and visually displays the electrical activity generated by nerve cells in the brain;



•

Epilepsy Monitoring, equipment that enables a physician to assess the frequency and severity of epileptic and non-epileptic seizures over long periods of time;



•

Audiology, equipment that assesses hearing and balance disorders using a variety of testing techniques and assists in the placement of digital hearing aids and cochlear implants;



•

Intra-Operative Monitoring ("IOM") and Transcranial Doppler, products that assist surgeons in preserving the functional integrity of a patient's circulatory and nervous systems during and after complex surgical procedures;



•

Physiologic peripheral vascular diagnostics, products that assist healthcare professionals to detect, grade and track treatment of peripheral vascular disease; and



•

Patient Management Software Solutions, systems that capture, communicate, archive and summarize patient results for remote viewing, billing and improved productivity.

Electromyography and Evoked Potential

        EMG is the measurement of electrical activity in the nerves and muscles. EP is the monitoring of patient response to stimuli in order to evaluate the condition of specific nerve pathways. Physicians and technicians in the fields of neurology, physical medicine and rehabilitation use EMG and EP data to confirm the diagnosis of various diseases and disorders, including carpal tunnel syndrome, Lou Gehrig's (ALS) disease, multiple sclerosis and spinal cord injury. Our principal EMG and EP diagnostic products are the VikingSelect™, VikingQuest and TOENNIES™ NEUROSCREEN® as well as the newly acquired products of Oxford Medical, which are sold under the SYNERGY™ brand name.

Electroencephalography

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

Epilepsy Monitoring

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

9

Audiology

        Audiology is the assessment of hearing, auditory performance and balance disorders using a variety of testing techniques, including the evaluation of the function of the ear and the measurement of neural responses to sound. We offer a broad range of audiology diagnostic instruments for middle ear testing in adults and children that we market under the GSI and NICOLET Biomedical brand names. Our primary audiology product is the GSI AUDERA™ device, which assists physicians in fitting cochlear implants and hearing aids especially in children. In 2004, the GSI AUDERA system was enhanced with important new diagnostic test features and a new software platform that allows for easy integration of language capability.

Intra-Operative Monitoring and Transcranial Doppler

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

Physiologic Peripheral Vascular Diagnostics

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

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

•

Medical pocket Dopplers, instruments that detect fetal heartbeats and blood flow in the peripheral vasculature; and



•

Transcranial Doppler sonographs, instruments that measure blood flow in the brain.

Patient Management Software Solutions

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

        We believe we are market leaders in the neurodiagnostic, peripheral vascular diagnostic and audiologist-focused audio diagnostic markets. In the most recent customer surveys conducted by MDBuyline, VIASYS NeuroCare ranked first in six out of seven customer attribute ratings and had the highest composite score in the industry.

Medical and Surgical Products

        Our Medical and Surgical group develops, manufactures and markets disposable products and specialty medical products. The Medical and Surgical group is 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, medical access systems and surgical barrier control systems, to hospitals and homecare, long-term care and, in some cases, to industrial customers. We market our specialty products and

10

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, medical disposable products for enteral feeding and respiratory therapy.



•

Orthopedics, Specialty Products and Materials, a variety of high-tech metal components and materials for inclusion by original equipment manufacturers in their products. These components include titanium knee and steel hip implants as well as surface textures for orthopedic implants.

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:

•

Specialty feeding tubes that supply nutrition to critically ill or compromised patients. These tubes run from the nose into either the stomach or small bowel and allow easily-digested nutrients to be delivered into a patient's digestive tract rather than into the blood stream. Our specially designed tubes can be placed into the small bowel at the patient's bedside resulting in reduced patient transport costs and quicker caloric goal achievement. We market this group of products under the CORFLO® brand name and, according to IMS, a global provider of business intelligence and strategic consulting services for the healthcare and pharmaceutical industries, we are the market leader in specialty long-term naso-gastric feeding tubes.



•

Neonatal/Pediatric devices, such as:



•

Closed suctioning systems that assist infants requiring mechanical ventilation by maintaining an open airway and ensuring that the lungs remain inflated. We market this product under the NeoLink™ brand name.



•

Farrell Gastric Relief Systems that eliminate the gas and fluid buildup that is common in infants suffering from digestive complications, thereby allowing the delivery of nutrients into the stomach. We market this product under the CORFLO brand name.



•

Disposable respiratory accessories that assist a patient's breathing during surgery or trauma, which we market under the PULMANEX® brand name.



•

Surgical barrier control systems that we market to hospitals globally under the Stackhouse brand name. Our principal surgical barrier control systems are:



•

FREEDOMAIRE® Surgical Helmets and ACS Surgical Face Shields that protect surgeons from contamination introduced into the operating room;



•

VitalVac® Surgical Smoke Evacuation Systems, which are air filtration systems that collect the smoke plume created from vaporizing tissue during laser surgery or electrosurgery; and



•

Gowns, masks and caps used in industrial environments.

        On January 24, 2005, we acquired substantially all of the assets of Navion Biomedical Corporation, a company that developed, manufactured and marketed the NAVIGATOR® BIONAVIGATION® ("NAVIGATOR") system. The NAVIGATOR system is used to facilitate the placement of PICCs and CVCs. PICCs are used by clinicians to deliver intravenous fluids, medications, and nutrition directly into the blood stream for faster dissemination throughout the body, especially the heart. The placement of PICCs must be verified by X-ray. PICC lines frequently need to be repositioned before proceeding with the administration of the drug or nutrition therapy. Repositioning and the additional confirmatory X-rays add significant cost to patient care and increase the time the patient is without the therapy. The NAVIGATOR system permits bedside determination of the position and direction of the catheter tip and reduces the need for repositioning and additional confirmatory X-rays.

11

        In early 2005, we received U.S. Food and Drug Administration clearance to market the CORTRAK™ system, a device designed to aid in the placement of enteral feeding tubes. The CORTRAK system consists of a computer monitor, a receiver and a specially designed transmitter stylet attached to our feeding tube. As the feeding tube is advanced, the monitor provides a real time representation of the feeding tube's relative position within the alimentary canal. Feeding tube placements, gastric or small bowel, follow a distinct "track". Any deviation from the expected track can be resolved by the clinician, thus preventing accidental lung placements or the tube coiling in the stomach. Clinical studies indicate an extremely high rate of successful bedside placement of small bowel feeding tubes on the first attempt when CORTRAK is used.

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:

•

Surgical implant components, which are used in reconstructive, spinal and trauma surgery, which we market to original equipment manufacturers that design and distribute orthopedic implants globally;



•

Key components for a left ventricular assist device which is used to bridge the gap to heart transplant in cardio-vascular surgery; and



•

Medical imaging components that reduce X-ray scatter, which allows for high resolution images in mammography and early detection of tumors.

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 approximately 220 experienced biomedical engineers and technicians.

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 is now substantially more productive than in the past due to the introduction of a disciplined process for managing research and development throughout the Company. All projects are closely monitored through each step of development and the basic assumptions about the market, costs and competition are systematically reviewed to continually validate the viability of the project.

        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 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. VMAX and MasterScreen are two competitive but highly complementary product lines that have given us market leadership in both the U.S. and Europe. In 2005, research and development efforts will begin for the next generation hardware platform that will capitalize on the strengths of both the MasterScreen and VMAX product lines.

12

        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 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 COPD. In 2004, we introduced SiPAP, the next generation of our patented INFANT FLOW non-invasive ventilation product.

        Our NeuroCare group launched a number of new products in 2004, including the ENDEAVOR CR, a much lighter and smaller IOM system. 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 launched an entire suite of core EEG, EMG, LTM and information technologies in the new NicoletOne multi-modality system that supports the new dynamic workflow requirements of diagnostic clinicians. Advanced signal processing, clinical reporting, database and interfacing tools were also launched (NicVue and V-Link) now improving quality and access of patient information, reducing costs and improving productivity and quality of care. The AUDERA system was enhanced in 2004 with important new diagnostic test features and a new software platform that allows for easy integration of language capability. The vascular technologies group continued to advance with new state-of-the-art operating system platforms and signal processing advances such as Continuous SoundTrack for transcranial Doppler monitoring.

        Our Medical and Surgical group has recently launched products to establish a new market based on technologies that determine the position of catheters placed into the body such as feeding tubes and CVCs. Generally, these catheters are placed "blindly" at the bedside and their position is confirmed by X-ray. Significant healthcare dollars are spent repositioning these catheters to the optimal position within the body. These new "medical access" technologies will drastically reduce the dollars spent on repositioning these catheters. MedSystems also expects to introduce several products to revitalize our barrier protection systems, including a new helmet system for protecting physicians and patients in the surgical suite.

Raw Materials

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

Government Regulation

United States

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

        In the United States, the testing, manufacture and sale of our products is subject to regulation by numerous governmental authorities, principally the FDA and corresponding state agencies. Pursuant to the Federal Food, Drug and Cosmetic Act and related regulations, the FDA regulates preclinical and clinical testing, development, manufacture, labeling, distribution and promotion of medical devices in

13

the United States. If we do not comply with applicable requirements, we can be subject to, among other things:

•

FDA warning letters;



•

injunctions;



•

fines;



•

civil penalties;



•

recall or seizure of products;



•

total or partial suspension of production;



•

operating restrictions/limitations on marketing;



•

refusal of the government to grant premarket clearance or premarket approval for devices;



•

withdrawal of marketing clearances or approvals; and



•

criminal prosecution.

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

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

•

Premarket clearance pursuant to section 510(k) of the Federal Food, Drug and Cosmetic Act. Generally speaking, 510(k) premarket clearance requires that an applicant submit information which establishes that a proposed device is substantially equivalent to a legally marketed device. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness or constitute a major change in the intended use of the device, require new 510(k) clearances. We believe that it now usually takes from approximately three to six months from the date of submission to obtain 510(k) clearance, although it can take substantially longer, depending on the device and its proposed use.



•

Premarket approval ("PMA"). For devices that are not exempt or eligible for 510(k) clearance, the PMA process may be utilized. A PMA application requires an applicant to prove the safety and effectiveness of the device to the FDA through clinical trials. The process of obtaining PMA approval is expensive and uncertain. We believe that FDA approval usually takes from one to three years after filing, but it can take longer, depending on the device.

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

•

Class I devices are non-critical products for which general regulatory controls are sufficient to provide reasonable assurance of safety and effectiveness. Most Class I devices are exempt from the requirement of 510(k) premarket clearance. The FDA must grant 510(k) premarket clearance prior to marketing a non-exempt Class I device in the United States.



•

Class II devices are products for which general regulatory controls are insufficient to provide reasonable assurance of safety and effectiveness and which therefore need special regulatory controls such as compliance with FDA prescribed standards. The FDA must grant 510(k) premarket clearance prior to marketing a Class II device in the United States.



•

Class III devices are products classified by the FDA as posing the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices that are not substantially

14

equivalent to a legally marketed Class I or Class II device. The FDA generally must approve a PMA application prior to marketing a Class III device in the United States. Two of our principal products, the 3100A and 3100B HFOV, are Class III devices. The FDA has approved a PMA for use of the 3100A HFOV product in children in acute respiratory failure with no upper weight limit. The 3100B HFOV has been approved by the FDA for use in adults with ARDS.

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

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

•

We use written procedures to control all aspects of our product development, manufacturing processes, labeling, packaging, handling, storage, distribution, installation and servicing of medical devices;



•

We validate, by extensive and detailed testing, every aspect of each process, and our ability to produce devices which meet our manufacturing specifications;



•

We investigate any deficiencies in the manufacturing process or in the products produced; and



•

We maintain detailed recordkeeping relating to all personnel, processes and aspects of the operation.

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

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

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

15

        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 44% of our revenues from sales of products outside the United States. Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. These laws and regulations range from simple product registration requirements in some countries to complex clearance and production controls in others. As a result, the processes and time periods required to obtain foreign marketing approval may be longer or shorter than those necessary to obtain FDA approval or marketing clearance. These differences may affect the efficiency and timeliness of international market introduction of new products.

        A medical device may only be marketed in the European Union ("EU") if it complies with the Medical Devices Directive ("MDD") and bears the CE mark as evidence of that compliance. To achieve this the medical devices in question must meet the "essential requirements" defined under the MDD relating to safety and performance and we, as manufacturer of the devices, must undergo a verification of our regulatory compliance by a third-party standards certification provider, a so-called "Notified Body". The nature of the assessment depends upon the regulatory class of products concerned, which in turn determines the precise form of testing undertaken by the Notified Body. Similar to the system in the United States, medical devices in the EU are classified according to the risks posed by their use, with Class I being low risk devices, Class IIa being medium risk devices, Class IIb being medium/high risk devices and Class III being high risk devices. Our devices fall into the medium and high risk categories and as such require a higher level of regulatory assessment. As of January 1, 2005, 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 and materials are incorporated by original equipment manufacturers into their products, compliance with the MDD is their responsibility.

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

Third-Party Reimbursement

        In the United States, health care providers that purchase medical devices generally rely on third-party payors to reimburse all or a portion of the cost of the devices either directly or bundled as a component of a reimbursement for health care services. Examples of third-party payors are Medicare, Medicaid, private health insurance plans and health maintenance organizations. Medicare is a federally funded program managed by the Centers for Medicare and Medicaid Services ("CMS"), through local fiscal intermediaries and carriers that administer coverage and reimbursement for certain health care items and services furnished to the elderly and disabled. Medicaid is an insurance program for the poor that is both federally and state funded and managed by each state. The federal government sets general guidelines for Medicaid and each state creates specific regulations that govern their individual program. Each payer has its own process and standards for determining whether it will cover and reimburse a procedure or particular product. Private payers often rely on the lead of the governmental payers in

16

rendering coverage and reimbursement determinations. Therefore, achieving favorable Medicare coverage and reimbursement is usually a significant gating issue for successful introduction of a new product. The competitive position of some of our products will depend, in part, upon the extent of coverage and adequate reimbursement for such products and for the procedures in which such products are used. Prices at which we or our customers seek reimbursement for our products can be subject to challenge, reduction or denial by the government and other payors.

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

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

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

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

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

        The United States Department of Health and Human Services has issued regulations from time to time setting forth so-called "safe harbors," which would protect certain limited types of arrangements from prosecution under the statute. Failure to comply with each element of a particular safe harbor does not mean that an arrangement is per se in violation of the Anti-Fraud and Abuse Law. As the comments to the safe harbors indicate, the purpose of the safe harbors is not to describe all illegal conduct, but to set forth standards for certain non-violative arrangements. Nevertheless, if an

17

arrangement implicates the Anti-Fraud and Abuse Law and full compliance with a safe harbor cannot be achieved, the Company risks greater scrutiny by the OIG and, potentially, civil and/or criminal sanctions. The Company believes its arrangements are in compliance with the Anti-Fraud and Abuse Law; however, no assurance can be given that regulatory authorities will not take a contrary position.

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

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

Patents, Licenses and Trademarks

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

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

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

Competition

        The respiratory 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 believe that we compete in each of our markets primarily on the basis of reputation, product reliability and performance, product features and benefits, price and post-sale service and support.

        Our Respiratory Technologies and Critical Care segments compete with products from firms such as Maquet AG, Dräger Medical AG, General Electric Company, Tyco Healthcare Group, Ferraris Group PLC and Respironics, Inc. The principal competitors of our NeuroCare segment include

18

Bio-logic Systems Corporation, Nihon Kohden Corporation and XLTEK (Excel Tech Ltd). The principal competitors of our Medical and Surgical Products segment include the Ross Products Division of Abbott Laboratories, Tyco Healthcare Group, Vital Signs, Inc., The Dow Chemical Company and J. P. Stevens Company.

Employees

        As of January 1, 2005, we had approximately 1,750 full-time employees, of which approximately 1,400 were employed in the United States. None of our employees based in the United States are unionized or subject to collective bargaining agreements. Some of our international employees are represented by either a labor union or a statutory work council arrangement. In countries with labor unions or work councils, our ability to reduce our workforce or wage rates is subject to agreement or consultation with the appropriate labor union or works council. We consider our employee relations to be good.

Available Information

        Our website address is www.viasyshealthcare.com. Through a link on the Investors Section of our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, and our proxy statements as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission. Our Code of Business Conduct and Ethics for Directors, Code of Conduct, Corporate Governance Guidelines and the charters of the Audit Committee, Compensation Committee and Nominating and Governance Committee of our Board of Directors are also available on the Investor Section of our website. Additionally, printed copies of these documents may be obtained, without charge, by calling our Investor Relations Department at (610) 862-0799 or by contacting: Investor Relations, VIASYS Healthcare Inc., 227 Washington Street, Suite 200, Conshohocken, PA 19428.

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 materially adversely affect sales of our sleep diagnostic testing equipment.

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

        Sales of medical products largely depend on the reimbursement of patients' medical expenses by government healthcare programs and private health insurers. The cost of some of our products, particularly our VMAX and 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.

19

        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 materially affect the payments we receive from sales of our products. Internationally, medical reimbursement systems vary significantly, with some medical centers having fixed budgets, regardless of the level of patient treatment and other countries requiring application for, and approval of, government or third-party reimbursement. Even if we succeed in bringing new products to market, uncertainties regarding future healthcare policy, legislation and regulations, as well as private market practices, could materially affect our ability to sell our products in commercially acceptable quantities at profitable prices.

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

        As of January 1, 2005, we had cash and cash equivalents of $122.3 million and a $60.0 million revolving credit facility under which $58.4 million was available to borrow. On January 24, 2005, we acquired substantially all of the assets of Navion Biomedical Corporation for a cash purchase price of $3.5 million, of which $0.2 million will be paid in the first quarter of 2006. On March 1, 2005, we acquired the global medical business of Oxford Instruments plc for a cash purchase price of approximately $46.0 million. On March 15, 2005, we acquired all of the outstanding capital stock of Micro Medical, for an aggregate purchase price of approximately $40.4 million. The purchase price consisted of approximately $36.6 million in cash (net of cash acquired) and approximately $3.8 million in assumed debt. The purchase price for these acquisitions was paid from our cash available at year end. The remaining cash and the credit facility are available to expand our business, either through acquisitions or development of new products.

        Our current credit facility will expire on May 31, 2005. We are currently in the process of obtaining a new credit facility and anticipate that a new facility will be in place on or before the expiration date of the current facility. The amount and other terms of the new credit facility have not yet been finalized. While we anticipate that we will be able to obtain a new credit facility and that the terms of such facility will be at least as favorable as the current credit facility, there is no guarantee that we will be able to obtain a new credit facility or that the terms will be attractive to us in financing our business plans.

        Our ability to access the current or new credit facility will depend on complying with the debt covenants that are part of those agreements. The covenants of our current credit facility 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. We expect the new debt

20

covenants to be similar in nature but anticipate that changes, such as the maximum capital expenditure limit, will be made in order to consider our needs over the term of the new credit facility.

        While we are in compliance with the debt covenants of our current credit facility and expect to be able to meet the requirements of the current credit facility through the expiration date and the requirements of any new credit facility in the future, failure to satisfy any of the conditions would require us to renegotiate either facility on terms that may not be as favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to fund our operations from other financial institutions, we cannot assure you that we would be successful, or if we were successful, that the new credit facility would be on terms that would be attractive to us in financing our business plans.

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

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

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

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

        VIASYS and its former parent company have paid substantial premiums over the net assets of some of the companies that comprise our business. We have acquired significant intangible assets, including approximately $190.2 million of cost in excess of net assets of acquired companies, or goodwill, recorded on our balance sheet as of January 1, 2005. This represents approximately 35% 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 have a material adverse effect on our business.

        International revenues account for a substantial portion of our revenues. International revenues, including export revenues from the United States, accounted for 44% of our total revenues in 2004 and 2003. While we plan to continue expanding our presence in international markets, our international operations present a number of risks, including the following:

•

Foreign laws in a number of countries may limit our ability to properly maintain our distribution channels. For example, a number of foreign laws restrict our ability to terminate a distributor for

21

taking actions that materially adversely affect our business, such as manufacturing and selling competing products.

•

The successful marketing of our products in some countries, including many European countries, may require us to establish a local presence. The revenues generated in these countries may not justify the expense of establishing and maintaining such a local presence.



•

Fluctuations in currency exchange rates have, on occasion, forced us to lower our prices, thereby reducing our margins for some of our respiratory and neurodiagnostic products.

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 material adverse impact on our operating results. In addition, intellectual property litigation or claims could force us to:

•

cease selling, incorporating or using any of our products that incorporate the challenged intellectual property, which would materially adversely affect our revenue;



•

obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; or



•

redesign our products, which would be costly and time-consuming.

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

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

22

terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license, we may be required to license to the licensor any related intellectual property that we developed.

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

        Our products and manufacturing operations are subject to extensive regulation in the United States by the FDA and by similar regulatory agencies in many other countries in which we do business. The principal risks that we face in obtaining and maintaining the regulatory approvals necessary to market our products include:

•

The approval process for medical devices in the United States and abroad can be lengthy, expensive and require extensive preclinical and clinical trials. As a result, we may expend substantial resources in developing and testing a new product but fail to obtain the necessary approvals or clearances to market or manufacture the product on a timely basis or at all.



•

When we modify a medical device for which we have received marketing approval, we must determine whether the modification requires us to seek new regulatory approvals. If the FDA or other regulatory agency does not agree with our determination, we may be prohibited from marketing the modified device until we receive the requisite regulatory approval or clearance. In addition, the FDA actively enforces regulations prohibiting marketing of devices for indications or uses that have not been cleared or approved by the FDA.



•

The FDA and foreign regulatory agencies require us to comply with an array of manufacturing and design controls and testing, quality control, storage and documentation procedures. Because our business is geographically dispersed in the United States and abroad, compliance with these procedures is difficult and costly.

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

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

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

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

        Outside vendors, some of which are sole-source suppliers, provide key components and raw materials that we use in the manufacture of our products. Although we believe that alternative sources for these components and raw materials are available, any supply interruption in a limited or

23

sole-source component or raw material could harm our ability to manufacture the affected product until we identify and qualify a new source of supply. In addition, an uncorrected defect or supplier's variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm our ability to manufacture the affected product. We may not be able to find a qualified alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, which could impair our ability to produce and supply our products. If we cannot obtain a necessary component, we may need to find, test and obtain regulatory approval for a replacement component, which would cause significant delays that could have a material adverse effect on 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 our stockholders might otherwise receive a premium for their shares. For example, these provisions:

•

authorize the issuance of "blank check" preferred stock without any need for action by stockholders;



•

provide for a classified board of directors with staggered three-year terms;



•

require supermajority stockholder approval to effect various amendments to our charter and by-laws;



•

eliminate the ability of stockholders to call special meetings of stockholders;



•

prohibit stockholder action by written consent; and



•

establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

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

Item 2. Properties

        The following is a summary of the properties we owned or leased at January 1, 2005:

24

        In connection with our acquisition of EME in 2002, we developed a plan to close two facilities located in Brighton, United Kingdom. These leases expire in March 2005 and April 2007.

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

        In connection with the divestment of our polyurethane business in 2003, we closed a facility in Woburn, MA. This lease expires in September 2005 and is currently being subleased to a third-party through April 2005.

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

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

Item 3. Legal Proceedings

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

        However, Tecomet Inc. ("Tecomet"), a subsidiary of VIASYS Healthcare Inc., has been advised by Smith & Nephew, Inc. ("S&N") that S&N may file a claim against Tecomet for indemnity and/or contribution in connection with more than 400 claims settled by S&N with patients who allegedly

25

required revision surgeries resulting from S&N knee implants. Tecomet supplied knee components and a surface texture to S&N that were allegedly used in the S&N knee implants. Tecomet learned in 2003 that S&N had advised the FDA that S&N was voluntarily withdrawing certain of its knee systems from the market due to unspecified problems that required revision surgery in some patients. Tecomet is investigating the claims made by S&N. At this stage, it is not possible to predict the likelihood or amount of any liability on the part of Tecomet nor the amount, if any, that would be covered under the Company's product liability insurance policies. If a suit is filed against Tecomet, Tecomet intends to defend it vigorously. In 2004, Tecomet was named as a defendant in two lawsuits in Texas brought by plaintiffs alleging that they had to undergo revision surgeries when their S&N implants failed. The amount of damages sought in these two cases is immaterial to the Company. These two cases were dismissed without prejudice in 2004.

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

        No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal year 2004.

Item 4A. Executive Officers of the Registrant

        The following is a list or our executive officers, their ages and positions as of March 9, 2005:

        Set forth below are biographical summaries, including positions and offices held during the past five years, of our executive officers as of March 9, 2005. There are no family relationships among the executive officers. The executive officers are elected or appointed by the Board of Directors of the Company or by an appropriate subsidiary board of directors to serve until the election or appointment and qualification of their successors or their earlier death, resignation or removal.

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

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

26

Matthew M. Bennett; Senior Vice President, Legal and Corporate Development, and Secretary

        Mr. Bennett has served as Senior Vice President, Legal and Corporate Development, and Secretary since September 2004. From October 2003 to September 2004, Mr. Bennett served as Corporate Vice President, General Counsel and Secretary. Prior to joining the Company, from August 1997 to October 2003, Mr. Bennett was a transactional attorney at Morgan, Lewis and Bockius LLP. While at Morgan, Lewis and Bockius LLP, Mr. Bennett represented the Company since our spin-off in 2001. From September 1996 to August 1997, Mr. Bennett was a litigator at Stradley, Ronon, Stevens & Young LLP and was previously a clerk for the Superior Court of New Jersey.

Lori J. Cross; Group President, NeuroCare

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

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

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

John F. Imperato; Corporate Vice President, Finance

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

Thomas I. Kuhn; Group President, MedSystems

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

Gregory G. Martin; Division President, Customer Care

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

27

Frank J. McCaney; Senior Vice President, Business Development

        Mr. McCaney has served as Senior Vice President, Business Development since April 2001. From October 1998 to April 2001, Mr. McCaney served as Vice President, Global Marketing and Business Development. Prior to joining the Company, from 1995 to 1998, Mr. McCaney was Vice President of Business Development at Diametrics Medical, Inc. From 1990 to 1995, Mr. McCaney held a number of management positions at the Lab Systems Division of Boehringer Mannheim Corporation, a clinical diagnostics business, principally as Area Business Manager.

Giulio A. Perillo; Group President, VIASYS Orthopedics

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

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

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

Mahboob H. Raja; Group President, International

        Mr. Raja has served as Group President, International since April 2003. Mr. Raja served as Vice President, European Sales from October 2001 to April 2003, Vice President Worldwide Sales and Marketing from 2000 to October 2001, Vice President, International Sales from 1999 to 2000 and Managing Director, International Sales from 1997 to 1999. Mr. Raja held various sales and marketing positions with Nicolet Biomedical from 1992 to 1997. Prior to the acquisition by Nicolet Biomedical of BMSI Holdings, Inc., from 1985 to 1992 Mr. Raja held the post of General Manager and also served as Head of Engineering and Customer Service with BMSI/Neuroscience Ltd. in the United Kingdom.

Wesley N. Riemer; Vice President and Corporate Treasurer

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

28

PART II

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

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

        On March 9, 2005, there were approximately 7,200 holders of record of our common stock. On March 9, 2005, the closing sale price of our common stock on the NYSE was $20.16.

        Since our spin-off, we have not paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain any current and future earnings to finance the growth and development of our business. Further, our senior revolving credit facility contains provisions that indirectly limit our ability to pay cash dividends.

Item 6. Selected Financial Data

        The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The consolidated statements of income data for the years ended January 1, 2005, January 3, 2004 and December 28, 2002, and the consolidated balance sheet data as of January 1, 2005 and January 3, 2004, are derived from our audited consolidated financial statements included in this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 29, 2001 and December 30, 2000 and the consolidated balance sheet data as of December 28, 2002, December 29, 2001 and December 30, 2000 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results presented here are not necessarily indicative of future results.

29

30

(1)

In the second quarter of fiscal 2004, the Company settled its litigation with INO Therapeutics, LLC and received a payment of $6,000 in connection with the dismissal of the litigation (See Note 15 of our Consolidated Financial Statements).

(2)

In June 2003, we issued 3,450 shares of common stock in a follow-on public offering. The net proceeds generated by the offering were $62,689.

(3)

The results of operation data for the years ended December 28, 2002, December 29, 2001 and December 30, 2000 have been adjusted to reflect certain businesses as discontinued operations (See Note 14 of our Consolidated Financial Statements).

(4)

We adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.142"), effective December 30, 2001. In connection with adopting SFAS No. 142, we no longer amortize goodwill or intangible assets with indefinite lives. Amortization of these assets for the years ended December 29, 2001 and December 30, 2000 was $4,114 and $3,900, respectively, net of tax.

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

Results of Operations

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

Revenues

        Revenues decreased $1.7 million to $393.2 million in 2004 from $394.9 million in 2003. This decrease was due to lower sales of $6.9 million in NeuroCare and $0.6 million in Critical Care, partially offset by increases of $4.0 million in Medical and Surgical Products and $1.8 million in Respiratory Technologies. The decrease was driven primarily by lower sales of our older products in NeuroCare, while Critical Care experienced lower international sales in 2004 as a result of unusually high sales in 2003 due to the SARS epidemic and $7.5 million of government tenders. These decreases were partially offset by the favorable impact of foreign currency translation of $7.3 million as well as increased sales in our orthopedics business and enteral feeding tube product lines.

Cost of Revenues and Gross Margin

        Cost of revenues increased $6.1 million to $218.9 million in 2004 from $212.8 million in 2003. Gross margin decreased $7.9 million to $174.3 million in 2004 from $182.2 million in 2003. Gross margin as a percentage of revenues decreased 1.8 percentage points to 44.3% in 2004 from 46.1% in 2003. The decrease in gross margin was primarily due to lower sales, a non-recurring high margin sale to a foreign government agency in the first quarter of 2003, higher warranty costs and inventory write-offs partially offset by the favorable impact of foreign currency translation of $3.4 million.

Selling, General and Administrative Expense

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

Research and Development Expense

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

31

Restructuring Charges

        Restructuring charges were $9.0 million in 2004, compared to $1.8 million in 2003.

        In the third quarter of 2004, we initiated a company-wide restructuring plan to lower our cost structure. The principal components of the plan include reducing worldwide headcount by approximately 220 employees, transitioning the Respiratory Technologies' U.S. manufacturing operations from Yorba Linda, California to our Critical Care facility in Palm Springs, California, combining Critical Care's U.S. commercial operations with Respiratory Technologies' U.S. commercial operations in a newly leased facility in Yorba Linda, California, and the closure of a facility in Bilthoven, the Netherlands. The plan involves the termination of employees in Germany, the Netherlands, the United Kingdom and the United States. The total amount of restructuring expense expected to be incurred in connection with this plan is between $9.5 million and $11.0 million. In 2004, we recorded a restructuring charge relating to this plan of approximately $8.6 million, including $8.3 million for severance, $0.2 million for employee retention and $0.1 million for other costs. As of January 1, 2005, 200 of the targeted employees had been severed and $4.3 million of severance had been paid. We expect all components of the plan to be substantially completed by the end of 2005. We estimate that as a result of this plan we will achieve annual operating expense savings of approximately $12.0 million in fiscal 2005.

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

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

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

Purchased in-process research and development

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

Legal Settlement

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

32

Provision for Income Taxes

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

Discontinued Operations

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

Segment Information

Respiratory Technologies

        Revenues increased $1.8 million to $115.9 million in 2004 from $114.1 million in 2003. This increase was primarily attributable to the favorable impact of foreign currency translation of $4.9 million, an increase in service revenue of $3.1 million including $1.5 million received from INO Therapeutics based on our submission of a research and development plan in connection with a co-development agreement in the pulmonary infection/inflammation field. These increases were partially offset by lower revenues in our Clinical Services business due to delays in the initiation of several clinical trials and lower domestic sales of sleep therapy systems due to a legal dispute, which was settled favorably in early 2005.

        Operating income decreased $7.1 million to $7.3 million in 2004 from $14.4 million in 2003. This decrease was mainly due to the following: costs of $7.1 million related to the restructuring plan initiated in the third quarter of 2004; increases in selling, general and administration expense; lower gross margin attributable to a change in product mix caused by the reduced revenues in our Clinical Services business; and costs related to the German restructuring plan initiated in the fourth quarter of 2003 of $0.9 million in 2004 compared to $0.3 million in 2003. Selling, general and administrative expense increased primarily due to the establishment of the infrastructure of our Clinical Services business, higher expenses related to the expansion of our field sales and service organizations, and higher legal expenses incurred to defend certain intellectual property. These reductions in operating income were partially offset by the $6.0 million legal settlement from INO Therapeutics received in the second quarter of 2004 and a reduction in incentive pay.

Critical Care

        Revenues decreased $0.6 million to $132.3 million in 2004 from $132.9 million in 2003. This decrease was primarily due to lower international sales as a result of $7.5 million of government tenders in 2003 and sales of $3.1 million related to the SARS epidemic in 2003 partially offset by increased sales of the new AVEA and VELA ventilators and an increase in service revenue of $1.7 million.

        Operating income decreased $8.0 million to $16.8 million in 2004 from $24.8 million in 2003. The decrease in operating income was primarily due to an increase in selling, general and administrative expense related to the expansion of our sales, service and marketing organizations, costs incurred to

33

consolidate our California manufacturing operations, inventory write-offs and costs of $0.5 million related to the restructuring plan initiated in the third quarter of 2004. These decreases in operating income were partially offset by spending reductions in research and development and costs in 2003 of $0.9 million related to the EME restructuring plan initiated in 2003.

NeuroCare

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

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

Medical and Surgical Products

        Revenues increased $3.9 million to $59.9 million in 2004 from $56.0 million in 2003. This increase was primarily driven by increased sales in our orthopedic business as well as higher sales of our enteral feeding tube product line. These increases were partially offset by lower sales of our medical imaging products.

        Operating income increased $0.7 million to $10.0 million in 2004 from $9.3 million in 2003. The increase was primarily due to increased gross margin resulting from the higher sales as well as manufacturing efficiencies and lower research and development expense. These increases were partially offset by higher expenses mainly to expand our medical disposables sales force to pursue opportunities in targeted markets and costs of $0.2 million related to the restructuring plan initiated in the third quarter of 2004.

Comparison of Results for the Year Ended January 3, 2004 to the Year Ended December 28, 2002

Revenues

        Revenues increased $52.4 million to $394.9 million in 2003 from $342.5 million in 2002. 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.

Cost of Revenues and Gross Margin

        Cost of revenues increased $31.2 million to $212.8 million in 2003 from $181.6 million in 2002. Gross margin percentage decreased 0.9 percentage points to 46.1% in 2003 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

34

products and higher installation and warranty expense. Partially offsetting the decreases in gross margin percentage were increased sales of new higher margin products.

Selling, General and Administrative Expense

        Selling, general and administrative expense increased $17.5 million to $112.9 million in 2003 from $95.4 million in 2002. As a percentage of revenues, selling, general and administrative expense was 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 Limited ("SciMed"), which were companies acquired in the fourth quarter of 2002.

Research and Development Expense

        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 Charges

        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. Beginning in 2004, this plan resulted in annual cost savings of approximately $3.5 million, much of which was reinvested into more productive areas in NeuroCare, such as sales and research and development.

        In 2003 as a result of the acquisition of EME, we initiated a restructuring plan related to our Critical Care segment, which resulted in the elimination of 48 positions in the areas of sales, finance, service and research and development. As of January 3, 2004, $0.9 million of retention payments were expensed and paid for approximately 45 employees. Severance for the remaining employees was expensed and paid in the first quarter of 2004. Beginning in 2004, this plan resulted in annual cost savings of approximately $2.0 million.

        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 are being eliminated over a period of five years. As of January 3, 2004, 7 of these positions had been eliminated. The total amount of restructuring expense expected to be incurred in connection with this plan is approximately $2.0 million. As of January 3, 2004, a total of $0.3 million had been incurred related to this plan. Once this plan is complete, the annual savings from this plan are 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.

35

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 associated with our acquisition of EME, partially offset by the tax benefit attributable to U.S. export sales. The impact of nondeductible purchased in-process research and development 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

Respiratory Technologies

        Revenues increased $16.9 million to $114.1 million in 2003 from $97.2 million in 2002. 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 $2.0 million to $14.4 million in 2003 from $12.4 million in 2002. This increase was 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.

Critical Care

        Revenues increased $35.6 million to $132.9 million in 2003 from $97.3 million in 2002. 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 $3.1 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 to $92.0 million in 2003 from $93.9 million in 2002. 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 increased $1.3 million to $5.3 million in 2003 from $4.0 million in 2002. This increase was primarily due to a reduction in restructuring and research and development expenses as well as savings from efficiencies obtained from our restructuring efforts. Partially offsetting these increases were lower gross margin due to the revenue decrease and higher expenses as a result of our incremental investment in the sales and marketing force.

Medical and Surgical Products

        Revenues increased $1.9 million to $56.0 million in 2003 from $54.1 million in 2002. 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 $1.4 million to $9.3 million in 2003 from $10.7 million in 2002. 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.

36

Liquidity and Capital Resources

        As of January 1, 2005 and January 3, 2004, we had cash and cash equivalents of $122.3 million and $97.9 million, respectively. At January 1, 2005, approximately $17.3 million of our cash and cash equivalents was held internationally and may be subject to U.S. income tax if repatriated to the U.S. Our working capital was approximately $230.4 million and $210.9 million at January 1, 2005 and January 3, 2004, respectively. On January 24, 2005, we acquired substantially all of the assets of Navion Biomedical Corporation for a cash purchase price of $3.5 million, of which $0.2 million will be paid in the first quarter of 2006. On March 1, 2005, we acquired the global medical business of Oxford Instruments plc for a cash purchase price of approximately $46.0 million. On March 15, 2005, we acquired all of the outstanding capital stock of Micro Medical for an aggregate purchase price of approximately $40.4 million. The purchase price consisted of approximately $36.6 million in cash (net of cash acquired) and approximately $3.8 million in assumed debt.

        Our cash flow from operations decreased by $7.5 million to $38.7 million in 2004 from $46.2 million in 2003. Cash flow from operations increased by $29.8 million to $46.2 million in 2003 from $16.4 million in 2002. Cash flows from our operating activities are generally the result of net income, deferred taxes, depreciation and amortization and changes in our working capital. Net income from continuing operations adjusted to exclude certain non-cash items, such as depreciation and amortization, was approximately $34.3 million, $42.7 million and $31.0 million in 2004, 2003 and 2002, respectively. The overall impact of changes in certain operating assets and liabilities on total operating cash flows resulted in net cash inflows of $4.6 million and $7.9 million in 2004 and 2003, respectively, and a use of cash of $18.1 million in 2002. Discontinued operations used cash of $0.2 million and $4.4 million in 2004 and 2003, respectively, and provided cash of $3.4 million in 2002.

        We used net cash from investing activities of continuing operations of $24.0 million in 2004, compared to $11.3 million and $29.9 million in 2003 and 2002, respectively. Our expenditures for property, plant and equipment were $10.6 million during 2004, compared to $6.0 million and $11.4 million during 2003 and 2002, respectively. Our expenditures for intangible assets were $10.1 million, compared to $3.9 million and $3.1 million in 2003 and 2002, respectively. We received proceeds from the sale of property, plant and equipment of $0.1 million in 2004, compared to $2.0 million and $2.8 million in 2003 and 2002, respectively. During 2004, we received proceeds from the sale of intangible assets of $2.2 million. During 2004, we paid $5.6 million to acquire substantially all of the assets of Taugagreining. During 2003, we made additional payments of $3.5 million related to the acquisitions of EME and Scimed. During 2002, we paid $18.2 million to acquire all of the outstanding capital stock of EME and Scimed. Discontinued operations provided cash of $20.5 million in 2003 compared to used cash of $4.4 million in 2002.

        We generated net cash from financing activities of $9.4 million in 2004, compared to $25.1 million and $14.3 million in 2003 and 2002, respectively. In 2004, we received $8.5 million in proceeds from the exercise of stock options, compared to $7.6 million and $0.9 million in 2003 and 2002, respectively. In 2004, we received $1.5 million in proceeds from the issuance of common stock pursuant to our employee stock purchase plan, compared to $2.1 million in fiscal 2003. In June 2003, we issued 3,450,000 shares of common stock in a follow-on public offering. The net proceeds generated by the offering, after expenses, were $62.7 million. In July 2003, we utilized a portion of these proceeds to repay the full amount outstanding under our credit facility.

        At January 1, 2005, we had a $60.0 million revolving credit facility (the "Facility") with a syndicate of six banks, of which $58.4 million was available to be borrowed. Up to $10.0 million of the $60.0 million is available for standby letters of credit. Under the Facility, there are options under which we can borrow funds that determine the interest rate charged. These options include borrowings at the London Interbank Borrowing Rate ("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. We repaid the full

37

amount outstanding under the Facility in July 2003. No amounts were outstanding under the Facility as of January 1, 2005.

        The Facility will expire on May 31, 2005. We are currently in the process of obtaining a new credit Facility and anticipate that a new facility will be in place on or before the expiration date of the current facility. The amount and other terms of the new credit facility have not yet been finalized. While we anticipate that we will be able to obtain a new credit facility and that the terms of such facility will be at least as favorable as the current Facility, there is no guarantee that we will be able to obtain a new credit facility or that the terms will be attractive to us in financing our business plans.

        Our ability to access the current Facility or a new credit facility will depend on complying with the debt covenants that are part of those agreements. The covenants of our Facility 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. We expect the new debt covenants to be similar in nature but anticipate that changes, such as the maximum capital expenditure limit, will be made in order to consider our needs over the term of the new credit facility.

        While we are in compliance with the debt covenants of our Facility and expect to be able to meet the requirements of the Facility through the expiration date and the requirements of any new credit facility in the future, failure to satisfy any of the conditions would require us to renegotiate either credit facility on terms that may not be as favorable or could require us to repay any outstanding balance. While we would attempt to find alternative sources to fund our operations from other financial institutions, we cannot assure you that we would be successful, or if we were successful, that the new credit facility would be on terms that would be attractive to us in financing our business plans.

        Our overall capital expenditures in 2005 are expected to approximate $20.0 million. This amount excludes potential capital expenditures related to the companies we acquired in 2005. 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.

        In 2004, we initiated a company-wide restructuring plan to lower our cost structure. We expect this action to bring expenses in line with the growth in our core businesses and enhance our near and long-term profitability. As a result of this initiative, we expect to incur a total pre-tax restructuring charge of $9.5 million to $11.0 million, of which $8.6 million has been recognized and $4.4 million has been paid in 2004. We expect this initiative to be substantially completed by the end of 2005 and the remaining amounts to be recognized and paid in 2005.

        Our principal source of liquidity at January 1, 2005 consisted of $122.3 million in cash and cash equivalents, plus $58.4 million available under the Facility. We believe that our available cash and cash equivalents, cash from operations and cash available under the Facility will be sufficient to finance our operations, the acquisition of Navion Biomedical Corporation, Oxford Medical and Micro Medical and capital expenditure requirements and commitments for the foreseeable future. However, it is possible that we may need to raise additional funds to finance unforeseen requirements or to acquire other businesses, products or technologies. These funds may be obtained through the sale of equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. There are no assurances that we will be able to obtain additional funds on terms that would be favorable to us, or at all. If funds are raised by issuing additional equity securities or convertible debt securities, the ownership percentage of existing shareholders would be reduced. In addition, equity or debt securities issued by us may have rights, preferences or privileges senior to those of our common stock.

38

Contractual Obligations and Commitments

        The following table summarizes our contractual obligations at January 1, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions):

        The following table summarizes our commercial commitments at January 1, 2005 (in millions):

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

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

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

Revenue Recognition

        We derive revenues primarily from the sale of products and to a lesser extent the provision of services and rental equipment. Where installation either is essential to product 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.

39

        Our service revenues are derived from parts, service contracts, training, repairs not under warranty and research and development for third parties. We sell service contracts on 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. We recognize revenues from the sale of spare parts upon transfer of title. We recognize revenues from training and repairs at the time the service is performed and the customer has accepted the work.

Allowance for Doubtful Accounts

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

Inventory

        We value our inventory at the lower of cost or net realizable value. Our determination of net realizable value 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 SFAS No. 142 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 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 2004 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

40

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 or a decrease in our forecasted operating results, 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, $5.3 million and $4.2 million for 2004, 2003 and 2002, respectively.

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

Recent Accounting Pronouncements

        For information on the recent accounting pronouncements impacting our business, see discussion under the caption "Recent Accounting Pronouncements" in Note 2 to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Risk

        We derive approximately 44% of our revenues from customers located outside the United States. Some of this business is transacted through our foreign subsidiaries, primarily in the local currency that is considered the functional currency of that foreign subsidiary. Expenses are also incurred in the local currencies to match revenues earned and minimize exchange rate exposure. The Company generally views its investment in its foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on the Company's net investment in foreign subsidiaries are reflected in accumulated other comprehensive income. A 10% depreciation in functional currency exchange rates relative to the U.S. dollar would have resulted in a decrease in the Company's net investment in foreign subsidiaries of approximately $12.9 million at January 1, 2005.

41

Interest Rate Risk

        Our cash and cash equivalents are sensitive to changes in interest rates. A change in interest rates would result in a change in interest income. Our market risk exposure to changes in interest rates is immaterial.

Item 8. Financial Statements and Supplementary Data

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

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

        None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

        Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

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

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

(c) Change in Internal Control Over Financial Reporting

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

Item 9B. Other Information

        Not applicable.

42

PART III

Item 10. Directors and Executive Officers of the Registrant

        The information required by this item with respect to our directors, our Audit Committee and audit committee financial expert is incorporated by reference to the information set forth under the captions entitled "Proposal No. 1. Election of Directors" and "Board of Directors and Corporate Governance Matters – Audit Committee" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

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

        The information required by this item with respect to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information set forth under the caption entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

        We have adopted a "Code of Business Conduct and Ethics for Directors" and a "Code of Conduct" applicable to all employees, including all executive officers of the Company. The "Code of Business Conduct and Ethics for Directors" and the "Code of Conduct" are posted on our website. The Internet address for our website is www.viasyshealthcare.com. The "Code of Business Conduct and Ethics for Directors" and the "Code of Conduct" may be found as follows:

1.

From our main web page, first click "Investors" in the top navigational bar.



2.

Next, click on "Corporate Governance" in the left hand navigational bar.



3.

Finally, click on "Code of Business Conduct and Ethics for Directors" and/or "Code of Conduct".

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

Item 11. Executive Compensation

        The information required by this item is incorporated by reference to the information set forth under the captions entitled "Board of Directors and Corporate Governance Matters – Compensation of Directors" and "Executive Compensation" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

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

        The information required by this item with respect to the security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

        The following table provides information as of January 1, 2005 with respect to the shares of our common stock that may be issued under our existing equity compensation plans.

43

Equity Compensation Plan Information

Item 13. Certain Relationships and Related Transactions

        The information required by this item is incorporated by reference to the information set forth under the caption entitled "Related Transactions" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934.

Item 14. Principal Accounting Fees and Services

        The information required by this item is incorporated by reference to the information set forth under the caption entitled "Independent Public Accountants and Related Fees" in our definitive proxy statement for the 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Act of 1934.

44

PART IV

Item 15. Exhibits and Financial Statement Schedules

        (a) The following documents are filed as part of this Annual Report on Form 10-K:

1.

Consolidated Financial Statements:

2.

Financial Statement Schedule:

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

3.

Exhibits:

45

*

Filed herewith.

†

Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

46

SIGNATURES

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

        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 17, 2005.

47

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

        Management evaluated the Company's internal control over financial reporting as of January 1, 2005. In making this assessment, management used the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of January 1, 2005, the Company's internal control over financial reporting was effective.

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

F-1

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

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

        We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that VIASYS Healthcare Inc. maintained effective internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). VIASYS Healthcare Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

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

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

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

        In our opinion, management's assessment that VIASYS Healthcare Inc. maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, VIASYS Healthcare Inc. maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of VIASYS Healthcare Inc. and our report dated March 15, 2005 expressed an unqualified opinion thereon.

                                                                                                                     /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
March 15, 2005

F-2

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

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

        We have audited the accompanying consolidated balance sheets of VIASYS Healthcare Inc. as of January 1, 2005 and January 3, 2004, 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 1, 2005. Our audits also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIASYS Healthcare Inc. at January 1, 2005 and January 3, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of VIASYS Healthcare Inc.'s internal control over financial reporting as of January 1, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2005 expressed an unqualified opinion thereon.

                                                                                                                     /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
March 15, 2005

F-3

VIASYS HEALTHCARE INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements.

F-4

VIASYS HEALTHCARE INC.
CONSOLIDATED STATEMENTS OF INCOME