MASIMO CORP, S-1, 2000-09-12

MASIMO CORP
S-1, 2000-09-12
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

MASIMO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3845 33-036882
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

2852 KELVIN AVENUE
IRVINE, CALIFORNIA 92614
(949) 250-9688
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

JOE E. KIANI
CHIEF EXECUTIVE OFFICER
2852 KELVIN AVENUE
IRVINE, CALIFORNIA 92614
(949) 250-9688
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
CHRISTOPHER KILPATRICK PATRICK T. SEAVER
JACQUELINE E. COWDEN DAVID B. ALLEN
ARTER & HADDEN LLP JEEVAN B. GORE
5 PARK PLAZA, SUITE 1000 LATHAM & WATKINS
IRVINE, CALIFORNIA 92614 650 TOWN CENTER DR., 20TH FLR.
(949) 252-7500 COSTA MESA, CALIFORNIA 92626
(714) 540-1235
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $0.001 par value....................... $69,000,000 $18,216
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</TABLE>

(1) Includes shares subject to the underwriters' over-allotment option.

(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES
IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED , 2000

[MASIMO LOGO]

SHARES
COMMON STOCK

This is the initial public offering of Masimo Corporation, and we are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share. We have applied to
list our common stock on the Nasdaq National Market under the symbol "MSMO."

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MASIMO
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>

We have granted the underwriters the right to purchase up to
additional shares to cover over-allotments.

DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY

THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3

LOGO

[The words "Our objective is to improve patient care by establishing Masimo SET
as the new performance standard for pulse oximetry and other monitoring
applications."]

[THE WORDS "MS BOARDS" AND A PHOTOGRAPH OF MS BOARDS]

[To the right of the photograph of the MS Boards the words "Our MS Boards
incorporate our proprietary Masimo SET signal processing software and algorithms
and are primarily sold to our licensees for incorporation into their monitors."]

[THE WORD "RADICAL" AND A PHOTOGRAPH OF THE RADICAL PRODUCT]

[To the right of the photograph of the Radical product the words "Our Radical is
a standalone pulse oximeter with a detachable module, which functions as a
battery operated, handheld pulse oximeter. Radical's SatShare feature enables
the upgrade of a conventional monitor to Masimo SET technology through a simple
cable connection. We believe that Radical's upgrade capability coupled with its
multi-functionality will facilitate hospital-wide conversions of installed
monitors to Masimo SET. We are currently offering Radical primarily through OEM
licensees and distributors worldwide."]

[THE WORDS "SENSOR FAMILY" AND A PHOTOGRAPH OF THE COMPLETE SENSOR LINE]

[To the right of the photograph of the complete sensor line the words "Our line
of disposable and reusable sensors and other accessories are used in combination
with monitors using our boards and our Radical product. Masimo SET monitors are
designed to function only with our proprietary sensors. We sell our sensors
primarily to our licensees for resale to end-users."]
<PAGE> 4

SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements and
related notes, before making an investment decision.

MASIMO CORPORATION

We develop, license and market advanced signal processing technologies and
products for the noninvasive monitoring of vital signs. Our first products,
based on our proprietary Signal Extraction Technology, or Masimo SET, are
designed to improve the effectiveness of pulse oximetry. Over twenty
independent, published studies have demonstrated that Masimo SET substantially
overcomes the limitations of conventional pulse oximeters in accurately
measuring arterial blood oxygen saturation levels and pulse rates in the
presence of motion artifact, or patient movement, and low perfusion, or low
arterial blood flow.

We license our technology and sell our products primarily to patient
monitoring companies with existing installed customer bases, permitting us to
leverage the sales and distribution channels of each OEM licensee. We have
agreements with over 30 OEM licensees. To date, 16 companies have launched a
total of 30 monitors worldwide incorporating Masimo SET. We believe over 25,000
monitors have been installed worldwide which use our technology. Our technology
and products are covered by 59 issued and 103 pending U.S. and foreign patents.

OUR TARGET MARKETS

Pulse oximetry is the noninvasive measurement of the oxygen saturation
level of arterial blood and pulse rate. Early detection of low arterial blood
oxygen saturation, or hypoxemia, is critical because an insufficient supply of
oxygen to the body's tissues, or hypoxia, can result in brain damage and death
in a matter of minutes. The use of pulse oximetry in critical care settings,
such as hospital operating rooms and intensive care units, is widely accepted as
a standard of care because of its ability to provide an early warning of
hypoxemia. However, conditions such as motion artifact and low perfusion impose
operating limitations on conventional pulse oximeters. These include inaccurate
measurements, the loss of a real-time signal, or false alarms when the pulse
oximeter falsely indicates a drop in the oxygen saturation level, all of which
can lead to adverse patient outcomes.

Despite the limitations of conventional pulse oximeters, pulse oximetry has
gained wide clinical acceptance as a monitoring technology. For example, in the
over 20 million annual surgical procedures performed in the U.S. in which
anesthesia is administered, pulse oximeters are used as part of the standard
protocol of monitoring procedures. We believe that Masimo SET technology may
also be applicable to other existing applications, such as blood pressure
monitoring, respiration monitoring and electrocardiography, as well as
parameters that currently are not well-served by available noninvasive
monitoring technologies, such as fetal oximetry.

OUR TECHNOLOGY AND PRODUCTS

Masimo SET is designed to address the problems of motion artifact and low
perfusion, enabling pulse oximeters to provide accurate real-time data despite
these challenging conditions. Masimo SET consists of proprietary software and
algorithms, used in combination with a patented sensor design. Our software and
algorithms enable the use of adaptive filters to cancel interference, while our
sensor design enhances the performance of our software. Masimo SET is
incorporated into our printed circuit boards, which are primarily sold to our
OEM licensees and incorporated into their monitors. We have recently introduced
Radical, a

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<PAGE> 5

standalone and handheld pulse oximeter that enables continuous monitoring as
patients are moved throughout the continuum of care. In addition, Radical,
through a simple cable connection to a conventional monitor, offers the ability
to upgrade the existing installed base of conventional pulse oximeters to Masimo
SET performance. We have developed two lines of disposable and reusable sensors
and other accessories to be used in combination with monitors using our boards
and our Radical product. Once Masimo SET has been incorporated into a monitor,
the pulse oximeter will function only with our proprietary sensors.

We believe the clinical benefits of our products include the following:

- Accurate Real-Time Measurement: Masimo SET is more reliable than
conventional pulse oximeters in delivering critical information to the
clinician in real-time.

- Reliable Monitoring During Motion: Masimo SET identifies and eliminates
interference caused by patient movement and provides an accurate
measurement of the patient's blood oxygen saturation and pulse rate.

- Accurate Monitoring During Low Perfusion: Masimo SET detects and
measures blood oxygen saturation in most patients who suffer from low
perfusion, such as elderly and critically ill patients.

- Resistance to Electromagnetic Interference and Ambient Light: Masimo SET
boards and sensors are designed to shield against or eliminate
interference caused by ambient light and electrical surgical instruments
commonly used in the hospital.

OUR STRATEGY

Our objective is to improve patient care by establishing Masimo SET as the
new performance standard for pulse oximetry and other monitoring applications.
Key elements of our strategy include:

- Create and Share With Our Licensees a Proprietary, Recurring Consumables
Franchise. Masimo SET monitors are designed to only function with our
proprietary sensors, which are primarily sold to our licensees for sale
to end-users.

- Expand the Market for Pulse Oximetry. As a result of the increased
performance and reliability of pulse oximeters utilizing Masimo SET
technology, we expect pulse oximetry to achieve greater penetration in
less acute care settings, such as intermediate care settings, the general
ward and the home.

- Apply Masimo SET to Other Monitoring Applications. We believe that
Masimo SET can be used to improve other existing monitoring applications
and can be applied to parameters that currently are not well-served by
available noninvasive monitoring technologies.

2
<PAGE> 6

THE OFFERING

Common stock offered by Masimo...... shares

Common stock to be outstanding upon
completion of this offering....... shares

Use of proceeds..................... General corporate purposes, including
working capital, capital equipment
purchases, product development, sales
and marketing, and possible
acquisitions or investments. See "Use
of Proceeds."

Proposed Nasdaq National Market
symbol.............................. MSMO

The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of June 30, 2000,
and includes 454,546 shares of Series F Preferred Stock sold in September 2000
for $11.00 per share and excludes:

- 2,083,170 shares of common stock issuable upon exercise of options
outstanding as of June 30, 2000, at a weighted average exercise price of
$4.37 per share;

- 709,430 shares of common stock available for issuance under our stock
option plans as of June 30, 2000;

- 10,000 shares of common stock issuable upon exercise of a warrant
outstanding as of June 30, 2000, at an exercise price of $3.00 per share;
and

- 90,909 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $11.00 per share issued in September
2000.
------------------------

Unless otherwise indicated, the information in this prospectus assumes:

- the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering, including the 454,546 shares of
Series F Preferred Stock issued in September 2000;

- no exercise of the underwriters' over-allotment option; and

- no issuance of additional common stock to holders of our Series F
preferred stock or to the holder of the warrant to purchase 90,909 shares
of our common stock pursuant to their existing antidilution rights which
will be triggered in the event the initial public offering price is less
than $11.00 per share. See "Description of Capital Stock."
------------------------

RECENT DEVELOPMENTS

In September 2000, we sold 454,546 shares of Series F Preferred Stock for
$11.00 per share and issued warrants to purchase 90,909 shares of common stock
at an exercise price of $11.00 per share to GE Marquette Medical Systems, Inc.
------------------------

We were incorporated in California in May 1989 and reincorporated in
Delaware in May 1996. Our executive offices are located at 2852 Kelvin Avenue,
Irvine, CA 92614. Our telephone number is (949) 250-9688 and our website is
www.masimo.com. The information on our website is not incorporated into and is
not intended to be a part of this prospectus.

Masimo, SET, Signal Extraction Technology, Radical, RadicalScreen,
SatShare, LNOP, Discrete Saturation Transform, MS and NR are trademarks of
Masimo. All other trademarks used in this prospectus are the property of their
respective owners.

3
<PAGE> 7

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Operating expenses:
Research and development........ 2,190 2,076 3,089 3,132 5,965 2,836 2,240
Selling, general and
administrative................ 1,301 1,750 2,599 3,930 7,767 3,438 5,790
------- ------- ------- -------- -------- ------- --------
Total operating expenses...... 3,491 3,826 5,688 7,062 13,732 6,274 8,030
------- ------- ------- -------- -------- ------- --------
Non-recurring income.............. -- 1,000 -- -- -- -- --
------- ------- ------- -------- -------- ------- --------
Loss from operations............ (3,491) (3,092) (6,928) (8,350) (13,452) (6,289) (6,928)
Interest and other, net........... 263 327 398 433 281 116 251
------- ------- ------- -------- -------- ------- --------
Net loss........................ $(3,228) $(2,765) $(6,530) $ (7,917) $(13,171) $(6,173) $ (6,677)
======= ======= ======= ======== ======== ======= ========
Net loss applicable to common
stockholders.................. $(3,950) $(4,329) $(9,041) $(10,828) $(18,022) $(8,372) $ (9,787)
======= ======= ======= ======== ======== ======= ========
Net loss per common share:
Basic and diluted............. $ (1.45) $ (1.54) $ (3.16) $ (3.75) $ (6.12) $ (2.87) $ (3.25)
======= ======= ======= ======== ======== ======= ========
Pro forma basic and diluted... $ (1.21) $ (.54)
======== ========
Weighted-average shares
outstanding used in computing
net loss per common share:
Basic and diluted............. 2,726 2,807 2,862 2,889 2,943 2,921 3,013
Pro forma basic and diluted... 10,915 12,420
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 15,941 $20,841
Working capital............................................. 19,000 23,900
Total assets................................................ 28,383 33,283
Long-term debt.............................................. 2,043 2,043
Redeemable preferred stock.................................. 81,500 --
Stockholders' equity (deficit).............................. (58,975) 27,425
</TABLE>

------------
(1) The pro forma column reflects the conversion of all series of preferred
stock outstanding as of June 30, 2000, into 10,082,174 shares of common
stock upon the closing of this offering and the issuance and conversion of
454,546 shares of Series F Preferred Stock issued at $11 per share with
estimated net proceeds of $4.9 million in September 2000 into common stock
upon the closing of this offering.

(2) The pro forma as adjusted column reflects the sale of shares of
our common stock in the public offering at an assumed initial public
offering price of $ per share, after deducting underwriting discounts and
commissions and estimated offering expenses and the application of the net
proceeds as described in "Use of Proceeds."

4
<PAGE> 8

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition could suffer
significantly. In that case, the market price of our common stock could decline,
and you may lose all or part of the money you paid to buy our common stock.

RISKS RELATED TO OUR BUSINESS

WE WILL NOT BE PROFITABLE IF THE MARKET DOES NOT ACCEPT OUR TECHNOLOGY AND
PRODUCTS BASED ON OUR TECHNOLOGY.

We are dependent upon the success and market acceptance of our proprietary
Signal Extraction Technology, Masimo SET. Market acceptance of equipment
incorporating Masimo SET will depend upon our ability to continue to provide
evidence to the medical community and health care providers that our products
are cost-effective and provide significantly improved performance compared to
conventional arterial blood oxygen saturation monitoring equipment. Health care
providers that currently have significant investments in conventional arterial
blood oxygen saturation monitoring equipment may be reluctant to purchase and
accept new arterial blood oxygen saturation monitoring equipment. If hospitals
and other health care providers do not accept monitoring systems which use our
Masimo SET as cost-effective, accurate or reliable, they may not buy and use
them in sufficient quantities to enable us to be profitable. If we are unable to
achieve significant market acceptance of our core technology or products
incorporating Masimo SET, generate significant revenues from the sale of our
Masimo SET sensors or expand the number of applications for Masimo SET, it would
have a material adverse effect on our business, financial condition and results
of operations.

In addition, the success of our overall business strategy depends on our
ability to generate demand for Radical and on market acceptance of Radical. Our
Radical product was first made commercially available in August 2000 and
accordingly, we do not know to what degree the market will accept this product.
We cannot assure you that our customers will accept Radical and purchase it in
quantities sufficient for us to be profitable. If the market does not accept
Radical and we are unable to generate sufficient demand for this product, our
business and results of operations will be adversely affected.

WE DEPEND ON OUR ORIGINAL EQUIPMENT MANUFACTURER LICENSEES FOR SUBSTANTIALLY ALL
OF OUR REVENUE. IF THEY DO NOT DEVOTE SUFFICIENT RESOURCES TO THE PROMOTION OF
PRODUCTS WHICH USE OUR MASIMO SET, THEN WE MAY NEVER BECOME PROFITABLE.

We are and will continue to be dependent upon our licensees for
substantially all of our future revenue through their marketing, selling and
distribution of products that incorporate Masimo SET. The failure of our
original equipment manufacturer, or OEM, licensees to successfully market, sell
or distribute products incorporating our technology, the termination of
licensing agreements, the loss of OEM licensees or the inability to enter into
future OEM licensing agreements would have a material adverse effect on our
business, financial condition and results of operations. Our success will depend
in part upon whether our OEM licensees devote sufficient resources to the
promotion of products which incorporate our technology. These products may
represent a relatively small portion of an OEM licensee's business and some of
our OEM licensees offer competitive products. Therefore, we cannot guarantee
that our OEM licensees will promote products incorporating Masimo SET. In
addition, we believe that there has been and may continue to be a trend towards
consolidation in the health care industry. As a result of consolidation, one or
more of our OEM licensees could be acquired, and

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we cannot assure you that an acquiring company would devote sufficient resources
to promote our technology.

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS FROM OPERATING ACTIVITIES,
EXPECT TO INCUR OPERATING LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE
PROFITABILITY.

To date, we have incurred net losses, primarily from research and
development and sales and marketing activities, and have an accumulated deficit
of $58.5 million as of June 30, 2000. We expect to incur operating losses for at
least the next twelve months, as we increase our operating expenses to, among
other things:

- market our current products;

- improve our manufacturing capability;

- research and develop new products; and

- increase our general and administrative functions to support our growing
operations.

We may find that these efforts are more expensive than we currently
anticipate, which would further increase our accumulated deficit. With increased
expenses, we will need to generate additional revenues to achieve profitability.
Consequently, it is possible that we will not achieve profitability, and even if
we do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.

WE ARE CURRENTLY INVOLVED IN EXPENSIVE, TIME-CONSUMING INTELLECTUAL PROPERTY
LITIGATION WITH A MAJOR COMPETITOR.

In October 1999, we filed a patent infringement lawsuit against
Mallinckrodt, Inc. and Nellcor Puritan Bennett, Inc., a subsidiary of
Mallinckrodt, Inc. In our complaint, as amended, we allege that Nellcor has
infringed two of our patents by making, using, selling and offering to sell
certain pulse oximetry equipment. We are seeking injunctive relief against
Nellcor to prohibit the sale of certain of Nellcor's products, as well as
damages, costs and expenses, reasonable attorneys' fees and treble damages for
willful infringement. Nellcor has denied our allegation of infringement and
contends that our patents are invalid or unenforceable. Our motion for a
preliminary injunction against Nellcor is pending before the Court, as are
Nellcor's motions for summary judgment seeking invalidity and non-infringement
findings on one of our patents and invalidity on the other patent. If Nellcor's
motions are granted, we could lose the protection for our intellectual property
rights currently covered by the patents in question. Even if our motion for a
preliminary injunction is successful, we may be required to post a significant
bond as security for Nellcor's damages should Nellcor ultimately prevail. In the
event that we do not prevail, our business could be materially and adversely
affected.

After our filing, in November, 1999 Nellcor filed a patent infringement
lawsuit against us and one of our customers, in which Nellcor alleges that we
are and have been infringing three of Nellcor's patents and alleges that we are
and have been inducing and contributing to the infringement of these three and a
fourth Nellcor patent. Nellcor is seeking injunctive relief to prevent our
alleged acts of infringement, as well as damages, costs and expenses, reasonable
attorneys' fees and treble damages for willful infringement. In our answer we
have denied Nellcor's allegation of infringement and allege that Nellcor's
patents are invalid or unenforceable. If we do not prevail in this lawsuit, we
could be liable to Nellcor for significant monetary damages and be prohibited
from selling our products. As a result, an outcome adverse to us will cause our
business to suffer materially. We also understand that Nellcor has notified one
of our distributors that it believes our Radical product may infringe five
additional patents. Nellcor has not added these patents to the lawsuit nor
provided this notice to us.

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<PAGE> 10

In addition, whether or not we ultimately prevail in either our lawsuit
against Nellcor or Nellcor's lawsuit against us, these litigations have been and
will continue to be a substantial drain on our financial resources and a
diversion of management's attention from the implementation of our business
strategy.

IN THE FUTURE WE MAY BE REQUIRED TO BRING ADDITIONAL LITIGATION TO ENFORCE OUR
INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY
DIVERT OUR ATTENTION FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.

We believe that the success of our business depends, in significant part,
on obtaining patent protection for our products and technology, defending our
patents once obtained and preserving our trade secrets. We rely on a combination
of contractual provisions, confidentiality procedures and patent, trademark and
trade secret laws to protect the proprietary aspects of our technology. These
legal measures afford only limited protection and competitors may gain access to
our intellectual property and proprietary information. In addition to the
Nellcor litigation, future 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. We believe that other competitors
may be violating our proprietary rights. Any litigation could result in
substantial expense and diversion of our attention from the growth of the
business and may not be adequate to protect our intellectual property rights.

IN THE FUTURE WE MAY BE SUED BY THIRD PARTIES THAT CLAIM OUR PRODUCTS INFRINGE
THEIR INTELLECTUAL PROPERTY RIGHTS. WHETHER WE WIN OR LOSE THOSE SUITS, WE WILL
INCUR SUBSTANTIAL EXPENSES AND DIVERSION OF MANAGEMENT TIME FROM THE BUSINESS.
IF WE LOSE, IT MAY MATERIALLY IMPACT OUR BUSINESS.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. In addition to the
Nellcor litigation, we may be exposed to future litigation by third parties
based on claims that our products and technology infringe the intellectual
property rights of others. This risk is magnified 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.
While intellectual property disputes are often settled through licensing
arrangements, these arrangements may not be favorable to us. In addition,
intellectual property litigation or claims could force us to do one or more of
the following, all of which would be disruptive to our business:

- cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would 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;

- redesign our products and technology, which could be costly and
time-consuming;

- participate in interference proceedings to determine the priority of
inventions declared by the U.S. Patent and Trademark Office or similar
foreign agencies with respect to our existing patents or patent
applications or future patent applications; or

- payment of substantial damages and attorneys fees.

Any litigation or claims against us, whether or not valid, and however
resolved, could result in substantial costs, could place a significant strain on
our financial resources and could harm our reputation.

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<PAGE> 11

WE EXPECT OUR FINANCIAL RESULTS TO FLUCTUATE, AND OUR EARLY STAGE OF
COMMERCIALIZATION LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES.

Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. Factors that might cause
fluctuations in our operating results include the following:

- varying demand for and market acceptance of our technology and products;

- changes in the timing of product orders and the volume of sales by our
OEM licensees;

- competitive pressures resulting in lower selling prices or significant
promotional costs;

- changes in our product or customer mix;

- unanticipated delays or problems in the introduction of new products,
including delays in obtaining FDA clearance;

- manufacturing problems;

- high levels of returns and repairs;

- inaccurate forecasting of revenues; and

- the announcement or introduction of new products or services by our
competitors.

To respond to these and other factors, we may need to make business
decisions that could adversely affect our operating results. Most of our
expenses, such as employee compensation and lease payment obligations, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if net
sales for a particular period were below our expectations, we may not be able to
proportionately reduce our operating expenses for that period. Any revenue
shortfall would have a disproportionately negative effect on our operating
results for the period.

Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for any one quarter as an indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts or investors.

OUR FAILURE, OR A FAILURE OF OUR OEM LICENSEES, TO OBTAIN NECESSARY FDA
CLEARANCES OR APPROVALS COULD HURT OUR ABILITY TO COMMERCIALLY DISTRIBUTE OUR
PRODUCTS.

Unless an exemption applies, each medical device that we and our OEM
licensees wish to market in the U.S. must be cleared or approved in advance by
the U.S. Food and Drug Administration, or FDA, through procedures called "510(k)
clearances" or "PMA approvals." The FDA's 510(k) clearance process usually takes
from four to twelve months, but it can last longer. The process of obtaining PMA
approval is much more costly, lengthy and uncertain. It generally takes from one
to three years or even longer.

We believe that our OEM licensees will be required to obtain their own
510(k) premarket clearance for products incorporating our technology. We cannot
assure you that the 510(k) clearances we have obtained will make it easier for
our OEM licensees to obtain clearance of products incorporating the technology.
In addition, we cannot assure you that the FDA will ever grant 510(k) clearance
for any future product we or our OEM licensees propose to market with the Masimo
SET MS boards and sensors. If the FDA does not grant 510(k) clearance on a
timely basis to products incorporating our technology, we and our OEM licensees
will not be able to market and sell products using this technology, which will
limit our ability to generate revenue.

8
<PAGE> 12

Our Radical product using SatShare has received 510(k) clearance as an
upgrade compatible with certain models of third-party monitors. The FDA has
informed us that it will require us to seek new 510(k) clearances if we wish to
promote the Radical for use with additional models. We cannot assure you that
the FDA will grant such clearances in a timely fashion or at all.

To date, the FDA has regulated Masimo SET pulse oximeters and sensors,
Radical and other products incorporating this technology for pulse oximetry
products under the 510(k) process. If the FDA were to conclude that future
products using our technology do not meet the requirements to obtain 510(k)
clearance, then a PMA application would have to be filed. We cannot assure you
that the FDA will not impose the more burdensome PMA approval process upon this
technology in the future, either for specific applications or more generally for
all applications.

In addition, many foreign countries in which our products are marketed have
regulatory bodies and restrictions similar to those of the FDA. Our failure to
obtain necessary foreign government approvals or to successfully comply with
foreign regulations could prevent us from selling our products outside of the
U.S.

OFF-LABEL PROMOTION OF OUR PRODUCTS COULD RESULT IN SUBSTANTIAL PENALTIES.

510(k) clearance only permits us to promote our products for the uses
indicated on the labels cleared by the FDA. We may request additional label
indications for our current products, and the FDA may deny those requests,
require additional expensive clinical data to support any additional indications
or impose limitations on the intended use of any cleared product as a condition
of clearance. If the FDA determines that we or our OEM licensees have promoted
our products for off-label use, we could be subject to fines, injunctions or
other penalties.

WE HAVE MADE MODIFICATIONS TO MARKETED DEVICES THAT MAY LEAD THE FDA TO REQUIRE
NEW 510(K) CLEARANCES OR PMA APPROVALS AND/OR REQUIRE US TO CEASE MARKETING
AND/OR RECALL THE MODIFIED DEVICES UNTIL THESE CLEARANCES ARE OBTAINED.

Any modification to a 510(k) cleared device that could significantly affect
its safety or effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or, possibly, PMA approval. The
FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any decision. We have modified some of our
marketed devices, and we cannot be certain that the FDA will agree with any of
our decisions not to seek 510(k) clearance. If the FDA requires us to seek
510(k) clearance for any modification, we also may be required to cease
marketing and/or recall the modified device until we obtain a new 510(k)
clearance or PMA approval.

IF WE DO NOT SUCCESSFULLY DEVELOP AND COMMERCIALIZE ENHANCED OR NEW PRODUCTS OR
KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES DEVELOPED BY OTHERS, WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS AND OUR ABILITY TO REMAIN
COMPETITIVE AND ACHIEVE FUTURE GROWTH WILL BE IMPAIRED.

The medical industry in which we market our products is characterized by
rapid product development and technological advances. Our long-term success
depends upon the development and successful commercialization of new products,
new or improved technologies and additional applications for our Masimo SET. The
technology and product research and

9
<PAGE> 13

development process is time-consuming and costly and may not result in products
or applications we can successfully commercialize. In addition, we face the
following risks:

- regulatory approvals or clearances may not be granted on a timely basis;

- our current or planned products are at risk of obsolescence from new
monitoring products, based on new or improved technologies, and
alternative techniques for monitoring arterial blood oxygen saturation
levels;

- we may not be able to develop our technology for applications outside
arterial blood oxygen saturation monitoring; and

- any new or improved technology or products which we develop may not gain
market acceptance.

If we do not successfully adapt our technology for new products and
applications both within and outside the field of arterial oxygen monitoring, we
could lose revenue opportunities and customers. In addition, we may not be able
to improve our products or develop new products or technologies quickly enough
to maintain a competitive position in our markets and continue to grow our
business.

IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY, WE
WILL NOT EXPAND OUR BUSINESS.

Our current sales and marketing efforts may not be sufficient to achieve
the level of market awareness and sales of our products by new and existing OEM
licensees which we need to expand our business. We have limited sales and
marketing experience both in the U.S. and internationally and may not be
successful in developing and implementing our strategy. We need to:

- continue to add domestic and international OEM licensees, key account
sales managers and clinical specialists;

- provide or assure that distributors and OEM licensees provide the
technical and educational support customers need to use monitoring
systems using our Masimo SET successfully;

- promote monitoring systems using our Masimo SET so that sales of those
systems increase; and

- be prepared to provide service as necessary to geographically dispersed
users of monitoring systems using our Masimo SET.

Our failure to accomplish any of the items set forth above will adversely
affect our sales and marketing strategy and accordingly, will adversely affect
our business and operating results.

THE LOSS OF ANY LARGE CUSTOMER OR ANY CANCELLATION OR DELAY OF A SIGNIFICANT
PURCHASE BY A LARGE CUSTOMER COULD SIGNIFICANTLY REDUCE OUR NET SALES AND HARM
OUR OPERATING RESULTS.

For the year ended December 31, 1999, sales to Zoll Medical Corporation,
Datascope Corporation and Atom Medical Corporation accounted for approximately
20%, 18% and 13% of our total revenue, respectively. The loss of any of these
large customers, or a significant reduction in sales to these customers, would
significantly reduce our net sales and adversely affect our operating results.
Although these three OEMs are contractually committed to make Masimo SET their
primary pulse oximetry technology, subject to some conditions, if any were to
breach its agreement, were to not buy components or were to delay purchases, our
net sales would decline substantially, and we may not be able to recover the
lost revenue. We anticipate that our operating results in any given period will
continue to depend to a significant

10
<PAGE> 14

extent upon revenues from a small number of large customers. We cannot assure
you that we will retain our current customers or that we will be able to attract
additional customers.

OUR RELIANCE ON SOLE SUPPLIERS OF RAW MATERIALS COULD ADVERSELY AFFECT OUR
ABILITY TO MEET OUR MARKET DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET.

Some of the components that are necessary for Masimo SET are currently
provided to us by separate sole suppliers or a limited group of suppliers. In
addition, there is currently a shortage in our industry of some components which
is causing longer lead-times for their delivery. The disruption or termination
of our supply of components could significantly increase our cost of acquiring
these components, which could affect our profitability. A disruption or
termination in the supply of components could also result in our inability to
meet the demand for our Masimo SET and Radical products, which could lead to
customer dissatisfaction and damage our reputation. Furthermore, if we are
required to change the manufacturer of a key component of the Masimo SET or
Radical, we will be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture Masimo
SET products in a timely manner or within budget.

WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY BE UNABLE TO EXPAND OUR
MANUFACTURING CAPABILITY SUFFICIENTLY.

The manufacturing process for our products is complex and requires
precision in the manufacturing and testing of finished products. Manufacturers
often encounter difficulties in initiating and expanding production, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. In our manufacturing activities, we
face the following potential risks:

- inability to successfully increase manufacturing capacity;

- inability to attract, train and retain the required personnel, including
personnel skilled in manufacturing processes;

- inability to maintain current or obtain new regulatory approvals to
manufacture in our facility;

- inability to manufacture sensors at a commercially reasonable cost; and

- inability to adapt current facilities or develop the capability to
manufacture new products.

We have limited experience in manufacturing our Masimo SET sensors, Radical
and our other existing products. We may not be able to successfully manufacture
any of our existing or new products in quantities required by our OEM licensees
or end-users, in an efficient, cost-effective manner, if at all.

WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS OR
RETURNS WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN
OPERATING RESULTS.

Depending on factors such as the timing of our introduction of new products
which utilize our Masimo SET, including our Radical, as well as warranty claims
and product returns, we may need to reserve amounts in excess of those currently
reserved for product obsolescence, warranty claims and product returns. These
additional reserves may not be adequate to cover all costs associated with these
items. If these reserves are inadequate, we would be required to incur
unanticipated expenses which would result in unexpected fluctuations in
quarterly operating results.

11
<PAGE> 15

BECAUSE WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES
THAN WE HAVE, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

We face intense competition in licensing our products to OEMs. In addition,
the market for monitoring systems for arterial blood oxygen saturation levels to
health care providers is very competitive. We face substantial competition from
larger medical device companies, including some of our OEM licensees, that have
greater financial, technical, marketing and other resources than we do. Some of
these competitors may strengthen their competitive position by pricing their
products more aggressively. We may not be able to compete effectively with these
companies. For example, we face substantial competition from companies
developing products that compete with our proprietary Masimo SET for use with
third party monitoring systems. We also expect to face competition from
companies currently marketing conventional monitors. One company in particular,
Nellcor, currently holds a substantial share of the conventional arterial blood
oxygen saturation monitoring market. In addition, one or more of our competitors
may develop products that are substantially equivalent to our FDA approved
products, or those of our OEM licensees, in which case they may be able to use
our products, or those of our OEM licensees, as predicate devices to more
quickly obtain FDA clearance of their competing products. Competition could
result in price reductions, fewer orders, reduced gross margins and loss of
market share.

IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.

We are highly reliant upon our President and Chief Executive Officer, Joe
E. Kiani, and our Chief Technical Officer, Mohamed K. Diab. We are also highly
dependent on the ability, experience and performance of other members of our
senior management and other key employees who have extensive experience in the
medical device industry. We carry key person life insurance on only Messrs.
Kiani and Diab. Because of their ability and experience, if we lose one or more
members of our senior management or other key employees, our ability to
successfully implement our business strategy could be seriously harmed.

IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND
OUR BUSINESS.

Our technology and products are based on complex technology. Accordingly,
we require skilled personnel to develop, manufacture, sell and support our
products. Our future success will depend largely on our ability to continue to
hire, train, retain and motivate additional skilled personnel, particularly
software engineers, sales representatives and specialists who are responsible
for coordinating with our OEM licensees. We may experience difficulty in
recruiting and retaining skilled personnel because the pool of experienced
persons is small, and we compete for personnel with other companies, many of
which have greater resources than we do. Consequently, if we are not able to
attract and retain skilled personnel, we will not be able to expand our
business.

IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE
SUBSTANTIAL LIABILITY. PRODUCT LIABILITY CLAIMS COULD DIVERT MANAGEMENT
ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES AS WELL AS OUR ABILITY TO
OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE
AMOUNTS.

The manufacture and sale of products using our Masimo SET expose us to
product liability claims and product recalls, including those which may arise
from misuse or malfunction of, or design flaws in, our products or use of our
products with incompatible components or systems. Any losses that we may suffer
from future liability claims, and the effect that any product liability
litigation may have upon the reputation and marketability of our technology and
products, together with the corresponding diversion of the attention of our key
employees, may

12
<PAGE> 16

adversely affect our business, financial condition and results of operations.
Any product liability claims could require us to spend significant time and
money in litigation and may subject us to significant damages. We currently have
product liability insurance. However, our current insurance coverage might not
be sufficient to cover damages or claims. Furthermore, we may not be able to
obtain or maintain insurance in the future at satisfactory rates or in adequate
amounts to protect us against any product liability claims.

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE MAY BE VOLATILE, AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.

Prior to this offering, there has been no public market for our common
stock. After this offering, an active trading market in our common stock might
not develop or continue. If you purchase shares of our common stock in this
offering, you will pay a price that was not established in a competitive market.
Rather, you will pay a price that we negotiated with the representatives of the
underwriters based upon an assessment of the valuation of our stock. The public
market may not agree with or accept this valuation, in which case you may not be
able to sell your shares at or above the initial offering price. The market
price of our common stock may fluctuate significantly in response to factors
which are beyond our control.

In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In particular, the market prices of securities of
technology and medical device companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.

WE MAY BE FORCED TO RAISE ADDITIONAL CAPITAL SOONER THAN CURRENTLY ANTICIPATED
AND MAY BE UNABLE TO DO SO ON ACCEPTABLE TERMS, IF AT ALL.

We expect that the net proceeds from this offering and our existing capital
resources will be sufficient to fund our operations at least through the next
twelve months. However, our future capital requirements will depend upon a
number of factors, including:

- our ability to sell our products through our OEMs, which could be
affected by the introduction of competitive products or price pressure;

- market acceptance of Masimo SET;

- obtaining the regulatory approvals required to ship our products;

- the extent to which we are required to recall products; and

- expenses incurred in connection with litigation.

We may require additional funds, and we cannot be certain that additional
funding will be available when needed or on terms acceptable to us. Further, if
we issue additional equity securities or debt securities, stockholders may
experience additional dilution, or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock.
If we cannot raise funds on acceptable terms, if and when needed, we may not be
able to develop or enhance our products, take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
requirements.

13
<PAGE> 17

IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THE
OFFERING, THE MARKET PRICE FOR OUR COMMON STOCK MAY DECLINE.

Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
The number of shares of common stock available for sale in the public market is
limited by restrictions under federal securities law and under lock-up
agreements with our underwriters. These lock-up agreements restrict some of our
stockholders from disposing of all of their shares for 150 days after the date
of this prospectus, two-thirds of their shares for 180 days, and one-third of
their shares for 210 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. However, Deutsche Bank
Securities Inc. may release all or any portion of these shares from the
restrictions in the lock-up agreements. Sales of a substantial number of shares
of our common stock in the public market after this offering could depress the
market price of our common stock and could impair our ability to raise capital
through the sale of additional equity securities.

OUR INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER MASIMO AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.

After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately % of our outstanding common stock. As a result,
these stockholders, if acting together, would have the ability to exercise
substantial control over all corporate actions requiring stockholder approval
irrespective of how our other stockholders may vote, including:

- the election of directors;

- the amendment of charter documents;

- the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; or

- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY TRANSACTIONS BENEFICIAL TO STOCKHOLDERS.

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

- our board of directors may issue up to five million shares of preferred
stock and determine the applicable powers, preferences and rights,
without any vote or further action by shareholders;

- shareholders cannot call special meetings;

- nomination of a director or the taking of specified actions requires
advance notice; and

- we have a classified board of directors of which approximately one-third
of the directors will be elected each year.

In addition, we are subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law, which limits us from engaging in any
merger, asset or stock sale or other transaction resulting in a financial
benefit to a shareholder holding 15% or more of our voting shares.

14
<PAGE> 18

NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION OF THEIR INVESTMENT.

The initial public offering price is substantially higher than the book
value per share of our common stock. Accordingly, purchasers of common stock in
this offering will suffer immediate and substantial dilution of their
investment. Purchasers will incur additional dilution upon the exercise of
outstanding stock options and warrants.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA

We make many statements in this prospectus under the captions Summary, Risk
Factors, Management's Discussion and Analysis of Financial Condition and Results
of Operations and Business and elsewhere that are forward-looking and are not
based on historical facts. These statements relate to our future plans,
objectives, expectations and intentions. We have attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"can," "continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors," that may cause our, or our industry's, actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.

Information regarding market and industry statistics contained in the
Summary and Business sections is included based on information available to us
that we believe is accurate. It is generally based on academic and other
publications that are not produced for purposes of securities offerings or
economic analysis. We have not reviewed or included data from all sources and
cannot assure you of the accuracy of the data we have included.

15
<PAGE> 19

USE OF PROCEEDS

Our net proceeds from the sale of shares of common stock we are
offering are estimated to be $ , after deducting underwriting discounts
and commissions and our estimated offering expenses. This assumes an initial
public offering price of $ per share. If the underwriters' over-allotment
option is exercised in full, the net proceeds are estimated to be approximately
$ on this same basis.

We intend to use the proceeds of this offering for general corporate
purposes, including working capital, capital equipment purchases, product
development, increasing our sales and marketing capabilities and possible
acquisitions or investments. The amount and timing of our actual expenditures
will depend on a number of factors, including the amount, if any, of cash
generated by our operations. Accordingly, our management will have broad
discretion in the application of the net proceeds. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the proceeds. Pending these uses, we plan to
invest the net proceeds in short-term, investment-grade instruments,
certificates of deposit or direct or guaranteed obligations of the U.S.

DIVIDEND POLICY

We have not declared or paid any cash dividends or distributions on our
common stock since our inception. We anticipate that, for the foreseeable
future, all earnings will be retained for use in our business, and no cash
dividends will be paid on our common stock. Payment of future cash dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our earnings, operating and financial
condition and projected capital requirements. We have a loan agreement with
Comerica Bank which prohibits the declaration or payment of cash dividends.

16
<PAGE> 20

CAPITALIZATION

The following table sets forth the following information:

- Our actual capitalization as of June 30, 2000;

- Our pro forma capitalization as of that date after giving effect to the
conversion of all outstanding shares of preferred stock as of June 30,
2000, into 10,082,174 shares of common stock upon completion of this
offering, and also giving effect to the issuance and conversion of
454,546 shares of Series F Preferred Stock issued at $11 per share with
estimated net proceeds of $4.9 million in September 2000 into 454,546
common stock upon completion of this offering;

- Our pro forma as adjusted capitalization as of that date to reflect the
receipt of net proceeds from our sale of shares of common stock
at an assumed initial public offering price of $ per share in this
offering, less the underwriting discounts and commissions and estimated
offering expenses.

<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt........................................ $ 2,043 $ 2,043 $
-------- ------- --------
Convertible redeemable preferred stock, 10,082,174
shares issued and outstanding (actual) and no shares
issued or outstanding (pro forma and pro forma as
adjusted)........................................... 81,500 --
-------- ------- --------
Stockholders' equity (deficit):
Preferred stock; $0.001 par value, 11,000,000 shares
authorized (actual and pro forma); 5,000,000
shares authorized (pro forma as adjusted)........
Common stock; $0.001 par value, 22,000,000 shares
authorized (actual and pro forma); 3,038,173
shares issued and outstanding (actual);
13,574,893 shares issued and outstanding (pro
forma); 60,000,000 shares authorized (pro forma
as adjusted); issued and outstanding
(pro forma as adjusted).......................... 3 14
Common stock subscribed............................. 43 43
Additional paid in capital.......................... 86,389
Deferred compensation............................... (527) (527)
Accumulated deficit................................. (58,494) (58,494)
-------- ------- --------
Total stockholders' equity (deficit)........ (58,975) 27,425
-------- ------- --------
Total capitalization........................ $ 24,568 $29,468 $
======== ======= ========
</TABLE>

The common stock information excludes:

- 2,083,170 shares of common stock issuable upon exercise of options
outstanding as of June 30, 2000 at a weighted-average exercise price of
$4.37 per share;

- 709,430 shares of common stock available for issuance under our stock
option plans as of June 30, 2000;

- 10,000 shares of common stock issuable upon exercise of a warrant
outstanding as of June 30, 2000 at an exercise price of $3.00 per share;
and

- 90,909 shares of common stock issuable upon exercise of a warrant
outstanding at an exercise price of $11.00 per share issued in September
2000.

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<PAGE> 21

DILUTION

Our pro forma net tangible book value as of June 30, 2000, after giving
effect to the conversion of all outstanding shares of convertible preferred
stock into common stock upon the closing of this offering, was approximately
$ million, or $ per share. Pro forma net tangible book value per share
represents our total assets less total liabilities and intangible assets,
divided by the shares of common stock outstanding after giving effect
to the conversion of all outstanding shares of convertible preferred stock into
common stock including 454,546 shares of Series F Preferred Stock issued in
September 2000 for estimated net proceeds of $4.9 million. Net tangible book
value dilution per share to new investors is the difference between the amount
per share paid by purchasers of common stock in this offering and the pro forma
net tangible book value per share immediately following the offering. After
giving effect to the issuance and sale of the shares of common stock in
this offering, at an assumed offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our pro forma net tangible book value as of June 30, 2000, would
have been $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders of $
per share. The initial public offering price per share will significantly exceed
the net tangible book value per share. Accordingly, new investors who purchase
common stock in this offering will suffer an immediate dilution of their
investment of $ per share. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
2000................................................... $
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after the
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>

The following table summarizes, on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock upon the closing of this offering, as of June 30, 2000 including the
454,546 shares of Series F Preferred Stock issued in September 2000, the
difference between the number of shares of stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors. The calculation below is based on an assumed
initial public offering price of $ per share, before deducting underwriting
discounts and commissions and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... % $ % $
New investors...................
-------- ----- -------- -----
Total...................... 100.0% $ 100.0%
======== ===== ======== =====
</TABLE>

Assuming the exercise in full of all options and warrants outstanding and
exercisable as of June 30, 2000, the number of shares purchased by existing
stockholders would be , or % of the total of shares
purchased, and the consideration paid for those shares would be $ , or
% of the total gross consideration of $ . After this offering and
assuming the exercise in full of all options and warrants outstanding and
exercisable as of June 30, 2000, the average price per share of existing
stockholders would be reduced by $
per share to $ per share.

18
<PAGE> 22

After this offering and assuming the exercise in full of all options and
warrants outstanding and exercisable as of June 30, 2000, our pro forma net
tangible book value per share as of June 30, 2000, would be $ , representing
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors.

If the underwriters exercise their over-allotment in full, the following
will occur:

- the number of shares of common stock held by existing stockholders will
decrease to approximately % of the total number of shares of our
common stock outstanding; and

- the number of shares held by new investors will increase to
shares, or approximately % of the total number of our common stock
outstanding after this offering.

19
<PAGE> 23

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and related notes and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The statement of operations
data for the year ended March 31, 1998, the nine-month period ended December 31,
1998, the year ended December 31, 1999, and the balance sheet data as of
December 31, 1998 and 1999, are derived from our financial statements included
elsewhere in this prospectus that have been audited by PricewaterhouseCoopers
LLP, independent accountants. The statement of operations data for the fiscal
years ended March 31, 1996, and 1997 and the balance sheet data at March 31,
1996, 1997 and 1998, are derived from our financial statements that are not
included in the prospectus. The statement of operations data for the six months
ended June 30, 1999, and 2000, and the balance sheet data as of June 30, 2000,
have been derived from our unaudited financial statements included elsewhere in
this prospectus. These unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for the fair
presentation of financial position, results of operations and cash flows.
Historical results do not necessarily show future results. We have calculated
pro forma basic net loss per share assuming the conversion of the outstanding
preferred stock into common stock as of January 1, 1999, or date of issuance, if
later. We changed our fiscal year end from March 31 to December 31 during 1998.
Accordingly, 1999 was the first full calendar year of audited financial
statements.

<TABLE>
<CAPTION>
SIX MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED YEAR ENDED JUNE 30,
--------------------------- DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1998 1998 1999 1999 2000
------- ------- ------- ------------ ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $ -- $ 367 $ 915 $ 1,697 $ 6,697 $ 2,794 $ 5,346
Cost of goods sold.................. -- 633 2,155 2,985 6,417 2,809 4,244
------- ------- ------- -------- -------- ------- --------
Gross margin...................... -- (266) (1,240) (1,288) 280 (15) 1,102
------- ------- ------- -------- -------- ------- --------
Operating expenses:
Research and development.......... 2,190 2,076 3,089 3,132 5,965 2,836 2,240
Selling, general and
administrative.................. 1,301 1,750 2,599 3,930 7,767 3,438 5,790
------- ------- ------- -------- -------- ------- --------
Total operating expenses........ 3,491 3,826 5,688 7,062 13,732 6,274 8,030
------- ------- ------- -------- -------- ------- --------
Non-recurring income................ -- 1,000 -- -- -- -- --
------- ------- ------- -------- -------- ------- --------
Loss from operations.............. (3,491) (3,092) (6,928) (8,350) (13,452) (6,289) (6,928)
Interest and other, net............. 263 327 398 433 281 116 251
------- ------- ------- -------- -------- ------- --------
Net loss.......................... $(3,228) $(2,765) $(6,530) $ (7,917) $(13,171) $(6,173) $ (6,677)
======= ======= ======= ======== ======== ======= ========
Net loss applicable to common
stockholders.................... $(3,950) $(4,329) $(9,041) $(10,828) $(18,022) $(8,372) $ (9,787)
======= ======= ======= ======== ======== ======= ========
Net loss per common share:
Basic and diluted............... $ (1.45) $ (1.54) $ (3.16) $ (3.75) $ (6.12) $ (2.87) $ (3.25)
======= ======= ======= ======== ======== ======= ========
Pro forma basic and diluted..... $ (1.21) $ (.54)
======== ========
Weighted-average shares
outstanding used in computing
net loss per common share:
Basic and diluted............... 2,726 2,807 2,862 2,889 2,943 2,921 3,013
Pro forma basic and diluted..... 10,915 12,420
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
------------------------------- -------------------- --------
1996 1997 1998 1998 1999 2000
------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 2,719 $ 8,085 $ 17,488 $ 11,596 $ 14,511 $ 15,941
Working capital......................... 2,515 7,823 17,789 12,341 16,614 19,000
Total assets............................ 3,625 9,822 22,594 17,909 24,180 28,383
Long-term debt.......................... 7 -- 1,633 1,458 2,439 2,043
Redeemable preferred stock.............. 10,125 21,155 40,707 46,658 68,740 81,500
Stockholders' equity (deficit).......... (7,894) (12,068) (21,039) (31,984) (49,657) (58,975)
</TABLE>

20
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those set forth under "Risk
Factors" and elsewhere in this prospectus.

OVERVIEW

We currently derive our revenues primarily through the sale, to our OEM
licensees, of printed circuit boards and consumables, such as sensors and
cables, used with those boards. The printed circuit board contains the Masimo
SET signal processing software and is integrated into the licensee's monitor.
The Masimo SET board permits the use of Masimo consumables only. Pulse oximeters
typically have useful lives of at least five years, so every monitor
incorporating Masimo SET technology which is sold adds to the base of monitors
that use only Masimo consumables. This creates an increasing and recurring
source of revenue for Masimo. Based on this model, we expect the portion of our
total sales attributable to consumables to increase each year as additional
monitors with Masimo SET boards are placed.

The first shipment of the Radical pulse oximeter to end-users occurred in
August 2000. Radical is a standalone pulse oximeter with a detachable battery
operated module that functions as a handheld pulse oximeter. Radical has a
unique feature that allows it to upgrade existing conventional pulse oximeters
to Masimo SET performance. We intend to sell Radical through some of our
licensees at reduced prices intended to promote conversions of the current
installed base of monitors and commitments to purchase sensors.

Since our inception in 1989, we have been unprofitable and, as of June 30,
2000, had an accumulated deficit of $58.5 million. Results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including the extent to which our technology and products gain market
acceptance, the timing and volume of sales by our OEM licensees, introduction of
new monitoring technology and products by our competitors, and the pricing of
competitors' products. Further, the timing of FDA and other regulatory approvals
which must be obtained by us or our licensees will affect our ability to
generate revenues from our technology.

We changed our fiscal year end from March 31 to December 31 during 1998.
Accordingly, a nine-month period from April 1, 1998 to December 31, 1998 is
shown. Please be aware that comparisons in this section are being made between
audited 12-month and nine-month periods and that many of the differences were
due solely to the number of months in the periods being compared.

RECENT DEVELOPMENTS

21
<PAGE> 25

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
statements of operations data expressed as a percentage of revenues. This
information has been derived from our statements of operations included
elsewhere in this prospectus. Results of operations for any prior periods are
not necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------------------------
SIX MONTHS
TWELVE MONTHS NINE MONTHS TWELVE MONTHS ENDED
ENDED ENDED ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, --------------
1998 1998 1999 1999 2000
-------------- ------------ ------------- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue..................... 100% 100% 100% 100% 100%
Cost of goods sold.......... 235 176 96 101 79
---- ---- ---- ---- ----
Gross margin........... (135) (76) 4 (1) 21
---- ---- ---- ---- ----
Operating expenses:
Research and development.. 338 185 89 101 42
Selling, general and
administrative......... 284 231 116 123 108
---- ---- ---- ---- ----
Total operating
expenses............. 622 416 205 224 150
---- ---- ---- ---- ----
Loss from operations... (757) (492) (201) (225) (129)
Interest and other, net..... 43 25 4 4 4
---- ---- ---- ---- ----
Net loss............... (714)% (467)% (197)% (221)% (125)%
==== ==== ==== ==== ====
</TABLE>

Six Months Ended June 30, 2000, Compared to Six Months Ended June 30, 1999

Revenue. Total revenue increased 91% to approximately $5.3 million for the
six months ended June 30, 2000, from approximately $2.8 million for the six
months ended June 30, 1999. The increase in revenue was primarily due to the
increase in the total number of products with Masimo SET launched by our OEM
licensees to 28 at June 30, 2000, from 24 at June 30, 1999, and increased levels
of sales by many of our existing licensees. Of the total revenue recognized
during the six months ended June 30, 2000 and 1999, approximately $3.0 million
and $1.7 million, respectively, was from consumables sales, approximately $2.1
million and $1.0 million, respectively, was from MS board sales to OEM licensees
and approximately $211,000 and $0, respectively, was from monitor sales to OEM
licensees. The remaining revenue of approximately $48,000 and $14,000 for the
six months ended June 30, 2000 and 1999, respectively, was attributable to
amortization of licensing fees received from the Company's OEM licensees. In the
short term, we expect that sales of Radical will account for a significant
portion of our revenue, but in the long term, we expect that sales of
consumables will increase as a percentage of revenue as our installed base of
monitors continues to grow.

Cost of Goods Sold. Cost of goods sold increased 51% to approximately $4.2
million for the six months ended June 30, 2000, from approximately $2.8 million
for the six months ended June 30, 1999. The net increase was primarily due to
increased product sales during the six months ended June 30, 2000, compared with
the six months ended June 30, 1999, offset by lower direct product costs. In
addition, as manufacturing volume increased, the overhead costs as a percentage
of total cost of goods sold decreased to 35% for the six months ended June 30,
2000, compared to 41% for the six months ended June 30, 1999. In the short term,
we expect that increased sales of Radical will result in lower overall margins,
but in the long term, we expect that increased sales of higher-margin
consumables will increase overall margins.

22
<PAGE> 26

Research and Development. Research and development expenses decreased 21%
to approximately $2.2 million for the six months ended June 30, 2000, from
approximately $2.8 million for the six months ended June 30, 1999. The decrease
was primarily due to the completion of the development of the Radical product in
February 2000, resulting in lower development costs such as consulting,
prototypes, and supplies in the six months ended June 30, 2000, compared with
the six months ended June 30, 1999. We expect research and development expenses
to increase in absolute dollars as we continue to invest in product improvements
and technology development.

Selling, General and Administrative. Selling, general and administrative
expenses increased 68% to approximately $5.8 million for the six months ended
June 30, 2000, from approximately $3.4 million for the six months ended June 30,
1999. The increase was primarily attributable to the increase in sales and
marketing expenses to approximately $3.9 million for the six months ended June
30, 2000, from approximately $2.5 million for the six months ended June 30,
1999. We substantially increased our marketing activities, including advertising
and trade show expenses, and increased the number of our total in sales and
marketing employees from 24 at June 30, 1999, to 34 at June 30, 2000. We expect
sales and marketing expenses to increase in absolute dollars as we continue to
expand our key account sales force and engage in activities to further educate
and promote the use of Masimo SET. General and administrative costs increased to
approximately $1.9 million for the six months ended June 30, 2000, from
approximately $940,000 for the six months ended June 30, 1999, primarily due to
increased salaries, legal fees, accounting fees, and insurance costs. We
incurred approximately $416,000 related to our litigation with
Nellcor/Mallinckrodt in the six months ended June 30, 2000. We anticipate
expenses related to our litigation with Nellcor to continue, and substantially
increase, in the future. In addition, we expect general and administrative
expenses to increase in absolute dollars as we continue to build the
infrastructure necessary to support the growth of our business and to operate as
a public company.

Interest Income. Interest income increased 95% to approximately $374,000
for the six months ended June 30, 2000, from approximately $191,000 for the six
months ended June 30, 1999. The increase was due to higher average cash balances
during the six months ended June 30, 2000 as a result of the Series F financing
which occurred in September and October 1999 and May 2000, as well as higher
interest rates.

Interest Expense. Interest expense increased 60% to approximately $119,000
for the six months ended June 30, 2000, from approximately $75,000 for the six
months ended June 30, 1999. The increase in interest expense was due to
additional capital equipment acquired under our equipment line of credit in the
second and third quarters of 1999, resulting in a higher outstanding loan
balance during the six months ended June 30, 2000, as compared to the six months
ended June 30, 1999.

Year Ended December 31, 1999, Compared to Nine Months Ended December 31, 1998,
Compared to Year Ended March 31, 1998

Revenue. Total revenue increased to approximately $6.7 million for 1999,
from approximately $1.7 million for the nine months ended December 31, 1998, and
approximately $915,000 for the year ended March 31, 1998. The increase in
revenue was primarily due to the increase in the total number of products with
Masimo SET being launched by our licensees to 25 at December 31, 1999 from five
at December 31, 1998, and two at March 31, 1998. Revenue from consumables
increased to approximately $4.0 million for 1999, from approximately $981,000
for the nine months ended December 31, 1998, and approximately $387,000 for the
year ended March 31, 1998. Revenue from board sales increased to approximately
$2.6 million for 1999, from approximately $697,000 for the nine months ended
December 31, 1998, and approximately $367,000 for the year ended March 31, 1998.
The remaining revenue of approximately $48,000 for 1999, approximately $19,000
for the nine

23
<PAGE> 27

months ended December 31, 1998, and approximately $161,000 for the year ended
March 31, 1998, was attributable to licensing fees from various licensees.

Cost of Goods Sold. Cost of goods sold increased to approximately $6.4
million for 1999, from approximately $3.0 million for the nine months ended
December 31, 1998, and approximately $2.2 million for the year ended March 31,
1998. The net increase was primarily due to increased product sales, offset by
lower direct product costs. In addition, as manufacturing volume increased, the
overhead costs decreased as a percentage of total cost of goods sold to
approximately 40% for 1999, from approximately 63% for the nine months ended
December 31, 1998, and approximately 78% for the year ended March 31, 1998.

Research and Development. Research and development expenses increased to
approximately $6.0 million for 1999, from approximately $3.1 million for the
nine months ended December 31, 1998, and approximately $3.1 million for the year
ended March 31, 1998. The increase in expenses for 1999 was primarily due to
additional costs for consulting, prototypes and supplies incurred to develop
Radical. The Radical project accelerated in the second quarter of 1999 and was
transferred to production in February 2000. In addition, in the fourth quarter
of 1999, $490,000 was attributable to the purchase of technology related to the
continuous and noninvasive measurement of blood pressure project. The increase
in expenses for the nine months ended December 31, 1998, was primarily due to
higher payroll costs from employing additional staff and additional engineering
costs due to product line expansion and product design improvements.

Selling, General and Administrative. Selling, general and administrative
expenses increased to approximately $7.8 million for 1999, from approximately
$3.9 million for the nine months ended December 31, 1998, and approximately $2.6
million for the year ended March 31, 1998. The increase was primarily
attributable to the increase in sales and marketing expenses to approximately
$5.6 million for 1999, from approximately $2.3 million for the nine months ended
December 31, 1998, and approximately $875,000 for the year ended March 31, 1998.
We substantially increased our marketing activities, including advertising and
trade shows, beginning in the fourth calendar quarter of 1998. We also increased
the total number of our sales and marketing employees from nine at March 31,
1998 to 22 at December 31, 1999. General and administrative costs increased to
approximately $2.2 million for 1999, from approximately $1.6 million for the
nine months ended December 31, 1998, and approximately $1.7 million for the year
ended March 31, 1998, due to increases in various costs, such as rent, legal
fees and insurance related to the commercial launch of our products, expansion
of operations, and operation of a new, larger facility to which we relocated in
1997. We incurred approximately $180,000 in the fourth calendar quarter of 1999
related to our litigation with Nellcor/Mallinckrodt. We anticipate expenses
related to this case to continue and substantially increase in the future.

Interest Income. Interest income was approximately $465,000 for 1999, as
compared to $561,000 for the nine months ended December 31, 1998, and
approximately $453,000 for the year ended March 31, 1998. These differences were
the result of cash being consumed to fund operations offset by cash being
generated by equity financings closing in the second quarter of 1996, the fourth
quarter of 1997 and the fourth quarter of 1999.

Interest Expense. Interest expense was approximately $206,000 for 1999,
approximately $128,000 for the nine months ended December 31, 1998, and
approximately $58,000 for the year ended March 31, 1998. The increase in
interest expense was primarily due to capital equipment acquired under our
equipment financing lines to develop a commercial manufacturing capability.

24
<PAGE> 28

STOCK COMPENSATION

In connection with the grant of stock options to employees, directors, and
consultants, we recorded deferred compensation totaling $605,175 for the year
ended December 31, 1999. Deferred compensation represents the difference between
the exercise price and the deemed fair value of our common stock for financial
reporting purposes on the date those options were granted. This amount is
initially recorded as a component of stockholders' equity and is being amortized
over the vesting period of the individual options. In fiscal 1996, we recorded
deferred compensation totaling $313,000, of which only $15,935 remains deferred
at December 31, 1999. We amortized deferred stock compensation expense of
$44,375, $27,984 and $149,753 for the year ended March 31, 1998, the nine months
ended December 31, 1998, and the year ended December 31, 1999, respectively. We
recorded additional compensation expense for the year ended December 31, 1999,
of $35,323 representing the fair market value of options granted to consultants
in 1999. Unrecorded deferred compensation related to these options to
consultants of approximately $139,000 at December 31, 1999, will be recorded as
compensation expense over the vesting period of the related options. At December
31, 1999, we had deferred compensation recorded of $499,203 remaining to be
amortized over the vesting periods of the stock options. We expect to amortize
this deferred compensation for options granted prior to December 31, 1999, as
follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000.................................................... $140,495
2001.................................................... 106,185
2002.................................................... 98,560
2003.................................................... 98,560
2004.................................................... 55,403
</TABLE>

In addition, we recorded additional deferred compensation of approximately
$116,000 for options granted during the first quarter of 2000, which is being
amortized over the vesting periods of these options. Please read the notes to
the financial statements for more information.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited selected quarterly operating
results for the two years ended June 30, 2000. We believe that the following
selected quarterly information includes all adjustments which consist only of
normal, recurring adjustments that we consider necessary to present this
information fairly. This financial information should be read in conjunction
with the financial statements and related notes appearing elsewhere in this
prospectus. Our results of operations have fluctuated in the past and are likely
to continue to fluctuate significantly from quarter to quarter in the future.
Therefore, results of operations for any previous periods are not necessarily
indicative of results of operations to be recorded in the future.

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
------------- ------------ --------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $ 476 $ 701 $ 1,261 $ 1,533 $ 2,133 $ 1,770 $ 2,496 $ 2,850
Gross margin......... (475) (429) (11) (4) 253 42 645 457
Operating expenses... 2,456 2,653 2,267 4,007 2,898 4,560 3,684 4,346
Net loss............. (2,795) (2,954) (2,193) (3,980) (2,646) (4,352) (2,937) (3,740)
</TABLE>

Revenue. Revenue has fluctuated primarily due to new product launches by
our licensees. When a licensee launches a new product with Masimo SET, it
typically places initial stocking orders to allow fulfillment of orders from
hospitals which require delivery within days or weeks. In addition, since we
supply products to our licensees on an OEM basis, any seasonality that

25
<PAGE> 29

exists for sales by our licensees will likely affect our results for the
previous quarter. Since medical equipment manufacturers typically experience an
increase in sales in the fourth quarter, this would indicate that we would
likely experience a similar effect in our third quarter. This effect may be
offset by new product launches which occur in the quarter. An example of these
effects was the third quarter of 1999 as compared to the fourth quarter of 1999.

Gross Margin. Gross margin is affected by the portion of sales for the
quarter from lower margin boards as compared to higher margin consumables. Gross
margin has also fluctuated due to costs incurred in various quarters to develop
a commercial manufacturing capability. An example of these effects is the first
quarter as compared to the second quarter of 1999 when the portion of sales
attributable to consumables decreased in the second quarter while overhead costs
in the areas of nonrecurring engineering, tooling and indirect salaries were
higher than normal.

Operating Expenses. Operating expenses have fluctuated quarterly primarily
due to the timing of various marketing activities such as trade shows,
advertising and direct mail, and the timing of research and development
activities related primarily to the Radical project. Two specific examples of
these effects were the second and fourth quarters of 1999. We attended four
major tradeshows in the second quarter and our two most significant tradeshows
in the fourth quarter which resulted in a significant increase in marketing
costs in the second and fourth quarters compared to the other quarters of 1999.
Also, the Radical project accelerated in the second quarter of 1999 and added
approximately $650,000 in incremental research and development costs for that
quarter. In addition, in the fourth quarter of 1999, $490,000 was attributable
to the purchase of technology related to the continuous and noninvasive
measurement of blood pressure project.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through the
private sale of equity securities. Through June 30, 2000, we have raised $65.5
million in net proceeds through private equity financing and stock option and
warrant exercises. In September 2000, we issued an additional 454,546 shares of
Series F Preferred Stock for estimated net proceeds of $4.9 million. At June 30,
2000, cash and cash equivalents was $15.9 million.

Working capital at June 30, 2000, was approximately $19.0 million compared
to approximately $16.6 million and approximately $12.3 million at December 31,
1999 and 1998, respectively. The increase in working capital from December 31,
1999, to June 30, 2000, was primarily due to the sale of our Convertible
Preferred Stock in May 2000, and increases in accounts receivable, and
inventory, offset by increases in accounts payable and accrued liabilities. The
increase in working capital from December 31, 1998 to December 31, 1999 was
primarily due to the sale of the our Convertible Preferred Stock in September
and October 1999, and increases in inventory and accounts receivable, offset by
increases in accounts payable, and current portion of long-term debt.

We used approximately $6.9 million of cash for operations in the six months
ended June 30, 2000. Cash used for operations during this period was primarily
driven by operating losses, increases in inventory and accounts receivable,
offset by increases in accounts payable, and accumulated depreciation. We used
approximately $27.6 million for operations during the 33-month period ended
December 31, 1999. Cash used for operations during this period was primarily
driven by operating losses, increases in inventory and accounts receivable,
offset by increases in accumulated depreciation and amortization and accounts
payable.

We used approximately $1.0 million of cash for investing activities in the
six months ended June 30, 2000. We invested approximately $800,000 in
manufacturing equipment, computer equipment and demonstration equipment and
approximately $200,000 in intangible assets including patents and trademarks. We
used approximately $5.4 million for investing activities
26
<PAGE> 30

during the 33-month period ended December 31, 1999. We invested approximately
$4.7 million in manufacturing equipment, demonstration equipment, computer
equipment and leasehold improvements and $700,000 in intangible assets including
patents and trademarks.

We received approximately $9.3 million of cash from financing activities in
the six months ended June 30, 2000, primarily as a result of the sale of our
Convertible Preferred Stock in May 2000. We received approximately $39.3 million
of cash from financing activities during the 33-month period ended December 31,
1999. Cash provided by financing activities during this period was primarily the
result of the sale of our Convertible Preferred Stock.

As of June 30, 2000, we had approximately $2.0 million outstanding under
two term loans under a loan and security agreement with Comerica Bank. The
amounts outstanding are payable in 48 equal monthly principal payments of
approximately $66,000. Amounts outstanding under the two loans bear interest at
the prime rate plus 1.5% and 1.25%, respectively. There are no additional
borrowings available under the loan and security agreement.

During the remainder of 2000 and in 2001, we plan to increase our level of
operations substantially, and in particular, plan to expand our commercial
manufacturing capability to accommodate significantly higher production volumes
and to expand our business development and marketing activities. Although we
believe that the proceeds from the offering and cash generated from future sale
of products will be sufficient to meet our operating and capital requirements
for at least the next twelve months, we may require additional financing prior
to such time.

TAX MATTERS

As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $25.3 million and $12.6 million, respectively.
Our federal net operating loss carryforwards expire beginning in 2010 and our
state net operating loss carryforwards expire beginning in 2000, if not
utilized. As of December 31, 1999, we had federal and state research and
experimentation credit carryforwards of approximately $716,000 and $563,000,
respectively. These carryforwards expire beginning in 2007 for federal purposes
and carry forward indefinitely for state purposes. In addition, we have state
manufacturers' investment tax credit carryforwards of approximately $195,000
which expire beginning in 2006.

The utilization of net operating loss and tax credit carryforwards are
subject to review by the Internal Revenue Service and may be limited under the
provisions of the Internal Revenue Code and similar state provisions. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on our
value immediately prior to the ownership change. Subsequent ownership change may
further affect the limitation in future years.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates to the
increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited to our
outstanding term loans, which have interest rates that are closely tied to
market rates. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation or our invested principal funds by limiting default risk,
market risk and reinvestment risk. We reduce default risk by investing in
investment grade securities. A hypothetical 100 basis point drop in interest
rates along the entire interest rate yield curve would not significantly affect
the fair value of our interest sensitive financial instruments at December 31,
1998, December 31, 1999, or June 30,

27
<PAGE> 31

2000. Declines in interest rates over time will, however, reduce our interest
income and expense while increases in interest rates will increase our interest
income and expense.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivatives and Hedging Activities," which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivatives and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to
be effective for all fiscal quarters beginning after June 15, 2000. The adoption
of SFAS 133, as amended is not expected to have a material effect on our
financial condition and results of operations as we do not currently hold any
derivative instruments or engage in hedging activities.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101) entitled "Revenue Recognition," which outlines the basic criteria that must
be met to recognize revenue and provides guidance for the presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The adoption of SAB 101 did not have a material
impact on our financial position or results of operations.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44) entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board No. 25 (APB 25). This
interpretation clarifies the definition of an employee for purposes of applying
APB 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of a previously fixed stock option or award; and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998 or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe that the adoption of FIN 44 will not have a material impact on our
financial position or results of operations.

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BUSINESS

THE COMPANY

We license and sell our products primarily to patient monitoring companies
with existing installed customer bases, permitting us to leverage the sales and
distribution channels of each OEM licensee. We have agreements with over 30 OEM
licensees. To date, 16 companies have launched a total of 30 monitors worldwide
incorporating Masimo SET. We believe over 25,000 monitors have been installed
worldwide which use our technology. Our technology and products are covered by
59 issued and 103 pending U.S. and foreign patents.

PATIENT MONITORING AND PULSE OXIMETRY

Patient monitoring systems provide clinicians with early warnings of
patient distress and allow, when necessary, the initiation of treatment or the
intensification of therapy. Monitoring systems are widely used in critical care
settings such as hospital operating rooms and other patient care settings, such
as intermediate care units and ambulatory settings. Historically, most patient
monitors were configured as standalone units measuring only a single patient
vital sign, or parameter. More recently, multi-parameter monitors, which
incorporate modules to measure more than one patient parameter, have begun to
constitute an increasing portion of the patient monitoring market. The five most
common parameters measured are:

- electrocardiography, or EKG;

- blood pressure;

- body temperature;

- respiration rate; and

- pulse oximetry.

Pulse oximetry has been established as a standard of care over the last 20
years because of the potential adverse effects of low arterial blood oxygen
saturation levels. The lack of sufficient arterial blood oxygen saturation,
known as hypoxemia, can lead to a deficiency of oxygen reaching the tissues of
the body, known as hypoxia. Early detection of hypoxemia is critical because
hypoxia can result in brain damage and death in a matter of minutes. Pulse
oximetry enables the detection of hypoxemia, allowing immediate intervention by
the clinician to increase the patient's oxygen intake. In the absence of pulse
oximetry, there is no other reliable noninvasive method to detect hypoxemia
until damage has occurred. In addition to providing continuous monitoring of
arterial blood oxygen saturation, pulse oximetry is used to measure and report
the pulse rate of the patient.

Pulse oximeters utilize sensors attached to an extremity, typically the
fingertip, to measure the arterial blood oxygen saturation level and pulse rate.
These sensors contain light emitting diodes that transmit red and infrared light
through the tissue to a photodetector on the sensor. The photodetector measures
the amount of red and infrared light absorbed by the tissue. A microprocessor
then analyzes the changes in light-absorption to provide a continuous, real-time
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measurement of the amount of oxygen in the patient's blood. Pulse oximeters
typically give audio and visual alerts, or alarms, when the patient's blood
oxygen saturation or pulse rate falls outside of the prescribed range. As a
result, clinicians are able to initiate treatment or intensify therapy on a
real-time basis to prevent the serious clinical consequences of hypoxia.

Since the first pulse oximeters were introduced in the early 1980s, pulse
oximetry has gained wide clinical acceptance as a monitoring technology because
it gives an early warning of hypoxemia, is noninvasive and requires little or no
special training to use in the clinical setting. Pulse oximeters are used as a
standard patient monitor in operating rooms, recovery rooms and intensive care
units, including neonatal intensive care units. For example, in the over 20
million annual surgical procedures performed in the U.S. in which anesthesia is
administered, pulse oximeters are used as part of the standard protocol of
monitoring procedures. We believe that Masimo SET technology may also be
applicable to other existing applications, such as blood pressure monitoring,
respiration monitoring and electrocardiography, as well as parameters that
currently are not well-served by available noninvasive monitoring technologies,
such as fetal oximetry. In addition, we believe that pulse oximetry will achieve
greater penetration in less acute care settings, such as intermediate care
settings, the general ward and the home.

LIMITATIONS OF CONVENTIONAL PULSE OXIMETERS

Despite its acceptance as a standard of care, conventional pulse oximetry
is still subject to technological limitations that reduce its effectiveness and
can contribute to adverse patient outcomes. Pulse oximetry utilizes the
absorption patterns of red and infrared light passing through tissue to
calculate blood oxygen saturation. Since different blood oxygen levels change
the degree to which light is absorbed by tissue, pulse oximeters can measure
blood oxygen levels by reading the amount of light being absorbed as it passes
through the tissue. Conventional pulse oximetry assumes that arterial blood is
the only element in motion within body tissue and that simply focusing on the
variations in absorption within the tissue will accurately identify the arterial
blood flow to be measured. While this assumption may hold true in a stable
environment, the presence of interfering signals found in everyday operating
environments, such as motion artifact, can cause this assumption to fail. For
example, patient movement causes other bodily elements besides arterial blood,
particularly venous blood, to move within the site being measured, resulting in
interfering signals. In addition, ambient, or bright light, and electrical
interference from the presence of electrical surgical equipment which is
typically found in the hospital environment may result in interfering signals.

In addition to motion artifact, the effectiveness of conventional pulse
oximeters is also limited by signal recognition problems caused by low
perfusion. While motion artifact can cause inaccurate measurements, low
perfusion can result in a complete failure by the pulse oximeter to obtain a
measurement. Further, the combination of motion artifact with low perfusion
exacerbates the difficulty in measuring arterial blood oxygen saturation because
motion artifact can "drown out" weak physiological signals. Independent,
published research shows that conventional pulse oximeters are subject to
several operating limitations in the presence of motion artifact and low
perfusion, including:

- inaccurate measurements, which can lead to the non-detection of a
hypoxemic event or improper and unnecessary treatment;

- false alarms, when the pulse oximeter falsely indicates a drop in the
oxygen saturation level, which can lead to the inefficient use of
clinical resources as clinicians respond to the false alarms, or the
non-detection of a true alarm if clinicians become indifferent to
frequently occurring false alarms; or

- signal drop-outs, or the loss of a real-time signal as the monitor
attempts to find or distinguish the pulse, which can lead to the
non-detection of clinical events due to the lack of a functioning
monitor.
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The clinical community has long recognized these limitations and
manufacturers of pulse oximeters have been actively seeking technological
solutions to address these issues. Some devices have been developed which
attempt to filter out interference and noise. However, none of these new devices
has been clinically proven through independent clinical studies to significantly
improve measurement performance under conditions of both motion artifact and low
perfusion. Other devices have attempted to minimize the effects of motion
artifact by freezing, or repeating the last measurement when motion artifact is
detected, until a new, clean signal is detected and a new measurement can be
displayed. Still other devices have attempted to average the signal over a
longer period of time, known as long-averaging, to reduce the effect of
temporary erroneous measurements. These solutions, commonly referred to as alarm
management techniques, amount to masking the limitations of conventional pulse
oximetry. Several published studies have demonstrated that some of these alarm
management technologies have actually contributed to increased occurrences of
undetected true alarm events, or events where hypoxemia occurs but is not
detected by the pulse oximeter.

THE MASIMO SOLUTION

We have developed a family of products, based on our proprietary Signal
Extraction Technology, or Masimo SET, that provides the clinician with reliable,
continuous, real-time information even in the presence of both motion artifact
and low perfusion. Masimo SET represents a fundamental departure from
conventional pulse oximetry technologies. Masimo SET does not attempt to mask
the limitations of conventional pulse oximetry with alarm management techniques
but instead is designed to work through the interference to obtain reliable,
continuous measurements under difficult conditions.

Independent researchers have published over 20 studies to date which detail
the clinical advantages of Masimo SET technology. These studies have covered a
broad range of patients, including both neonates and adults, in conditions
involving both motion and low perfusion. All of these studies showed significant
performance improvements with Masimo SET as compared to the current industry
leading devices. As a result of these studies and our clinical experience, we
believe that our products offer several key benefits, including:

- Accurate Real-Time Measurement. Masimo SET delivers critical information
to the clinician in real-time. By utilizing proprietary algorithms and
sensor designs, Masimo SET eliminates the need to utilize alarm
management techniques such as freezing and long-averaging of signals. We
believe that the ability to provide accurate and reliable information in
critical medical situations will enhance current applications of pulse
oximetry and expand its use in a variety of other patient care settings.

- Reliable Monitoring During Motion. Masimo SET identifies and
substantially eliminates interference caused by patient movement and
provides an accurate measurement of the patient's blood oxygen saturation
and pulse rate. We believe that the elimination of motion artifact will
enhance the performance of pulse oximeters in environments such as the
recovery room, intensive care units, emergency care and ambulatory
settings. In addition, we believe Masimo SET's ability to provide
reliable monitoring during motion artifact will expand pulse oximetry to
other settings where motion has previously prohibited its use. These
settings include intermediate care units, subacute centers, skilled
nursing facilities, the general ward and the home.

- Accurate Monitoring During Low Perfusion. Masimo SET detects and
measures blood oxygen saturation in most patients who suffer from low
perfusion, such as elderly and critically ill patients. We believe that
this enhances the performance of pulse oximeters in critical medical
situations, where there is often the greatest need for accurate and
reliable measurements.

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- Resistance to Electromagnetic Interference and Ambient Light. Masimo SET
boards and sensors are designed to shield against or eliminate
interference caused by ambient light, electrical surgical instruments and
other electromagnetic instruments commonly used in the hospital. This
permits pulse oximetry to function reliably in environments where
interference is common, such as in neonatal intensive care units,
operating rooms, ambulatory and other intermediate care settings.

OUR STRATEGY

Our objective is to improve patient care by establishing Masimo SET as the
new performance standard for pulse oximetry and other monitoring applications.
The key elements of our strategy are as follows:

- Gain Broad Market Acceptance of Masimo SET Through OEM License
Arrangements With Patient Monitoring Companies. We license our
proprietary products to patient monitoring companies for incorporation
into their products. In order to enhance wide market acceptance, we have
designed Masimo SET to be easily integrated into conventional monitoring
systems, thereby providing patient monitoring companies with the option
of retrofitting existing instruments depending upon their current
configuration. We have licensing agreements with over 30 OEM licensees.
We believe these licensees account for approximately 50% of the worldwide
pulse oximetry market. We believe that patient monitoring companies with
established sales and distribution channels will facilitate broad
commercialization of our technology and products.

- Upgrade the Existing Installed Base of Conventional Pulse Oximetry
Monitors. We expect to utilize our new product, Radical, to facilitate
upgrades of the installed base of conventional pulse oximeters, in
addition to working with our licensees to develop upgrade modules for
their existing monitors. Radical represents a convenient and cost-
effective upgrade solution which we believe will facilitate large-scale
conversions of existing installed monitors to Masimo SET.

- Create and Share With Our Licensees a Proprietary, Recurring Consumables
Franchise. Masimo SET monitors are designed to only function with our
proprietary sensors. The patented design prevents any other sensor from
being used with a Masimo SET system. Our sensors are primarily sold to
our licensees for sale to end-users. With an average life of five to ten
years, we expect each monitor to represent a source of proprietary,
recurring sensor revenue for Masimo and our licensees.

- Expand the Market for Pulse Oximetry. We believe that because
conventional pulse oximeters are often ineffective during conditions of
motion artifact and low perfusion, their widespread adoption beyond
operating rooms, recovery rooms and intensive care units has been
limited. We believe that Masimo SET substantially overcomes the problems
of motion artifact and low perfusion and provides significantly improved
performance in pulse oximeters, particularly in less acute care settings.
As a result of the increased performance and reliability of pulse
oximeters utilizing Masimo SET technology, we expect pulse oximetry to
achieve greater penetration in less acute care settings, such as
intermediate care settings and the general ward.

- Apply Masimo SET to Other Monitoring Applications. We believe that
Masimo SET can be used to improve other existing monitoring applications,
such as blood pressure, respiration monitoring and electrocardiography.
We believe that the development of such applications involves adapting
our pulse oximetry software, algorithms and sensors to the specific needs
of each application. We acquired technology for the continuous
noninvasive measurement of blood pressure and are currently evaluating
other applications in which to focus future development efforts. In
addition, we believe that

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Masimo SET can be applied to parameters that currently are not
well-served by available noninvasive monitoring technologies, such as
fetal oximetry.

MASIMO SET TECHNOLOGY

Masimo SET is a combination of signal processing software, algorithms and
sensor designs. Our signal processing software and algorithms enable the
effective use of adaptive filters to cancel interference in real-time. Masimo
SET is incorporated into our MS printed circuit boards, which are primarily sold
to our licensees and OEM partners and incorporated into their monitors. This
represents a fundamentally unique approach to calculating arterial blood oxygen
saturation and pulse rate by first assuming that interference will be present.
Masimo SET utilizes our proprietary Discrete Saturation Transform algorithm to
distinguish the signal from the noise. With this improved ability to distinguish
the signal from the noise, Masimo SET enables accurate measurements in the
presence of motion and small signals resulting from low perfusion.

Conventional pulse oximeters have been unable to effectively use adaptive
filters because of the occurrence of unpredictable in-band noise, or noise which
is in the same frequency range as the signal being measured. Widely used in
other industries, such as telecommunications, adaptive filters change their
filtering characteristics in response to changing in-band noise. Adaptive
filters work by tuning the filter's parameters to the predicted frequency
characteristics of the noise or the signal, creating a reference signal. In
pulse oximetry, the unpredictability of the noise and signal has previously made
the use of adaptive filters unachievable. Our proprietary technology, including
our Discrete Saturation Transform algorithm effectively solves this problem. The
Discrete Saturation Transform algorithm builds a reference signal from the
incoming red and infrared signals for each blood oxygen level between 1% and
100% saturation. The reference signal along with the incoming red and infrared
signals are passed through an adaptive filter, which cancels the correlated
frequencies between the reference signal and the incoming red or infrared
signals. If the frequencies between the two inputs are all similar, the entire
signal cancels and a low energy output occurs. If they are dissimilar, a high-
energy output is obtained. Twice per second, the energy output from the adaptive
filter is determined based on potential oxygen saturation levels from 1-100% and
a plot is created of the results. Based on the assumption that arterial blood
has higher oxygen saturation levels than anything else present within the
monitoring site, the algorithm then finds the peaks on the plot and, so long as
system models are satisfied, displays the highest saturation peak as the
arterial oxygen saturation reading.

In addition, our sensors are uniquely designed to limit the effects of
motion artifact, both physiological and non-physiological. Patient movement may
cause body tissue, for example, a finger, to compress within the sensor. As a
result, the distance that the signal light travels through the tissue will vary,
resulting in variances and inaccuracies in the initial signal reading. Our
sensors minimize these limitations through our proprietary and patented design.
Unlike conventional pulse oximetry sensor designs, the photodetector receiving
the signal light passing through the tissue in our sensor is recessed in a
cavity. The cavity is covered by a comfortable adhesive that allows body tissue
to move in and out of the cavity during motion. By allowing for movement without
compression of body tissue, the sensor minimizes the variances in the optical
path length. This design also stabilizes venous blood movement due to motion at
the monitored site. In addition, our recessed photodetector design allows the
photodetector to be better protected from ambient light and electromagnetic
interference as compared to conventional sensors, which have the photodetector
flush with the tissue.

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PRODUCTS

Masimo SET MS Printed Circuit Boards

Our Masimo SET MS printed circuit boards house the signal processing
technology and apparatus. Our MS printed circuit boards are primarily sold to
our licensees and OEM partners for incorporation into their monitors. Once
incorporated, the MS board performs all data acquisition processing and reports
the pulse oximetry levels to the host monitor. We price our MS boards
competitively with other third-party vendors of conventional pulse oximetry
boards and modules. We originally released the MS-1 board with our first
generation of software to the market in 1996. In 1998, we released the MS-3, and
our second generation of software. The MS-3 utilizes approximately one-half the
power of the MS-1.

Radical Signal Extraction Pulse Oximeter

We made commercially available our newest product, Radical, in August 2000.
Designed for flexibility, Radical may be used as:

- a standalone device for bedside monitoring;

- a detachable handheld unit for easy portable monitoring; and

- a monitor interface to upgrade existing multi-parameter patient monitors
to Masimo SET technology.

Radical is a fully equipped standalone pulse oximeter with a detachable
module, which functions as a battery operated, handheld pulse oximeter. The
handheld module can be connected into any other Radical base station, which
allows Radical to stay with the patient, enabling continuous and reliable
arterial oxygen saturation monitoring as patients are transported and moved
within the hospital. For example, Radical can monitor a patient from the
ambulatory environment, to the emergency room, to the operating room, to the
general ward, and on until the patient is discharged. Radical delivers the
accuracy and reliability of Masimo SET technology with multi-functionality, ease
of use and a convenient upgrade path for existing monitors.

The upgrade capability is enabled by our proprietary SatShare technology.
SatShare enables a conventional monitor to upgrade to Masimo SET technology
through a simple cable connection from the back of Radical to the sensor input
port of the conventional monitor. No software upgrades or new modules are
necessary for the upgrade, which can be completed in several minutes. We believe
that Radical's upgrade capability coupled with its multi-functionality will
facilitate hospital-wide conversions of installed monitors to Masimo SET. We are
currently offering Radical primarily through OEM licensees and distributors.

Masimo Pulse Oximetry Sensors and Cables

LNOP Sensors. We have developed a line of disposable and reusable, low
noise optical probe, or LNOP, pulse oximetry sensors. We sell our sensors
primarily to our licensees for resale to end-users. We have designed different
sensors for adults, children, infants and pre-term infants.

Our LNOP sensors are available in both disposable and reusable lines. Our
disposable, or single-patient use, sensors offer several advantages over
reusable sensors including cleanliness, increased comfort and greater
reliability. Our single-patient use LNOP sensors also offer several advantages
over competitive disposable sensors, including a substantially more durable tape
material which is less likely to tear and has an adhesive which can be easily
rejuvenated with an alcohol pad. As a result, our single-patient use sensors
were shown in an independent, published study to last nearly twice as long as
the market leading disposable sensor. We also

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offer an adult and pediatric reusable sensor. Reusable sensors are primarily
used for short term hospital stays and spot checks.

NR Sensors. We have also developed a line of value-priced disposable and
reusable noise reduction, or NR, sensors. NR sensors are designed for less
critically ill patients who do not typically suffer from low perfusion. They are
intended to function at a higher performance level than conventional pulse
oximeter sensors under motion and low perfusion conditions, but are not as
sensitive or durable as our LNOP sensors. We expect to commercially launch our
NR sensors in the fourth quarter of 2000 through our OEM licensees to hospitals
and group purchasing organizations that utilize both types of sensors and are
trained on the appropriate conditions under which NR sensors could be relied
upon to provide adequate performance.

Cables. We also offer a variety of different low noise cables to connect
our sensors to our pulse oximetry monitors. We offer these cables primarily
through our OEM licensees and distributors worldwide.

LICENSING AND DEVELOPMENT AGREEMENTS

We license our products to monitoring companies with existing customer
bases, permitting us to leverage the sales and distribution channels of each OEM
licensee. To date, we have agreements with over 30 OEM licensees. To date, 16
companies have launched a total of 30 monitors worldwide incorporating Masimo
SET. While some of our OEM licensees have decided to withhold public disclosure
until their product launch, the companies listed below have publicly announced
their agreements with us:

<TABLE>
<S> <C> <C> <C>
- Alaris Medical Systems, Inc. - Island Critical Care Corporation
- Allegiance Healthcare Corporation - Ivy Biomedical Corporation
- Atom Medical Corporation - Kohken Medical Co., Ltd.
- Bitmos Medizintechnik GmbH - Medical Data Electronics, Inc.
- Cardiopulmonary Corporation - Nascor PTY, Ltd.
- Datascope Corporation - NEC Corporation
- Datex-Ohmeda, Inc - Ohmeda Medical, Inc.
- Drager Medizintechnik GmbH - Omnitech Ltda.
- F. Stefan GmbH Medizintechnik - Welch Allyn Protocol Inc.
- GE Marquette Medical Systems, Inc. - Quartz Medical, Inc.
- GeTeMed GmbH - Respironics, Inc.
- GS-Elektromedizinishe Gerate - Schiller AG Corporation
- Invivo Research Incorporated - VitalCom Inc.
- Zoll Medical Corporation
</TABLE>

Most of the current agreements contain the following characteristics and we
intend for the majority of our future agreements to contain these basic
characteristics:

- they are with companies that currently sell pulse oximeters;

- they have terms averaging approximately 6 years; and

- they contain integration commitments to make Masimo SET their primary
pulse oximetry platform, which is defined in most cases as at least 80%
of all new shipments by the third year of the agreement.

For the year ended December 31, 1999 sales to Zoll Medical Corporation,
Datascope Corporation and Atom Medical Corporation accounted for approximately
20%, 18% and 13% of our total revenue. For the year ended December 31, 1999, no
other customer accounted for 10% or more of our total revenue.

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SALES AND MARKETING

We do not currently derive a significant portion of our revenue from sales
directly to end-users, and as a result do not employ a large, direct sales
force. We have key account sales managers that work primarily with our
licensees' sales representatives to facilitate the conversion of large accounts
to our products. In addition, we employ clinical specialists to work with our
licensees and end-users to educate them on the benefits of Masimo SET. Our sales
and marketing strategy is focused on:

- building end-user awareness of the clinical and cost-saving benefits of
Masimo SET; and

- utilizing the upgrade feature of Radical to facilitate large account
conversions to Masimo SET.

We build end-user awareness through advertising, direct mail, tradeshows,
distributing published clinical studies, sponsoring accredited educational
seminars for doctors, nurses and therapists and conducting clinical evaluations.
All of our OEM licensees are required to put the Masimo designation logo on
their products to establish brand recognition. As of June 30, 2000, we had 34
employees in sales and marketing, including 16 nurses and respiratory therapists
and 11 key account sales managers, and anticipate hiring additional clinical
specialists and key account managers in the future. We also provide sales
materials, including brochures, reprints, technical materials and summaries of
clinical studies, to our licensees for use in the sales process.

MANUFACTURING

Our strategy is to manufacture products in-house when it is efficient and
cost-effective to do so. We currently manufacture in-house our Radical product,
our full line of disposable and reusable sensors and our patient cables. As of
June 30, 2000, we had 67 dedicated employees in manufacturing and we maintain a
15,000 square foot ISO 9001 certified manufacturing area in our facility.

We will continue to utilize third-party contract manufacturers for products
that can be more efficiently manufactured by such third-parties. We monitor our
third-party manufacturers and perform inspections and product tests at various
steps in the manufacturing cycle to ensure compliance with our specifications.
We also do full functional testing of our MS printed circuit boards, which are
manufactured by a third-party.

We and our contract manufacturers rely on sole source suppliers for some
components, including digital signal processor chips and analog to digital
converter chips. We and our contract manufacturers have taken steps to minimize
the impact of a shortage or stoppage of shipments of digital signal processor
chips or analog to digital converter chips, including maintaining excess
inventory and designing software that may be easily ported to another digital
signal processor chip. In the event of a delay or disruption in the supply of
sole source components, we believe that we and our contract manufacturers will
be able to locate additional sources of these sole source components on
commercially reasonable terms and without experiencing material disruption in
our business or operations.

RESEARCH AND PRODUCT DEVELOPMENT

We believe that ongoing research and development efforts are essential to
our success. As of June 30, 2000, we employed 34 engineers and engineering
support staff. Our research and development efforts focus primarily on
continuing to enhance our technical leadership in pulse oximetry. We intend to
continue to develop and release new versions of our signal processing software,
printed circuit board and sensor lines. We are also researching the use of
Masimo SET to other applications, such as:

- continuous noninvasive blood pressure monitoring;

- fetal oximetry;

- monitoring for sudden infant death syndrome; and

- respiration monitoring.

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We expect research and development expenses to increase in the future as we seek
to enhance our existing products and develop additional products and
applications of our technology. We acquired technology for the continuous
noninvasive monitoring of blood pressure and plan to increase development
efforts with respect to this technology starting in 2001 and increasing in 2002.
Our total research and development expenditures were $3.1 million for the year
ended March 31, 1998, $3.1 million for the nine months ended December 31, 1998,
$6.0 million for the year ended December 31, 1999, and $2.2 million for the six
months ended June 30, 2000.

COMPETITION

We regard any company that sells pulse oximeters as a potential customer,
but at the same time recognize that the companies selling pulse oximetry modules
on an OEM basis and/or pulse oximetry sensors are also potential competitors.
Our primary competitor is Nellcor. Nellcor sells its own pulse oximeters to
end-users and also sells pulse oximetry modules to other monitoring companies on
an OEM basis. Other competitors include BCI International Inc., Nonin Medical,
Inc. and Novametrix Medical Systems, Inc.

In addition to their position in disposable sensors, Nellcor also has
significant relationships and contracts with various health care networks and
group purchasing organizations. These contracts frequently involve a commitment
by the group purchasing organization to purchase a certain percentage of its
products from Nellcor and, thus, may inhibit the wide adoption of pulse
oximeters utilizing Masimo SET. We have ongoing negotiations with several group
purchasing organizations, and most of our licensees also have relationships and
contracts with these group purchasing organizations. Our strategy is to
demonstrate, and help our licensees demonstrate, the advantages of Masimo SET to
group purchasing organizations and their clinician members in order to encourage
the group purchasing organizations to allow Masimo SET equipped monitors to be
purchased by their members.

PATENTS AND PROPRIETARY RIGHTS

We have filed patent applications in the U.S. and in selected foreign
countries to seek to protect certain of our inventions, including, in some
instances, Canada, Japan, Australia, and certain Western European countries. As
of June 30, 2000, we have 41 issued U.S. patents, 18 issued foreign patents, 44
pending U.S. patent applications and 59 pending foreign patent applications
relating to our technologies and products. We also rely upon trade secrets,
continuing technological innovations and licensing opportunities to develop and
maintain our competitive position.

GOVERNMENT REGULATION

FDA's PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either 510(k) clearance or PMA approval in advance from the FDA pursuant to the
Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually
takes from four to twelve months, but it can last longer. The process of
obtaining PMA approval is much more costly, lengthy and uncertain. It generally
takes from one to three years or even longer. We cannot be sure that 510(k)
clearance or PMA approval will ever be obtained for any product we propose to
market.

The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
premarket notification requesting 510(k) clearance, unless an exemption applies.
The premarket notification must demonstrate that the proposed device is
"substantially equivalent" in intended use and in safety and effectiveness to a
legally marketed "predicate device" that is either in class I, class II, or is a
class III device that was in commercial distribution before May 28, 1976, for
which the FDA has not yet called for submission of a PMA application.

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After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance or could
require a PMA approval. The FDA requires each manufacturer to make this
determination in the first instance, but the FDA can review any decision. If the
FDA disagrees with a manufacturer's decision not to seek a new 510(k) clearance,
the agency may retroactively require the manufacturer to seek 510(k) clearance
or PMA approval. The FDA also can require the manufacturer to cease marketing
and/or recall the modified device until 510(k) clearance or PMA approval is
obtained. We have modified some of our 510(k) cleared devices but have
determined that, in our view, new 510(k) clearances or PMA approvals are not
required. We cannot be certain that the FDA would agree with any of our
decisions not to seek 510(k) clearance or PMA approval. If the FDA requires us
to seek 510(k) clearance or PMA approval for any modification, we also may be
required to cease marketing and/or recall the modified device until we obtain a
new 510(k) clearance or PMA approval.

Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed predicate device, are placed in
class III. These devices are required to undergo the PMA approval process in
which the manufacturer must prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and also information about the device and its components
regarding, among other things, device design, manufacturing and labeling. After
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process.

A clinical trial may be required in support of a 510(k) submission and
generally is required for a PMA application. These trials generally require an
Investigational Device Exemption, or IDE, application approved in advance by the
FDA for a specified number of patients, unless the product is deemed a
nonsignificant risk device eligible for more abbreviated IDE requirements. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results. Clinical trials may begin if the IDE application is
approved by the FDA and the appropriate institutional review boards at the
clinical trial sites.

We believe that our OEM licensees may be required to obtain 510(k)
premarket clearance from the FDA for products that incorporate Masimo SET MS
boards and LNOP sensors. In order to facilitate our OEM licensees in obtaining
510(k) clearance for their products that incorporate Masimo SET MS boards and
LNOP sensors, we have submitted seven 510(k) notices covering our Masimo SET MS
board and LNOP sensors. We received clearance from the FDA in February 1997 for
Masimo SET MS-1 pulse oximeter and accessories, in January 1998 for Masimo SET
MS-1P pulse oximeter and accessories with claims for accuracy during patient
motion, and in June 1999 for the Masimo SET 2000 pulse oximeter and accessories
with accuracy claims during motion and low perfusion, in October 1999 for the
Masimo SET Radical pulse oximeter, in October 1999 for the Radical SET Radical
pulse oximeter with SatShare, and in November 1999 for the Masimo/Quartz 2500
pulse oximeter. In addition, we received a 510(k) clearance in April 2000 on the
Masimo SET Radical pulse oximeter with SatShare with expanded claims. Our
Radical product using Sat Share has received 510(k) clearance as an upgrade
compatible with certain models of third party monitors. In August 2000, the FDA
orally informed us that we must seek new "special 510(k)" clearances if we wish
to promote the Radical for use as an upgrade with additional models. The special
510(k) process is an abbreviated version of the normal 510(k) process. It is
reserved for device modifications that ordinarily would require 510(k) clearance
but do not affect the intended use or fundamental scientific technology of a
device. The FDA's stated policy is to rule on special 510(k) submissions in a 30
day time frame. We cannot assure you that the FDA will provide special 510(k)
clearance for compatibility of Sat Share with additional models in a timely
fashion or at all. Nor can we assure

38
<PAGE> 42

you that the FDA will agree to allow future clearance requests to undergo the
special 510(k) process rather than the more costly and lengthy 510(k) process.

In the future, we may be required to submit additional 510(k) clearance to
address new claims, uses or products. We cannot assure you that FDA will not
deem one or more of our future products (or those of our OEM licensees) to be a
class III device subject to the more burdensome PMA approval process.

PERVASIVE AND CONTINUING FDA REGULATION. A host of regulatory requirements
apply to our marketed devices, including the Quality System Regulation (which
requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures), the Medical Device
Reporting regulation (which requires that manufacturers report to the FDA
certain types of adverse events involving their products), labeling regulations,
and the FDA's general prohibition against promoting products for unapproved or
"off-label" uses. Class II devices also can have special controls such as
performance standards, postmarket surveillance, patient registries, and FDA
guidelines that do not apply to class I devices. Unanticipated changes in
existing regulatory requirements or adoption of new requirements could hurt our
business, financial condition and results of operations.

Our OEM licensees and we are subject to inspection and market surveillance
by the FDA to determine compliance with regulatory requirements. If the FDA
finds that our OEM licensees or we have failed to comply, the agency can
institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as:

- fines, injunctions, and civil penalties;

- recall or seizure of our products;

- the issuance of public notices or warnings;

- operating restrictions, partial suspension or total shutdown of
production;

- refusing our requests for 510(k) clearance or PMA approval of new
products;

- withdrawing 510(k) clearance or PMA approvals already granted; and

- criminal prosecution.

The FDA also has the authority to request repair, replacement or refund of the
cost of any medical device manufactured or distributed by us. Our failure (or
the failure of our OEM licensees) to comply with applicable requirements could
lead to an enforcement action that may have an adverse effect on our financial
condition and results of operations.

OTHER U.S. REGULATION. We and our OEM licensees also must comply with
numerous federal, state and local laws relating to matters such as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. We cannot be sure that we will not be
required to incur significant costs to comply with these laws and regulations in
the future or that these laws or regulations will not hurt our business,
financial condition and results of operations. Unanticipated changes in existing
regulatory requirements or adoption of new requirements could hurt our business,
results of operations and financial condition.

FOREIGN REGULATION. Many foreign countries in which we market or may
market our products have regulatory bodies and restrictions similar to those of
the FDA. International sales are subject to foreign government regulation, the
requirements of which vary substantially from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval and the requirements may differ. Companies are
now required to obtain the CE Mark prior to sale of certain medical devices
within the European Union. During this process, the sponsor must demonstrate
compliance with ISO manufacturing and quality requirements. We do have CE
Marking on all our products that require such markings. We cannot assure you
that we or our OEM licensees will be able to obtain necessary

39
<PAGE> 43

foreign government approvals or successfully comply with foreign regulations.
Our failure to do so could hurt our business, results of operations and
financial condition.

EMPLOYEES

As of June 30, 2000, we have approximately 142 full-time employees and 1
part-time employee, 34 of which are engaged in research and development
activities, 67 of which are engaged in manufacturing, quality assurance and
regulatory affairs, 34 of which are engaged in sales and marketing activities
and 8 of which are engaged in general and administrative functions. We believe
that our relations with our employees are good.

FACILITIES

We lease approximately 30,000 square feet of manufacturing, laboratory and
office space in Irvine, California. This lease expires in May 2002. We expect to
require additional space within the next 12 months.

LEGAL PROCEEDINGS

In October 1999, we filed a patent infringement lawsuit in the United
States District Court for the Central District of California against
Mallinckrodt, Inc. and Nellcor Puritan Bennett, Inc., a subsidiary of
Mallinckrodt, Inc., or Nellcor, for infringement of a U.S. patent issued to us
in February 1996. In our complaint, we alleged that Nellcor has infringed one of
our patents by making, using, selling and offering to sell certain pulse
oximetry equipment. We amended the lawsuit to allege that Nellcor and
Mallinckrodt infringed a second patent. We are seeking injunctive relief against
Nellcor to prohibit the sale of certain of Nellcor's products, as well as
damages, costs and expenses, reasonable attorneys' fees and treble damages for
willful infringement. Nellcor has denied our allegation of infringement and
contends that our patents are invalid or unenforceable. Our motion for a
preliminary injunction is pending before the Court, as are Nellcor's motions for
summary judgment seeking invalidity and non-infringement findings on one of our
patents and invalidity on the other patent.

After our filing, in November, 1999 Nellcor filed a patent infringement
lawsuit against us and one of our customers in the United States District Court
for the District of Delaware. This lawsuit has been transferred to the Central
District of California pursuant to our request. Nellcor alleges that we are and
have been infringing three of Nellcor's patents and alleges that we are and have
been inducing and contributing to the infringement of these three and a fourth
Nellcor patent. Nellcor is seeking injunctive relief to prevent our alleged acts
of infringement, as well as damages, costs and expenses, reasonable attorneys'
fees and treble damages for willful infringement. In our answer we have denied
Nellcor's allegation of infringement and allege that Nellcor's patents are
invalid or unenforceable.

We intend to vigorously prosecute our patent infringement case against
Nellcor and to vigorously defend ourselves against Nellcor's patent infringement
case. However, due to the nature of litigation generally and because these cases
are in an early stage, we cannot be sure whether we will have any liability in
this litigation. In addition, we cannot assure you that we will obtain any
remedy or that our patents will survive the validity and non-infringement
challenges by Nellcor.

In connection with this litigation, we have incurred and expect to continue
to incur substantial legal and other litigation related expenses. In addition,
this litigation has diverted, and is expected to continue to divert, the
attention of management and technical personnel from our on-going business.

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<PAGE> 44

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information about our executive
officers and directors as of September 8, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joe E. Kiani......................... 36 President, Chief Executive Officer
and Chairman of the Board
Mohamed K. Diab...................... 42 Chief Technical Officer and Director
Bradley R. Langdale.................. 36 Executive Vice President, Chief
Financial Officer and Secretary
Ammar Al-Ali......................... 37 Vice President, Engineering
James J. Cronin...................... 52 Vice President, Regulatory Affairs
and Quality Assurance
Julian M. Goldman, M.D. ............. 40 Vice President, Medical Affairs
Eric M. Heer......................... 36 Vice President, Marketing
Drew J. Rogers....................... 46 Vice President, Sales
George R. Ryan....................... 50 Vice President, Business Development
Gary L. Waite........................ 44 Vice President, Manufacturing
Edward L. Cahill(1).................. 47 Director
Robert L. Coleman, Ph.D.(1)(2)....... 53 Director
Jack W. Lasersohn(2)................. 46 Director
Frederick A. Robertson, M.D.(1)...... 45 Director
H.J.C. Swan, Ph.D., M.A.C.P. ........ 78 Director
</TABLE>

---------------
(1) Member of the Audit Committee

(2) Member of the Compensation Committee

Mr. Kiani is a founder of Masimo and has served as President, Chief
Executive Officer and Chairman of the Board since our inception in 1989. Prior
to founding Masimo, Mr. Kiani served as the Engineering Director of Newport
Medical Electronics, a developer of conventional pulse oximeters. Mr. Kiani
served as regional technical manager for Antherm Electronics and as a field
applications engineer for Bell Industries. Mr. Kiani holds a B.S.E.E. degree and
an M.S.E.E. degree from San Diego State University. In addition, Mr. Kiani
serves on the boards of Masimo Laboratories and Saba Software Inc. In February
2000, Mr. Kiani received the first Society of Critical Care Medicine Industry &
Technology Critical Care Technology Excellence Achievement Award.

Mr. Diab is a founder of Masimo and has served as Chief Technical Officer
and director since September 1989. Prior to founding Masimo, Mr. Diab served as
Chief Engineering Consultant at Newport Medical Electronics, developing
conventional pulse oximetry, and as Senior Design Engineer at Galiso, developing
precision data acquisition boards for testing high pressure gas cylinders and
the purification of industrial gases. Mr. Diab holds a B.S.E.E. degree from
California State University, Fullerton.

Mr. Langdale has served as Executive Vice President, Chief Financial
Officer and Secretary of Masimo since July 1998. Mr. Langdale joined Masimo as
Vice President, Finance and Chief Financial Officer in February 1996. From July
1993 to November 1995, Mr. Langdale served as Director of Finance for CareLine,
Inc., a publicly-held provider of emergency medical services that was acquired
by Laidlaw Inc. in November 1995. Prior to March 1990, Mr. Langdale was employed
by the public accounting firm Price Waterhouse & Company LLP. Mr. Langdale is a

41
<PAGE> 45

Certified Public Accountant and holds a B.S. degree from the University of
California, Los Angeles.

Mr. Al-Ali has served as Vice President, Engineering of Masimo since
December 1996. Prior to December 1996, Mr. Al-Ali was most recently the Director
of Software Development and held various other engineering positions since
joining Masimo in April 1995. From January 1992 to November 1994, Mr. Al-Ali
served as the Director of Research and Development, Electronics for Ami-Med
Corporation, a medical company providing devices for continuous cardiac output.
Mr. Al-Ali holds a B.S. degree from the University of Arizona.

Mr. Cronin has served as Vice President, Regulatory Affairs and Quality
Assurance of Masimo since April 1996. Between January 1995 and April 1996, Mr.
Cronin served as our Director, Regulatory Affairs and Quality Assurance. From
August 1991 to July 1993, Mr. Cronin served as Product Development Manager for
O.B. Tech, a medical device manufacturer. Prior to that, Mr. Cronin held various
management positions in regulatory, research and development and operations for
Microgon and Purolator Technologies. Mr. Cronin holds a B.S. degree from New
York University.

Dr. Goldman has served as Vice President, Medical Affairs of Masimo since
January 1999. Prior to January 1999, Dr. Goldman was a Tenured Associate
Professor of Anesthesiology and Director of Anesthesia Research at the
University of Colorado Health Sciences Center in Denver, where he was on the
faculty since January 1990. In December 1990, he completed research fellowship
training in artificial intelligence applications in anesthesia monitoring. Dr.
Goldman holds a B.S. degree from Touro College, an M.D. from SUNY Health
Sciences Center at Brooklyn and anesthesiology training at University of
Colorado Health Sciences Center. He is certified by the American Board of
Anesthesiology and serves on national and international anesthesia and standards
committees.

Mr. Heer has served as Vice President, Marketing of Masimo since March
2000. Prior to March 2000, Mr. Heer held various management positions with Zoll
Medical Corporation, a manufacturer of cardiac resuscitation devices and one of
our licensees, including Regional Sales Manager between March 1999 and March
2000, Director of Hospital Marketing between September 1994 and October 1997 and
Territory Sales Manager between July 1991 and September 1994. From October 1997
to March 1999, Mr. Heer served as Senior Marketing Manager and Business
Development and Strategic Planning Manager for St. Jude Medical. Mr. Heer holds
a B.S. degree from Stanford University, an M.S. degree from the University of
California, Los Angeles, and an M.B.A. from Pepperdine University.

Mr. Rogers has served as Vice President of Sales of Masimo since March
2000. Mr. Rogers joined the Company as Vice President, Marketing and Business
Development in June 1999. Mr. Rogers held various management positions with MDE,
a manufacturer of patient monitors and one of our licensees, including General
Manager between July 1996 and March 1999, Vice President of Sales & Marketing
between April 1993 and June 1996, and Director of Sales between January 1989 and
March 1992 during which he established worldwide distribution. Mr. Rogers holds
a B.S. degree from the University of Missouri.

Mr. Ryan has served as Vice President, Business Development of Masimo since
July 2000. Prior to July 2000, Mr. Ryan served as Director, Business Development
for Hill-Rom, a manufacturer of maternal infant care, patient transport and
support equipment and one of our licensees. Mr. Ryan also held various
management positions with Respironics including Director of Business Development
from October 1994 to January 1999 and Director of Worldwide Marketing from March
1992 to September 1994. Mr. Ryan holds a B.S.E.E. from the Milwaukee School of
Engineering and an M.B.A. in International Marketing and Finance from the
University of Southern California.

42
<PAGE> 46

Mr. Waite has served as Vice President, Manufacturing of Masimo since May
1998. From May 1993 to May 1998, Mr. Waite was Director of Manufacturing for
Nellcor, our principal competitor. Mr. Waite has held various positions at
Printronix, Inc. and Allen-Bradley, respectively. Mr. Waite holds a B.S. degree
in Operations Management from Long Beach State University.

Mr. Cahill has served as a director since January 1999. Mr. Cahill is a
partner of Cahill, Warnock & Company, LLC, a private investment firm. Prior to
founding Cahill, Warnock & Company, LLC, Mr. Cahill was a Managing Director at
Alex. Brown & Sons, where he headed the Health Care Investment Banking Group
from 1986 to 1995. Mr. Cahill is a director of Occupational Health +
Rehabilitation, Inc., Centene Corporation, MedPlus, Inc. and is also a trustee
of Johns Hopkins Medicine, The Johns Hopkins Health System Corporation and St.
Johns Preparatory School. Mr. Cahill holds a B.A. from Williams College and an
M.P.P.M. from Yale University.

Dr. Coleman has served as a director since February 1997. Dr. Coleman was
President and CEO of MediSense, an Abbott Laboratories Company, from September
1991 to December 1996. Dr. Coleman was a co-founder of Nova Biomedical
Corporation, a manufacturer of clinical laboratory equipment, and served as
President and CEO from 1976 to 1991. Dr. Coleman holds a B.S. degree from
Morehead State University, Kentucky and a Ph.D. degree in Analytical Chemistry
from the University of Tennessee. Dr. Coleman held a faculty appointment as
Associate in Medicine (Biochemistry) at Harvard Medical School for the academic
years 1971 and 1972.

Mr. Lasersohn has served as a director since January 1995. He has been a
General Partner of The Vertical Group, L.P., a private venture capital and
investment management firm, since its formation in 1989 by former principals of
F. Eberstadt & Co., Inc. From January 1981 to March 1989, he was a Vice
President and later a Managing Director of the venture capital division of F.
Eberstadt & Co., Inc. Mr. Lasersohn also serves as a director of Kyphon, Inc.
and a number of privately-held health care companies. He holds B.S. and M.A.
degrees from Tufts University and a J.D. degree from Yale University.

Dr. Robertson has served as a director since September 2000. Dr. Robertson
has served as a director since September 2000. Dr. Robertson has been an
Associate Clinical Professor of Anesthesiology at the Medical College of
Wisconsin since March 1993. From July 2000 through September 2000, Dr. Robertson
was Chief Clinical Officer of GE Medical Systems. From January 1993 to July
2000, he held various management positions with GE Marquette Medical Systems and
the former Marquette Medical Systems, including President and Chief Executive
Officer between November 1998 and July 2000, Chief Executive Officer and
President -- Monitoring Group between November 1997 and November 1998, Medical
Director between February 1997 and November 1997, President, Patient Monitoring
Division between May 1994 to February 1997 and Medical Director between January
1993 and May 1994. Dr. Robertson is a certified by the American Board of
Anesthesiology and serves as a director of the Anesthesia Patient Safety as well
as a privately-held healthcare research foundation. Dr. Robertson attended the
University of Wisconsin, holds an M.D. degree from the University of Wisconsin
Medical School and an M.B.A. from San Diego State University.

Dr. Swan has served as a director since August 1992. Dr. Swan is a past
President and Distinguished Fellow of the American College of Cardiology, and a
Master of the American College of Physicians. He is the 1985 recipient of the
James Herrick Award of the American Heart Association. Dr. Swan is a Professor
of Medicine (Emeritus) at the University of California, Los Angeles and is the
inventor of the Swan-Ganz Catheter. Dr. Swan holds a Ph.D. degree in Physiology
from the University of London and has held academic positions in London, at the
Mayo Clinic and at Cedars-Sinai Hospital in Los Angeles. Dr. Swan has published
over 140 scientific papers in the areas of cardiology and physiology.

43
<PAGE> 47

COMMITTEES OF OUR BOARD OF DIRECTORS

The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Coleman and
Lasersohn, reviews and approves the salaries, bonuses and other compensation
payable to our executive officers and administrators and makes recommendations
concerning our employee benefit plans.

The audit committee, consisting of Messrs. Cahill, Coleman and Robertson,
recommends the selection of independent public accountants to the board of
directors, reviews the scope and results of the audit and other services
provided by our independent accountants and reviews our accounting practices and
systems of internal accounting controls.

BOARD COMPOSITION

We currently have six directors. Upon the closing of this offering the
terms of office of the board of directors will be divided into three classes. As
a result, a portion of our board of directors will be elected each year.

- The class I directors will be Messrs. Cahill and Kiani and their term
will expire at the annual meeting of stockholders to be held in 2001.

- The class II directors will be Messrs. Swan and Diab and their term will
expire at the annual meeting of stockholders to be held in 2002.

- The class III directors will be Messrs. Coleman, Lasersohn and Robertson
and their term will expire at the annual meeting of stockholders to be
held in 2003.

At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of Masimo.

DIRECTOR COMPENSATION

Directors who are also our employees currently receive no additional
compensation for their services as directors of our company. Directors who are
not our employees receive an annual grant of 3,000 non-qualified stock options
under our Third Amended and Restated 1996 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan. We have no other director
compensation arrangements, other than reimbursement for travel expenses and
other out-of-pocket costs incurred in connection with directors' attendance at
meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as members of our board of directors or compensation committee.

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<PAGE> 48

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by us to our chief
executive officer and to our four other most highly compensated executive
officers who earned more than $100,000 in salary and bonus for all services
rendered in all capacities during the calendar years ended December 31, 1999,
1998 and 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS
----------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Joe E. Kiani............................... 1999 $224,406 17,930
Chief Executive Officer and President 1998 208,177 $87,500 269,250
1997 202,260 0
Mohamed K. Diab............................ 1999 154,450 9,890
Chief Technical Officer 1998 142,750 48,000 110,600
1997 122,324 0
Bradley R. Langdale........................ 1999 152,500 27,090
Executive Vice President, Chief 1998 127,500 49,600
Financial Officer and Secretary 1997 120,615 15,000
Ammar Al-Ali............................... 1999 156,461 26,720
Vice President, Engineering 1998 147,779 38,300
1997 137,610 20,000
Julian M. Goldman, M.D..................... 1999 191,667 4,390
Vice President, Medical Affairs 1998 -- 80,000
1997 -- 0
</TABLE>

------------
(1) Bonuses for 1999, 1998 (except Joe E. Kiani and Mohamed K. Diab) and 1997
were paid in stock options and are included in the above table as long-term
compensation.

OPTION GRANTS IN 1999

The table below sets forth grants of stock options during 1999 to our named
executive officers. The exercise price per share of each option was equal to the
fair market value of the common stock on the date of grant as determined by the
board of directors. The potential realizable value is calculated based on the
term of the option at its time of grant, which is 10 years. It is calculated
assuming that the fair market value of common stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire term
of the option and that the option is exercised and sold on the last day of its
term for the appreciated

45
<PAGE> 49

stock price. These numbers are calculated based on the requirements of the SEC
and do not reflect our estimate of future stock price growth.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF OF ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE FAIR VALUE EXPIRATION ---------------------------
NAME GRANTED YEAR (PER SHARE) (PER SHARE) DATE 0% 5% 10%
---- ---------- ---------- ----------- ----------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joe E. Kiani............... 5,800 1.0% $5.00 $6.50 10/20/09
12,130 2.1% $5.50 $6.70 1/26/10
Mohamed K. Diab............ 3,200 0.6% $5.00 $6.50 10/20/09
6,690 1.2% $5.50 $6.70 1/26/10
Bradley R. Langdale........ 20,400 3.5% $5.00 $6.50 10/20/09
6,690 1.2% $5.50 $6.70 1/26/10
Ammar Al-Ali............... 10,000 1.7% $4.00 $6.00 6/11/09
11,700 2.0% $5.00 $6.50 10/20/09
5,020 0.9% $5.50 $6.70 1/26/10
Julian M. Goldman, M.D. ... 4,390 0.8% $5.50 $6.70 1/26/10
</TABLE>

The dates of exercisability of the options are determined in accordance with
their respective vesting schedules.

OPTION EXERCISES AND YEAR-END OPTION VALUES

The table below sets forth information concerning stock options exercised
during the year ended December 31, 1999 by our named executive officers and
options outstanding at December 31, 2000.

The information regarding the value realized reflects the fair market value
of our common stock underlying the option on date of exercise minus the
aggregate exercise price of the option.

The information regarding the value of unexercised in-the-money options is
based on a value of $ per share, the assumed initial public offering price,
minus the per share exercise price, multiplied by the number of shares
underlying the option.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT THE MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES ACQUIRED ---------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED VESTED UNVESTED EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe E. Kiani................. 6,500 $35,100 188,797 298,383
Mohamed K. Diab.............. 4,000 $21,600 13,357 107,133
Bradley R. Langdale.......... 35,690 81,000
Ammar Al-Ali................. 31,520 73,500
Julian M. Goldman, M.D. ..... 4,390 80,000
</TABLE>

EMPLOYMENT AGREEMENTS

On May 4, 1996, we entered into employment agreements with each of Mr. Joe
E. Kiani, our President and Chief Executive Officer and Mr. Mohamed K. Diab, our
Chief Technical Officer. The agreements terminate three years after notice of
non-renewal is given by either the
46
<PAGE> 50

executive or Masimo. Under these agreements, Mr. Kiani is currently entitled to
a base salary of $255,200 and Mr. Diab is currently entitled to a base salary of
$176,000 and each is entitled to a bonus based upon attainment of certain
operating income. If either of these agreements is terminated by us without
cause, Mr. Kiani and Mr. Diab, as applicable, are entitled to a lump sum payment
equal to two years of his then base salary and immediate vesting of all
outstanding stock options, and issuance of such related stock as additional
compensation.

STOCK OPTION PLANS

Third Amended and Restated 1996 Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan

Our Third Amended and Restated 1996 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 1996 stock plan was initially adopted
by our board of directors and approved by our stockholders in May 1996, and was
amended and restated by our board of directors and approved by our stockholders
in August 1999. Unless terminated sooner, the 1996 stock plan will terminate
automatically ten years from the date of obtaining board of directors approval.

Initially, 1,000,000 shares of common stock were reserved for issuance
under this plan. In December 1997, our board of directors approved an amendment
to the 1996 Stock Plan to increase the number of shares reserved for issuance to
1,200,000 and then in August 1999 to 1,400,000. In October 1999, our board of
directors approved an amendment to the 1996 stock plan to increase the number of
shares reserved for issuance to include the unissued options from the 1989
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan prior to its expiration, as well as any additional options that would
become available through future forfeitures. In March 2000, our board of
directors and in May 2000, our stockholders approved an amendment to the 1996
stock plan to increase the number of shares reserved for issuance to 2,400,000.
As of June 30, 2000, options to purchase 1,679,070 shares of common stock were
outstanding under the 1996 stock plan and 709,430 were available for further
issuance.

Authority to control and manage the operation and administration of the
1996 stock plan is vested with the board of directors which may delegate some or
all of such responsibilities to an administrator. The administrator of our 1996
stock plan has the power to determine among other things:

- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;

- the number of shares issuable under each option or stock purchase right;

- the exercisability of each option or stock purchase right; and

- the form of consideration payable upon the exercise of each option or
stock purchase right.

The board of directors has the authority to amend, suspend or terminate the
1996 stock plan, so long as no such action affects any shares of common stock
previously issued and sold or any option previously granted under the 1996 stock
plan. During any calendar year, each optionee may be granted options to purchase
a maximum of 500,000 shares.

Options and stock purchase rights granted under our 1996 stock plan are
generally not transferable by the optionee, and each option is exercisable
during the lifetime of the optionee only by such optionee.

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<PAGE> 51

In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants us the right to have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment or consulting relationship with us for any reason,
including death or disability. The purchase price for shares repurchased under
the restricted stock purchase agreement must be the original price paid by the
purchaser for shares which have not vested and at fair market value for shares
which have vested.

The exercise price of all incentive stock options granted under the 1996
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1996 stock plan is determined by the
administrator, but in no event may be less than 85% of fair market value. For
nonstatutory stock options intended to qualify as "performance-based
compensation" under Section 162(m) of the Internal Revenue code, the exercise
price must be at least equal to the fair market value of our common stock on the
date of grant. For any participant who owns stock possessing more than 10% of
the voting power of all classes of our outstanding capital stock, the exercise
price of any incentive stock option granted must be at least equal to 110% of
the fair market value on the grant date and the term of such incentive stock
option must not exceed five years. The term of all other options granted under
the 1996 stock plan may not exceed ten years.

The 1996 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall either be assumed or an equivalent option substituted for
by the successor corporation or if the outstanding options and stock purchase
rights are not assumed or substituted for by the successor corporation, the
optionees will become fully vested in and have the right to exercise such
options or stock purchase rights. If an option or stock purchase right becomes
fully vested and exercisable upon a merger or sale of assets, the administrator
must notify the optionee that the option or stock purchase right is fully
exercisable for a period of 15 days from the date of the notice, and the option
or stock purchase right will terminate upon the expiration of the 15 day period.

1989 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan

Our amended and restated 1989 stock plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 1989 stock plan was initially adopted
by our board of directors and approved by our stockholders in September 1989,
and was amended by our board of directors and approved by our stockholders in
May 1999. The 1989 stock plan has terminated as it has been more than ten years
from the date of obtaining stockholder approval.

A total of 1,000,000 shares of common stock were reserved for issuance
under this plan. As of June 30, 2000, options to purchase 404,100 shares of
common stock were outstanding under the 1989 stock plan and there are no more
shares under this plan available for further issuance.

The administrator of our 1989 stock plan has the power to determine among
other things:

- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;

- the number of shares issuable under each option or stock purchase right;

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<PAGE> 52

- the exercisability of each option or stock purchase right; and

- the form of consideration payable upon the exercise of each option or
stock purchase right.

During any fiscal year, each optionee may be granted options to purchase a
maximum of 500,000 shares.

Options and stock purchase rights granted under our 1989 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1989 stock plan must generally be exercised within
three months after the end of optionee's status as an employee, director or
consultant, or within twelve months after such optionee's termination by death
or disability, but in no event later than the expiration of the option's term.

The exercise price of all incentive stock options granted under the 1989
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1998 stock plan is determined by the
administrator, but for nonstatutory stock options intended to qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. For any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal to 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1989 stock plan may not exceed ten years.

The 1989 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding options and stock purchase rights are
not assumed or substituted for by the successor corporation, the optionees will
become fully vested in and have the right to exercise such options or stock
purchase rights. If an option or stock purchase right becomes fully vested and
exercisable upon a merger or sale of assets, the administrator must notify the
optionee that the option or stock purchase right is fully exercisable for a
period of 30 days from the date of the notice, and the option or stock purchase
right will terminate upon the expiration of the 30 day period.

2000 EMPLOYEE STOCK PURCHASE PLAN

Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in August 2000, and stockholder approval is expected before the closing of the
offering. The purchase plan will become effective immediately upon the signing
of the underwriting agreement for this offering. A total of 500,000 shares of
common stock have been reserved for issuance under the purchase plan. The share
reserve will increase annually by the lesser of (a) 1% of the outstanding shares
on the last day of our fiscal year, or (b) a lesser amount determined by our
board of directors. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the U.S. Internal
Revenue Code. Under the purchase plan, our board of directors may specify
offering periods of up to 24 months, except for the first offering period which
commences upon the date the underwriting agreement is signed and ends on the
last business day in December 2002. The purchase plan also contains consecutive
six month purchase periods. Subsequent offering and all purchase periods start
on the first business day in January and July of each year, and end on the last
business day in June and December of each year.

Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any

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<PAGE> 53

calendar year. However, any employee who immediately after receiving a grant
owns stock possessing 5% or more of the total combined voting power of value of
all classes of our capital stock or whose rights to purchase stock under this
plan accrues at a rate which exceeds $25,000 in fair market value of common
stock for each calendar year, may not participate in this plan. The purchase
plan permits participants to purchase common stock through payroll deduction of
up to 15% of the participant's base salary.

Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The purchase price
will be 85% of the lower of the fair market value of the common stock at the
beginning of the offering period and the fair market value of the common stock
at the end of the purchase period. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.

If the fair market value of our common stock on any purchase date is less
than the fair market value on the start date of the offering period, then that
offering period will automatically terminate, and a new offering period will
begin on the next business day. All participants in the terminated offering will
be transferred to the new offering.

Rights granted under the purchase plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the plan. In the event of our merger, consolidation,
reorganization or liquidation, our board of directors has discretion to provide
that each outstanding option may be assumed or an equivalent right substituted
by the successor corporation or the board of directors may provide for all sums
collected by payroll deductions to be applied to a purchase of our common stock
immediately prior to such merger or other transaction. The purchase plan will
terminate automatically in 2010 unless terminated earlier. Our board of
directors has the authority to amend or terminate the purchase plan, except that
no such action may adversely affect any outstanding rights to purchase stock
under the purchase plan. Our board of directors has the exclusive authority to
interpret and apply the provisions of the purchase plan.

401(k) PLAN

All full-time employees of Masimo over age 21 are eligible to participate
in the Masimo Retirement Savings Plan, a defined contribution plan, effective
April 1, 1995 and intended to qualify under Section 401 of the Internal Revenue
Code. Eligible employees may enter the savings plan immediately upon hire date.
Participants may make pre-tax contributions to the savings plan of up to 15%
percent of their eligible earnings, but not in excess of a statutory annual
limit. We may make discretionary matching contributions to the savings plan. As
of June 30, 2000, we have not made any matching contributions to the Masimo
Retirement Savings Plan.

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<PAGE> 54

CERTAIN TRANSACTIONS

SPIN-OFF OF MASIMO LABORATORIES

In April 1998, we completed the spin-off of our non-vital signs monitoring
applications (including all applications other than certain clinical oxygen
saturation measurements, sudden infant death syndrome monitoring,
electrocardiography, and blood pressure, temperature and respiration monitoring)
to a newly formed entity, Masimo Laboratories, Inc. The spin-off was effectuated
through a stock dividend whereby we distributed all of the issued and
outstanding shares of our wholly-owned subsidiary, Masimo Laboratories, to the
holders of the outstanding shares of our common stock and preferred stock, in
each case, on a one-for-one basis. Our stockholders were not required to pay any
cash or other consideration for the shares of Masimo Laboratories and were not
required to surrender or exchange shares of our stock in order to receive the
shares of Masimo Laboratories. After the spin-off, we and Masimo Laboratories
entered into a cross-licensing agreement, whereby we agreed to fund research and
development conducted by Masimo Laboratories for a period of up to two years,
which was extended for another two years effective March 2000, in an amount not
to exceed $2,500,000 in exchange for certain licensing rights of Masimo
Laboratories technologies. On a monthly basis, we reimburse Masimo Laboratories
for its cash expenditures and charges it an allocation of engineering labor,
facility, administrative, and equipment related costs paid by Masimo on behalf
of Masimo Laboratories.

WARBURG, PINCUS VENTURES, L.P.

In October 1998, Warburg, Pincus Ventures, L.P. sold and transferred
1,487,500 of the 1,541,490 shares it held of our Series C Preferred Stock to
INVESCO (NY), Inc., as investment manager, INVESCO Funds Group, Inc., and
several other investors. Pursuant to the Warburg sale, Warburg received gross
proceeds of $9,073,750 and we received gross proceeds of $2,826,215 as
consideration for making certain representations, warranties, covenants and
agreements in connection with the sale. Warburg sold and transferred its
remaining 53,990 shares of our Series C Preferred Stock to INVESCO (NY), Inc.
(and its affiliated entities) in a subsequent sale.

INVESCO (NY), INC.

In September 1999, we sold an aggregate of 181,819 shares of our Series F
preferred stock to entities affiliated with Invesco (NY), Inc., an existing
investor, at a purchase price of $11.00 per share for an aggregate purchase
price of approximately $2 million.

MOORE GLOBAL INVESTMENTS, LTD.

In September 1999, we sold an aggregate of 181,819 shares of our Series F
preferred stock to Moore Global Investments, Ltd. and its related entity,
Remington Investment Strategies, L.P., existing investors, at a purchase price
of $11.00 per share for an aggregate purchase price of approximately $2 million.

VITAL INSITE ACQUISITION

In December 1999, we acquired certain of the assets of Vital Insite, Inc.,
a development stage medical device company engaged in the development of
technology for continuous noninvasive measurement of blood pressure, in exchange
for 45,455 shares of our Series F Preferred Stock. Mr. Lasersohn, one of our
directors, was also one of the directors of Vital Insite, Inc.

GE MARQUETTE MEDICAL SYSTEMS, INC.

In September 2000, we sold 454,546 shares of Series F Preferred Stock for
$11.00 per share and issued warrants to purchase 90,909 shares of Common Stock
at an exercise price of $11.00 per share to GE Marquette Medical Systems, Inc.
Dr. Robertson, one of our directors, was President and Chief Executive Officer
of GE Marquette Medical Systems, Inc. until July 2000.

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<PAGE> 55

LOAN TO EXECUTIVE OFFICER

In January 1998, we loaned $80,000 to Mr. Al-Ali. The loan is evidenced by
a letter agreement and bears interest at 3.5% per annum. As of June 30, 2000,
$59,600 of the principal amount of the loan was outstanding. Pursuant to the
terms of the letter agreement, no principal payments are due until January 2003.
In the event that Mr. Al-Ali terminates his employment with us prior to a change
of more than 50% of the voting stock of Masimo, the loan will become immediately
due and payable. In the event that we terminate Mr. Al-Ali's employment, the
interest rate will increase to 7%.

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

We have entered into an agreement with our preferred stockholders, other
than the Series D stockholders, pursuant to which they will have registration
rights with respect to their shares of common stock following this offering.
Please see "Description of Capital Stock -- Registration Rights" for a further
description of the terms of this agreement.

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<PAGE> 56

PRINCIPAL STOCKHOLDERS

The following table provides summary information regarding beneficial
ownership of our outstanding common stock as of June 30, 2000:

- each person or group who beneficially owns more than 5% of our common
stock,

- each of our directors and the named executive officers, and

- all of our directors and executive officers as a group.

Beneficial ownership of shares is determined under the rules of the SEC and
generally includes any shares over which a person exercises sole or shared
voting or investment power. Except as indicated by footnote, and subject to
applicable community property laws, each person identified in the table
possesses sole voting and investment power with respect to all shares of common
stock held by them. Shares of common stock subject to options currently
exercisable or exercisable within 60 days of June 30, 2000 and not subject to
repurchase as of that date are deemed outstanding for calculating the percentage
of outstanding shares of the person holding these options, but are not deemed
outstanding for calculating the percentage of any other person. Applicable
percentage ownership in the following table is based on 13,120,347 shares of
common stock outstanding as of June 30, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock, including the 454,546
shares of Series F Preferred Stock issued in September 2000, into common stock
upon the closing of the offering, and shares of common stock
outstanding immediately following the completion of this offering.

Unless otherwise indicated, the address of each of the named individuals is
c/o Masimo Corporation, 2852 Kelvin Ave., Irvine, CA 92614.

<TABLE>
<CAPTION>
PERCENT OF SHARES OUTSTANDING
---------------------------------
NAME AND ADDRESS SHARES BEFORE OFFERING AFTER OFFERING
---------------- --------- --------------- --------------
<S> <C> <C> <C>
Invesco (NY), Inc.(1)........................... 1,610,809 11.9%
1166 Ave. of the Americas
New York, NY 10036
Joe E. Kiani(2)................................. 1,042,964 7.6
Mohamed K. Diab(3).............................. 1,009,024 7.4
Moore Global Investments, Ltd.(4)............... 959,598 7.1
1251 Ave. of the Americas, 53rd Fl.,
New York, NY 10020
DSV Partners.................................... 925,000 6.8
620 Newport Center Dr., St 1600
Newport Beach, CA 92660
Franklin Templeton(5)........................... 909,091 6.7
777 Mariners Island Blvd.
San Mateo, CA 94404
Feibusch & Co., Inc.(6)......................... 708,061 5.2
80 E. Sir Francis Drake Blvd., 3D
Larkspur, CA 94939
Bradley R. Langdale(7).......................... 51,690 *
Ammar Al-Ali(8)................................. 45,520 *
James J. Cronin(9).............................. 30,800 *
Gary L. Waite(10)............................... 20,080 *
Drew J. Rogers(11).............................. 10,730 *
Julian M. Goldman(12)........................... 8,390 *
</TABLE>

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<PAGE> 57

<TABLE>
<CAPTION>
PERCENT OF SHARES OUTSTANDING
---------------------------------
NAME AND ADDRESS SHARES BEFORE OFFERING AFTER OFFERING
---------------- --------- --------------- --------------
<S> <C> <C> <C>
Eric M. Heer(13)................................ 2,000 *
Edward L. Cahill(14)............................ 440,230 3.2
Jack W. Lasersohn(15)........................... 312,748 2.3
Robert L. Coleman(16)........................... 44,750 *
Frederick A. Robertson M.D. .................... 0 *
H.J.C. Swan, M.D., Ph.D......................... 81,000 *
All executive officers and directors as a group
(13 persons)(17).............................. 3,099,926 22.1
</TABLE>

---------------
* Less than 1% of the outstanding common stock

(1) Includes 197,816 shares of Series C Preferred Stock and 25,169 shares of
Series F Preferred Stock sold to Chancellor Private Capital Partners III,
L.P., 753,836 shares of Series C Preferred Stock and 95,912 shares of
Series F Preferred Stock sold to Citiventure 96 Partnership, L.P., 325,997
shares of Series C Preferred Stock and 41,478 shares of Series F Preferred
Stock sold to Chancellor Private Offshore Partners II, L.P., 26,341 shares
of Series C Preferred Stock and 3,351 shares of Series F Preferred Stock
sold to Chancellor Private Capital Offshore Partners I, C.V., and 125,000
shares of Series C Preferred Stock and 15,909 shares of Series F Preferred
Stock sold to INVESCO Funds Group, Inc.

(2) Includes 225,464 shares of common stock subject to options exercisable
within 60 days of June 30, 2000 and excludes 83,334 shares of common stock
subject to options exercisable upon completion of this offering.

(3) Includes 20,024 shares of common stock subject to options exercisable
within 60 days of June 30, 2000 and excludes 33,334 shares of common stock
subject to options exercisable upon completion of this offering.

(4) Includes 637,779 shares of Series E Preferred Stock and 149,092 shares of
Series F Preferred Stock sold to Moore Global Investments, LTD. and 140,000
shares of Series E Preferred Stock and 32,727 shares of Series F Preferred
Stock sold to Remington Investment Strategies, L.P.

(5) Includes 772,727 shares of Series F Preferred Stock sold to Hare & Co. FBO
California Growth Fund 180 and 136,364 shares of Series F Preferred Stock
sold to Hare & Co. FBO Global Health Care Fund 1999.

(6) Includes 398,061 shares of Series A Preferred Stock and 110,000 shares of
Series B Preferred Stock issued to Feibusch & Co., Inc. and 200,000 shares
of Series A Preferred Stock issued to Tamalpais Associates.

(7) Includes 51,690 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(8) Includes 45,520 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(9) Includes 25,800 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(10) Includes 20,080 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(11) Includes 10,730 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(12) Includes 8,390 shares of common stock subject to options exercisable within
60 days of June 30, 2000.

(13) Includes 2,000 shares of common stock subject to options exercisable within
60 days of June 30, 2000.

(14) Includes 285,715 shares of Series D Preferred Stock sold to Cahill, Warnock
Strategic Partners Fund L.P., CWSPF, 151,515 shares of Series A Preferred
Stock issued upon exercise of Series A Warrants in October 1996, and 3,000
shares of common stock subject to options exercisable within 60 days of
June 30, 2000. All of the preferred stock indicated as owned by Mr. Cahill
are owned directly by CWSPF and are included because of his affiliation
with CWSPF. Mr. Cahill disclaims beneficial ownership of the preferred
stock.

(15) Includes 306,748 shares of Series C Preferred Stock held of record by
Vertical Fund Associates, L.P., of which Mr. Lasersohn disclaims beneficial
ownership, and 6,000 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(16) Includes 44,750 shares of common stock subject to options exercisable
within 60 days of June 30, 2000.

(17) Includes directors' and executive officers' shares listed above, including
306,748 shares of capital stock held of record by Vertical Fund and the
151,515 and 285,715 shares of capital stock held of record by CWSPF.

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<PAGE> 58

DESCRIPTION OF CAPITAL STOCK

GENERAL

As of June 30, 2000, there were outstanding:

- 3,038,173 shares of common stock held of record by 94 stockholders,

- 10,082,174 shares of preferred stock held of record by 199 stockholders;

- options to purchase 2,083,170 shares of common stock; and

- warrants to purchase 10,000 shares of common stock.

In addition, in September 2000, we sold 454,546 shares of Series F
Preferred Stock and issued warrants to purchase 90,909 shares of common stock to
one stockholder.

Upon the closing of this offering, all outstanding shares of preferred
stock will automatically convert into 10,536,720 shares of common stock. The
options and warrants will remain outstanding. In the event the initial public
offering price is less than $11.00 per share, the holders of our Series F
preferred stock will be entitled to receive up to a maximum of 676,134
additional shares of our common stock upon the closing of this offering. In
addition, one of our warrantholders has antidilution protection pursuant to the
terms of its warrant. In the event the initial public offering price is less
than $11.00 per share, this holder will be entitled to receive up to a maximum
of 20,202 additional shares of our common stock upon the closing of this
offering.

Upon completion of this offering, our authorized capital stock will consist
of 60,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.01 par value per share.

COMMON STOCK

Subject to the preferences of any preferred stock outstanding at the time,
the holders of our common stock are entitled to receive dividends out of legally
available assets as and when determined by our board. Holders of our common
stock are entitled to one vote for each share held on all matters submitted to a
vote of stockholders. Our certificate of incorporation does not authorize
cumulative voting for the election of directors, which means that the holders of
a majority of shares voted can elect all of our directors then standing for
election. Our common stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or
winding-up, the assets legally available for distribution to our stockholders
are distributable ratably among the holders of our common stock after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of our common stock is, and
all shares of our common stock to be outstanding upon completion of this
offering will be, when issued and paid for, fully paid and nonassessable.

PREFERRED STOCK

Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 5,000,000 shares of preferred stock in one or
more series. Our board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to fix the rights, preferences and
privileges of the shares of each series.

Our board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of our common stock. Although we have no present plan to issue
any shares of preferred stock, any future issuance of shares of preferred stock,
or the issuance of rights to purchase preferred shares,

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<PAGE> 59

may have the effect of delaying, deferring or preventing a change of control of
our company or an unsolicited acquisition proposal.

WARRANT

As of June 30, 2000, there was an outstanding warrant to purchase 10,000
shares of common stock at an exercise price of $3.00 per share, which expires on
May 1, 2004. The holder of the warrant may also from time to time convert all or
a portion of the warrant into a number of shares of common stock to be
determined by dividing (a) the aggregate fair market value of the shares of
common stock to be converted minus the aggregate warrant price for such shares,
by (b) the fair market value of one share of common stock. The warrant also
provides for certain anti-dilution protection in the event of certain stock
dividends, splits, combinations, issuances for less than the exercise price and
other diluting events. The holder of the warrant is also entitled to certain
piggy-back registration rights.

In September 2000, we issued a warrant to purchase 90,909 shares of common
stock at an exercise price of $11.00 per share, which expires on September 7,
2005. The holder of the warrant may also from time to time convert all or a
portion of the warrant into a number of shares of common stock equal to the
difference of (a) the total number of shares of common stock into which the
warrant is exercisable minus (b) that number of shares of common stock having an
aggregate spread equal to the aggregate warrant price, with the spread being the
difference between the warrant price and the fair market value of the common
stock. The warrant also provides for certain antidilution protection in the
event of certain stock dividends, splits, combinations, issuances for less than
the exercise price and other diluting events.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

Under the terms of a registration rights agreement, the holders of
9,036,721 shares of our common stock are entitled to certain rights with respect
to the registration of those shares under the Securities Act of 1933. Under the
agreement, the holders of registration rights who hold certain threshold amounts
of common stock may demand that we register their securities for resale under
the Securities Act, in which case holders of registration rights who hold other
shares of common stock may join in such demand registration. In addition, if we
propose to register any of our securities under the Securities Act, either for
our own account or the account of other stockholders, the holders of
registration rights are entitled to notice of such registration and are entitled
to include their registrable shares in the registration. In either case, among
other conditions and limitations, the underwriters have the right to limit the
number of shares included in the registration. Holders of registration rights
also may require us to register, at our expense, all or a portion of their
registrable shares on Form S-3 when such form becomes available to us, subject
to certain conditions and limitations.

CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER LAW

Provisions of Delaware law and our certificate of incorporation and bylaws
summarized below could make more difficult our acquisition by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control to first negotiate with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because negotiation of these
proposals could result in an improvement of their terms.

Stockholder Meetings. Under our restated certificate of incorporation and
restated bylaws, the board of directors, the chairman of the board and the
president may call special meetings of

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<PAGE> 60

stockholders but our stockholders may not call a special meeting. In addition,
our restated certificate of incorporation and restated bylaws do not provide for
the right of stockholders to act by written consent without a meeting or for
cumulative voting in the election of directors.

Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our restated bylaws establish advance notice procedures for
proposals and the nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of directors or a board
committee.

No Stockholder Action by Written Consent. Our certificate of incorporation
provides that stockholders can take action only at an annual or special meeting
of stockholders duly called in accordance with our bylaws. Accordingly, our
stockholders will not be able to take action by written consent in lieu of a
meeting.

Staggered Board. Under our restated certificate of incorporation, there
will be three classes of directors, approximately one-third of whom would be
elected each year, thus requiring any potential acquirer to successfully
complete two proxy contests in order to take control of the board of directors.

Limitation of Liability and Indemnification. Our certificate of
incorporation provides that our directors will not be personally liable to us or
to our stockholders for monetary damages for breach of fiduciary duty as a
director, except that the limitation will not eliminate or limit liability to
the extent that the elimination or limitation of this liability is not permitted
by the Delaware General Corporation Law as it exists or may later be amended.
Our certificate of incorporation further provides for the indemnification of our
directors and officers to the fullest extent permitted by law.

Delaware Anti-Takeover Law. We are a Delaware corporation and are subject
to the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction by
which that person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years prior did own, 15% or more of our voting stock.

TRANSFER AGENT AND REGISTRAR

U.S. Stock Transfer Corporation will be our transfer agent and registrar
for our common stock.

57
<PAGE> 61

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have shares of common
stock outstanding. Of these shares, the shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. A significant number of shares of our stock outstanding prior to
this offering are subject to a lock-up agreement restricting the sale of these
shares for 150 days, two-thirds of these shares for 180 days and one-third of
these shares for 210 days, and may not be sold in the public market prior the
expiration of the lock-up agreements. Deutsche Bank Securities Inc. may release
the shares subject to the lock-up agreements in whole or in part at any time
without prior public notice. However, Deutsche Bank Securities Inc. has no
current plans to effect such a release. Upon the expiration of all of the
lock-up agreements, approximately additional shares will be available
for sale in the public market, subject in some cases to compliance with the
volume and other limitations of Rule 144.

<TABLE>
<CAPTION>
DAYS AFTER DATE SHARES ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
------------------ --------------- -------
<S> <C> <C>
Upon effectiveness........................ Freely tradable shares eligible for sale
under Rule 144(k) and not locked-up
90 days................................... Shares not locked-up and saleable under
Rules 144 and 701
150 days.................................. One-third of lock-up released; shares
saleable under Rules 144 and 701
180 days.................................. Two-thirds of lock-up released; shares
saleable under Rules 144 and 701
210 days.................................. All of lock-up released; shares saleable
under Rules 144 and 701
Various dates thereafter.................. Restricted securities held for one year or
less as of 180 days following
effectiveness
</TABLE>

RULE 144

In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of

- 1% of the then outstanding shares of our common stock (approximately
shares immediately after this offering) or

- the average weekly trading volume during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to
the sale.

A person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the sale
who has beneficially owned his or her shares for at least two years is entitled
to sell these shares pursuant to Rule 144(k) without regard to the limitations
described above. Affiliates must always sell pursuant to Rule 144, even after
the applicable holding periods have been satisfied.

We cannot estimate the number of shares that will be sold under Rule 144,
as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock, and there can be no assurance
that a significant public market for our common stock will

58
<PAGE> 62

develop or be sustained after this offering. Any future sale of substantial
amounts of our common stock in the open market may adversely affect the market
price of our common stock.

LOCK-UP AGREEMENTS

We and our directors, executive officers and certain of our stockholders
have agreed pursuant to the underwriting agreement and other agreements not to
sell without the prior consent of Deutsche Bank Securities Inc. any of our
common stock until 150 days from the date of this prospectus, two-thirds of our
common stock until 180 days from the date of this prospectus, and one-third of
our common stock until 210 days from the date of this prospectus. Transfers or
dispositions can be made sooner only with the prior written consent of Deutsche
Bank Securities Inc.

STOCK OPTIONS

We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of our common stock that are subject to outstanding
options or reserved for issuance under our equity incentive plans 180 days
following the effectiveness of this registration statement, which permits the
resale of these shares by nonaffiliates in the public market without restriction
under the Securities Act.

RULE 701

Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitations or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus.

REGISTRATION RIGHTS

After this offering the holders of 9,036,721 shares of our common stock
will be entitled to certain rights with respect to registration of such shares
under the Securities Act. Registration of these shares under the Securities Act
would result in these shares becoming freely tradable without restriction under
the Securities Act except for shares purchased by affiliates. See "Description
of Capital Stock -- Registration Rights."

59
<PAGE> 63

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray, Inc. have severally
agreed to purchase from Masimo the following respective number of shares of
common stock at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Deutsche Bank Securities Inc. ..............................
Chase Securities Inc. ......................................
U.S. Bancorp Piper Jaffray Inc. ............................
--------
Total..................................................
========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.

The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $ per share to
other dealers. After the initial public offering, representatives of the
underwriters may change the offering price and other selling terms.

We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of the common stock offered hereby.
To the extent that the underwriters exercise this option, each of the
underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above tables bears
to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares are
being offered.

The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is currently expected to be approximately
of the initial public offering price. We have agreed to pay the
underwriters the following fees, assuming either no exercise or full exercise by
the underwriters of the underwriters' over-allotment option:

<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEES PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
-------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Masimo...... $ $ $
</TABLE>

In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .

60
<PAGE> 64

We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.

Each of our officers and directors, and certain holders of our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
for a period of 150 days, with respect to two-thirds of their stock, for a
period of 180 days, and with respect to one-third of their stock, for a period
of 210 days after the effective date of the registration statement of which this
prospectus is a part without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without public notice. We
have entered into a similar agreement with the representatives of the
underwriters, except that we may grant options and issue shares under our Third
Amended and Restated 1996 Incentive Stock Option Nonqualified Stock Option and
Restricted Stock Purchase Plan. There are no agreements between the
representatives and any of our stockholders or affiliates releasing them from
these lock-up agreements prior to the expiration of the lock-up period described
above.

The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short position in our common stock for their own account. A short position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase shares of our common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may also
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq Stock Market or otherwise. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for our employees, family members
of employees, customers and other third parties. The number of shares of our
common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved shares that are not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.

PRICING OF THIS OFFERING

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:

- prevailing market conditions;

- our sales, earnings and other financial and operating information in
recent periods;

- our record of operations, our current financial position and future
prospects;
61
<PAGE> 65

- the market capitalization, price-earnings ratios, price-sales ratios and
financial and operating information of other companies that we and the
representatives of the underwriters believe to be comparable to our
business; and

- the experience of our management.

The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed
upon for us by Arter & Hadden LLP, Irvine, California. As of the date of this
prospectus, a member of Arter & Hadden LLP beneficially owns 32,000 shares of
our common stock and options to purchase 8,000 shares of our common stock.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins, Costa Mesa, California. As of the date of
this prospectus, a member of Latham & Watkins beneficially owns 5,555 shares of
our common stock.

EXPERTS

The financial statements as of December 31, 1998 and 1999 and for the year
ended March 31, 1998, the nine months ended December 31, 1998, and the year
ended December 31, 1999, included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

The information contained in "Business -- Patents and Proprietary Rights",
excluding the last sentence, and the first two paragraphs of "Business -- Legal
Proceedings" have been reviewed and approved by Knobbe, Martens, Olson & Bear
LLP Newport Beach, California, our patent counsel, as experts in such matters,
and are included herein in reliance upon their review and approval. As of the
date of this prospectus, members of Knobbe, Martens, Olson & Bear beneficially
own 33,675 shares of our common stock.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered under this
prospectus. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and to the exhibits and schedule to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance we refer you to the copy of each contract or
other document filed as an exhibit to the registration statement. Each of these
statements is qualified in all respects by this reference. You may inspect a
copy of the registration statement without charge at the SEC's principal office
in Washington, D.C., and copies of all or any part of the registration statement
may be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of fees prescribed by the SEC. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the Web site is http://www.sec.gov. The SEC's toll
free investor information service can be reached at 1-800-SEC-0330. Information
contained on our website does not constitute part of this prospectus.

62
<PAGE> 66

Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.

63
<PAGE> 67

MASIMO CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-5
Statements of Stockholders' Equity (Deficit)................ F-6
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-9
</TABLE>

F-1
<PAGE> 68

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Masimo Corporation

In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit), and cash flows present fairly, in
all material respects, the financial position of Masimo Corporation at December
31, 1998 and 1999, and the results of its operations and its cash flows for the
year ended March 31, 1998, the nine months ended December 31, 1998, and the year
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Costa Mesa, California
March 17, 2000

F-2
<PAGE> 69

MASIMO CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,596,421 $ 14,511,154 $ 15,940,893
Accounts receivable, net of allowance for doubtful
accounts of $220,000, $74,372 and $91,220
(unaudited) at December 31, 1998, December 31,
1999, and June 30, 2000, respectively............. 307,689 1,296,388 2,410,289
Inventories, net.................................... 1,972,294 3,579,326 4,511,377
Other current assets................................ 487,503 341,985 386,372
------------ ------------ ------------
Total current assets......................... 14,363,907 19,728,853 23,248,931
Fixed assets, net..................................... 2,703,557 3,423,907 3,527,359
Intangible assets, net................................ 761,875 946,650 1,064,012
Other assets.......................................... 80,113 80,113 542,539
------------ ------------ ------------
Total assets................................. $ 17,909,452 $ 24,179,523 $ 28,382,841
============ ============ ============

LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable.................................... $ 547,123 $ 1,222,265 $ 1,796,401
Accrued liabilities................................. 1,009,696 1,019,793 1,559,582
Deferred revenue.................................... 28,571 80,442 100,516
Current portion of long-term debt................... 437,500 792,113 792,113
------------ ------------ ------------
Total current liabilities.................... 2,022,890 3,114,613 4,248,612
Deferred revenue...................................... 191,131 334,971 357,815
Long-term debt........................................ 1,020,833 1,647,172 1,251,116
------------ ------------ ------------
Total liabilities............................ 3,234,854 5,096,756 5,857,543
------------ ------------ ------------
Commitments and contingencies
Redeemable preferred stock:
Convertible Series A Preferred Stock, 966,362 shares
issued and outstanding (pro forma no shares issued
or outstanding) (liquidation preference of
$1,829,082 at December 31,
1999)............................................. 1,394,246 1,394,246 1,394,246 $ --
Convertible Redeemable Series B Preferred Stock,
1,125,000 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $3,114,972 at December 31, 1999).... 2,940,811 3,115,910 3,203,541 --
Convertible Redeemable Series C Preferred Stock,
1,848,238 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $12,603,519 at December 31, 1999)... 10,938,097 12,016,166 12,510,219
Convertible Redeemable Series D Preferred Stock,
1,500,000 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $13,677,564 at December 31, 1999)... 12,123,069 13,250,547 13,777,214 --
</TABLE>

F-3
<PAGE> 70

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 2000 2000
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Convertible Redeemable Series E Preferred Stock,
2,054,516 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $21,803,630 at December 31, 1999)... 19,262,197 21,189,006 22,099,050 --
Convertible Redeemable Series F Preferred Stock,
1,678,967 shares issued and outstanding at
December 31, 1999 and 2,588,058 shares (unaudited)
at June 30, 2000 (pro forma no shares issued or
outstanding)(liquidation preference of $18,935,270
at December 31, 1999)............................. 17,774,241 28,515,493 --
------------ ------------ ------------ ------------
Total redeemable preferred stock............. 46,658,420 68,740,116 81,499,763 --
------------ ------------ ------------ ------------
Stockholders' equity (deficit):
Preferred stock; $0.001 par value, 11,000,000 shares
authorized (pro forma 5,000,000 shares authorized,
no shares issued or outstanding)..................
Common stock; $0.001 par value, 22,000,000 shares
authorized, 2,907,348, 2,984,326 and 3,038,173
(unaudited) shares issued and outstanding at
December 31, 1998, December 31, 1999, and June 30,
2000, respectively, (pro forma 60,000,000 shares
authorized, 13,574,893 issued and outstanding).... 2,907 2,984 3,038 13,575
Common stock subscribed............................... 40,898 43,431 43,431
Additional paid in capital............................ 86,389,226
Deferred compensation................................. (43,781) (499,203) (526,887) (526,887)
Accumulated deficit................................... (31,942,948) (49,202,028) (58,494,047) (58,494,047)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)......... (31,983,822) (49,657,349) (58,974,465) $ 27,425,298
------------ ------------ ------------ ============
Total liabilities, redeemable preferred
stock, and stockholders' equity
(deficit).................................. $ 17,909,452 $ 24,179,523 $ 28,382,841
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71

MASIMO CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS SIX MONTHS
MARCH 31, DECEMBER 31, DECEMBER 31, ENDED ENDED
1998 1998 1999 JUNE 30, 1999 JUNE 30, 2000
----------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales.................... $ 753,878 $ 1,677,967 $ 6,649,136 $ 2,779,822 $ 5,297,794
License fees..................... 161,250 19,048 48,103 14,226 48,267
----------- ------------ ------------ ----------- ------------
Total revenue.................... 915,128 1,697,015 6,697,239 2,794,048 5,346,061
Cost of goods sold................. 2,154,753 2,985,009 6,416,764 2,809,247 4,243,691
----------- ------------ ------------ ----------- ------------
Gross margin..................... (1,239,625) (1,287,994) 280,475 (15,199) 1,102,370
----------- ------------ ------------ ----------- ------------
Operating expenses:
Research and development......... 3,089,611 3,132,279 5,965,672 2,835,844 2,240,522
Selling, general and
administrative................. 2,598,877 3,929,376 7,766,798 3,438,037 5,789,523
----------- ------------ ------------ ----------- ------------
Total operating expenses......... 5,688,488 7,061,655 13,732,470 6,273,881 8,030,045
----------- ------------ ------------ ----------- ------------
Loss from operations............. (6,928,113) (8,349,649) (13,451,995) (6,289,080) (6,927,675)
Non-operating income (expense):
Interest income.................. 453,380 561,625 465,168 191,138 373,642
Interest expense................. (58,406) (128,140) (206,005) (74,531) (118,923)
Other............................ 4,121 22,207 (3,414)
----------- ------------ ------------ ----------- ------------
Loss before provision for income
taxes.......................... (6,529,018) (7,916,164) (13,170,625) (6,172,473) (6,676,370)
Provision for income taxes......... 823 800 800 800 800
----------- ------------ ------------ ----------- ------------
Net loss......................... $(6,529,841) $ (7,916,964) $(13,171,425) $(6,173,273) $ (6,677,170)
=========== ============ ============ =========== ============
Net loss applicable to common
stockholders................... $(9,041,365) $(10,828,454) $(18,022,393) $(8,372,112) $ (9,786,816)
=========== ============ ============ =========== ============
Net loss per common share:
Basic and diluted.............. $ (3.16) $ (3.75) $ (6.12) $ (2.87) $ (3.25)
=========== ============ ============ =========== ============
Pro forma basic and diluted
(unaudited).................. $ (1.21) $ (.54)
============ ============
Weighted-average shares
outstanding used in computing
net loss per common share:
Basic and diluted.............. 2,862,365 2,889,257 2,943,113 2,920,951 3,012,640

Pro forma basic and diluted
(unaudited).................. 10,914,836 12,420,488
</TABLE>

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

F-5
<PAGE> 72

MASIMO CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MARCH 31, 1998, THE NINE MONTHS ENDED DECEMBER 31, 1998,
THE YEAR ENDED DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN COMMON STOCK DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL SUBSCRIBED COMPENSATION DEFICIT TOTAL
--------- ------ ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997.... 2,831,998 $2,832 $ -- $ -- $(146,723) $(11,924,535) $(12,068,426)
Stock options exercised...... 47,150 47 26,333 26,380
Amortization of deferred
compensation................ 44,375 44,375
Reversal of deferred
compensation for stock
options canceled............ 10,720 (10,720) --
Accretion of redemption value
on redeemable preferred
stock....................... (26,333) (2,485,191) (2,511,524)
Net loss..................... (6,529,841) (6,529,841)
--------- ------ --------- ------- --------- ------------ ------------
BALANCE AT MARCH 31, 1998.... 2,879,148 2,879 -- -- (91,628) (20,950,287) (21,039,036)
Spin-off of Masimo
Laboratories, Inc. ......... (169,866) (169,866)
Stock options exercised...... 28,200 28 25,522 25,550
Amortization of deferred
compensation................ 27,984 27,984
Reversal of deferred
compensation for stock
options canceled............ 19,863 (19,863) --
Accretion of redemption value
on redeemable preferred
stock....................... (25,522) (2,885,968) (2,911,490)
Net loss..................... (7,916,964) (7,916,964)
--------- ------ --------- ------- --------- ------------ ------------
BALANCE AT DECEMBER 31,
1998........................ 2,907,348 2,907 -- -- (43,781) (31,942,948) (31,983,822)
Stock options exercised...... 62,400 62 47,598 47,660
Common stock
issued/subscribed in
exchange for legal
services.................... 14,578 15 75,217 40,898 116,130
Deferred compensation related
to stock option grants in
1999........................ 605,175 (605,175) --
Amortization of deferred
compensation................ 149,753 149,753
Compensation related to stock
option grants to consultants
in 1999..................... 35,323 35,323
Accretion of redemption value
on redeemable preferred
stock....................... (763,313) (4,087,655) (4,850,968)
Net loss..................... (13,171,425) (13,171,425)
--------- ------ --------- ------- --------- ------------ ------------
BALANCE AT DECEMBER 31,
1999........................ 2,984,326 2,984 -- 40,898 (499,203) (49,202,028) (49,657,349)
Stock options exercised*..... 41,750 42 85,308 85,350
Common stock subscribed in
exchange for legal
services*................... 12,097 12 84,267 2,533 86,812
Deferred compensation related
to stock option grants in
2000*....................... 115,696 (115,696) --
Amortization of deferred
compensation*............... 88,012 88,012
Compensation related to stock
option grants to
consultants*................ 96,054 96,054
Bonus options granted*....... 113,472 113,472
Accretion of redemption value
on redeemable preferred
stock*...................... (494,797) (2,614,849) (3,109,646)
Net loss*.................... (6,677,170) (6,677,170)
--------- ------ --------- ------- --------- ------------ ------------
BALANCE AT JUNE 30, 2000
(UNAUDITED)................. 3,038,173 $3,038 $ -- $43,431 $(526,887) $(58,494,047) $(58,974,465)
========= ====== ========= ======= ========= ============ ============
</TABLE>

------------
* unaudited

The accompanying notes are an integral part of these financial statements

F-6
<PAGE> 73

MASIMO CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, -------------------------
1998 1998 1999 1999 2000
----------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $(6,529,841) $(7,916,964) $(13,171,425) $(6,173,273) $(6,677,170)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization.... 426,483 519,347 1,565,133 470,859 661,419
Compensation related to stock
options granted................ 44,375 27,984 185,076 21,448 184,066
(Gain) loss on disposal of fixed
assets......................... (4,121) 77,931 77,931 84,346
Gain on insurance recovery....... (22,207)
Provision for doubtful
accounts....................... 20,000 203,900 29,363 11,701 16,848
Provision for inventory.......... 130,000 239,311 521,677 69,705 60,000
Stock issued/subscribed for legal
services....................... 116,130 56,846 86,812
Changes in operating assets and
liabilities:
Accounts receivable............ (139,878) (229,532) (1,018,062) (358,490) (1,130,749)
Inventories.................... (1,136,866) (992,958) (2,128,709) (733,850) (992,051)
Other assets................... (340,877) (111,802) 160,418 50,550 (494,813)
Accounts payable............... 144,821 110,713 675,142 626,890 574,136
Accrued liabilities............ 274,621 290,808 10,097 88,679 653,261
Deferred revenue............... 138,750 80,952 195,711 (14,226) 42,918
----------- ----------- ------------ ----------- -----------
Net cash used by operating
activities................ (6,972,533) (7,778,241) (12,803,725) (5,805,230) (6,930,977)
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Cash disbursed in Masimo
Laboratories, Inc. spin-off...... (18,223)
Proceeds from insurance recovery... 22,207
Proceeds from disposal of fixed
assets........................... 6,758
Purchases of fixed assets.......... (2,016,956) (837,661) (1,821,565) (1,158,143) (819,146)
Increase in intangible assets...... (310,179) (147,078) (228,024) (130,785) (147,432)
----------- ----------- ------------ ----------- -----------
Net cash used by investing
activities................ (2,320,377) (1,002,962) (2,027,382) (1,288,928) (966,578)
----------- ----------- ------------ ----------- -----------
</TABLE>

F-7
<PAGE> 74

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30,
MARCH 31, DECEMBER 31, DECEMBER 31, -------------------------
1998 1998 1999 1999 2000
----------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of preferred
stock, net of offering costs..... 17,040,000 299,997 16,730,728 9,650,000
Proceeds for assistance in
facilitating Series C stock
resale........................... 2,740,349
Proceeds from issuance of common
stock............................ 23,880 23,050 34,160 8,520 73,350
Proceeds from issuance of notes
payable.......................... 1,632,507 117,493 1,418,452 1,175,018
Principal payments of notes
payable.......................... (291,667) (437,500) (218,750) (396,056)
----------- ----------- ------------ ----------- -----------
Net cash provided by
financing activities...... 18,696,387 2,889,222 17,745,840 964,788 9,327,294
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in
cash and cash
equivalents............... 9,403,477 (5,891,981) 2,914,733 (6,129,370) 1,429,739
Cash and cash equivalents at
beginning of period................ 8,084,925 17,488,402 11,596,421 11,596,421 14,511,154
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period............................. $17,488,402 $11,596,421 $ 14,511,154 $ 5,467,051 $15,940,893
=========== =========== ============ =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest......................... $ 58,406 $ 127,835 $ 205,288 $ 74,531 $ 118,923
Taxes............................ $ 823 $ 800 $ 800 $ 800 $ 800
Noncash investing and financing
activities:
Accretion of redemption value of
redeemable preferred stock..... $ 2,511,524 $ 2,911,490 $ 4,850,968 $ 2,198,839 $ 3,109,646
Reversal of deferred compensation
for stock options canceled..... $ 10,720 $ 19,863
Deferred compensation for stock
options granted................ $ 605,175 $ 115,696
Assets transferred in Masimo
Laboratories, Inc. spin-off,
net of cash.................... $ 151,643
Asset acquisition with issuance
of Series F Preferred Stock.... $ 500,000
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 75

MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF THE COMPANY:

In May 1989, Masimo Corporation ("Masimo" or the "Company") was
incorporated in California, then reincorporated in Delaware in May 1996, to
design, develop and license advanced medical technology for the noninvasive
monitoring of certain physiological parameters. The Company's first products,
based on its proprietary digital signal processing and sensor technology, are
designed to improve the effectiveness of pulse oximetry by overcoming the
inability of current monitors to precisely measure arterial blood oxygen
saturation levels in the presence of certain "noise" interference and low
perfusion. The Company is designing and developing monitoring instruments for a
variety of other applications, including fetal oximetry and Sudden Infant Death
Syndrome monitoring. Masimo licenses its products to companies with existing
installed customer bases, permitting the Company to leverage the sales and
distribution channels of each of its customers. In late 1999, the Company began
allocating financial resources to develop its own sales force to work in
conjunction with its customers' sales forces. The Company is currently working
with several of its customers to incorporate Masimo's technology into certain of
their products.

During 1998, the Company changed its fiscal year end from March 31 to
December 31. Accordingly, a nine-month period from April 1, 1998 to December 31,
1998 is reflected in the accompanying financial statements.

In April 1998, the Company completed a spin-off of its non-vital signs
monitoring applications by forming a new Delaware corporation, Masimo
Laboratories, Inc. ("Masimo Labs"), transferring certain fixed assets, patents,
and cash valued at $169,866 (which approximated net book value), and
distributing Masimo Labs common stock, through a stock dividend, to Masimo
Corporation stockholders on a share for share basis. After the transaction, the
companies entered into a cross-licensing agreement whereby the Company agreed to
fund research and development conducted by Masimo Labs for a period of up to two
years in an amount not to exceed $2,000,000 in exchange for certain licensing
rights of Masimo Labs technologies. On a monthly basis, the Company reimburses
Masimo Labs for its cash expenditures and charges it an allocation of
engineering labor, facility, administrative, and equipment related costs paid by
Masimo on behalf of Masimo Labs. The Company expenses all such costs and
allocations as research and development as incurred, except for capital
equipment, which are owned by Masimo and are depreciated over their useful lives
with the related depreciation being charged to Masimo Labs as rental expense and
included in the monthly allocation. Such expenses included in research and
development for the nine months ended December 31, 1998 and the year ended
December 31, 1999 approximated $169,000 and $248,000, respectively. At December
31, 1999, the Company had approximately $1,583,000 remaining under this funding
commitment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash And Cash Equivalents:

For purposes of the balance sheet and statement of cash flows, the Company
considers all highly liquid investments that are readily convertible into known
amounts of cash and have a maturity of three months or less when acquired to be
cash equivalents. At December 31, 1998 and 1999, management believes that the
carrying amount of cash equivalents approximates fair value due to the type and
short maturity of these financial instruments.

F-9
<PAGE> 76
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined
using a standard cost method, which approximates FIFO (first in, first out).

Fixed Assets:

Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets, which range from
three to seven years, or over the lesser of the term of the lease or the
estimated useful life of the asset for assets under capital lease. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the improvements. Normal repairs and maintenance are
expensed as incurred whereas significant improvements that materially increase
values or extend useful lives are capitalized and depreciated over the remaining
estimated useful lives of the related assets. Upon sale or retirement of
depreciable assets, the related cost and accumulated depreciation or
amortization are removed from the accounts. Any gain or loss on the sale or
retirement is recognized in current operations.

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of the asset's carrying amount to
future net undiscounted cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the asset.

Intangible Assets:

Intangible assets consist of patents and trademarks. Costs related to
patents and trademarks, which include legal and application fees, are
capitalized and amortized over their estimated useful lives using the
straight-line method. Patents and trademarks are amortized over 10 and 17 years,
respectively, which commences once final approval of the patent or trademark has
been obtained. The Company continually evaluates the amortization period and
carrying basis of patents and trademarks to determine whether any events or
circumstances warrant a revised estimated useful life or reduction in value.
Capitalized application costs are charged to operations when it is determined
that the patent or trademark will not be obtained or is abandoned.

Deferred Revenue:

Deferred revenue consists of license fees received in connection with
certain licensing agreements. License fees are amortized over the term of the
respective agreements using the straight-line method.

Income Taxes:

In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the

F-10
<PAGE> 77
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

amount expected to be realized. The provision for income taxes represents the
tax payable for the period and the change during the period in deferred tax
assets and liabilities.

Management's Estimates:

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

Accounting For Employee Stock Options:

In conformity with SFAS No. 123 "Accounting for Stock-Based Compensation,"
the Company has adopted the disclosure-only provisions of SFAS No. 123 and
continues to follow Accounting Principles Board Opinion No. 25 for measurement
and recognition of employee stock-based transactions.

Fair Value of Financial Instruments:

The estimated fair market values of the Company's financial instruments,
which include accounts receivable, accounts payable, and bank notes payable,
approximate their carrying values due to their short maturities and/or market
rates of interest.

Revenue Recognition:

The Company recognizes revenue from product sales at the time of shipment.
The Company's products are under warranty against defects in material and
workmanship for periods ranging from three to eighteen months. The Company
provides for the estimated cost of warranty at the time of product shipment. The
accrued liability for estimated warranty cost is included in accrued liabilities
in the accompanying balance sheets. License fees are recognized ratably over the
terms of the related agreements.

Advertising Costs:

Advertising costs are expensed as incurred. These costs are included in
selling, general and administrative expense in the statements of operations.
Advertising costs for the year ended March 31, 1998, the nine months ended
December 31, 1998, and the year ended December 31, 1999 were approximately
$13,000, $780,000, and $1,660,000, respectively.

Research And Development:

Research and development is expensed as incurred and includes personnel
costs, materials, depreciation and amortization on associated tangible and
intangible assets and an allocation of facility costs, all of which are directly
related to research and development activities. As of December 31, 1999, no
research and development activities had been funded by third parties.

Comprehensive Income:

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires disclosure of
all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events
F-11
<PAGE> 78
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

and circumstances from non-owner sources. The adoption of SFAS No. 130 did not
have any effect on the Company's financial statements, as there were no elements
of comprehensive income impacting the Company.

Reclassifications:

Certain reclassifications have been made in the prior period financial
statements to conform to the 1999 presentation.

Net Loss Applicable to Common Stockholders:

Net loss applicable to common stockholders is net loss increased by
accreted additions, primarily for cumulative but undeclared and unpaid
dividends, to the carrying amount of mandatorily redeemable preferred stock
during the respective periods.

Net Loss Per Common Share:

The Company follows SFAS No. 128, "Earnings per Share." Basic net loss per
common share represents net loss applicable to common stockholders divided by
the weighted average number of common shares outstanding. Diluted net loss per
common share is the same as basic net loss per common share as the inclusion of
common stock issuable pursuant to the exercise of stock options, warrants and
the conversion of convertible preferred stock would be antidilutive. Pro forma
net loss per common share includes the weighted average common shares
outstanding and reflects the automatic conversion of all convertible preferred
stock into common stock upon completion of the Company's initial public offering
using the "as-if-converted" method. Pro forma net loss per common share assumes
no accretion as all shares of preferred stock are assumed to have converted on
January 1, 1999, or date of issuance, if later.

No potential common shares were included in the diluted per share amounts
for any periods presented as the effect would have been anti-dilutive. For the
year ended March 31, 1998, the nine months ended December 31, 1998, the year
ended December 31, 1999, and the six month periods ended June 30, 1999 and 2000,
potentially dilutive securities consisted of options, preferred stock and
warrants and resulted in potential common shares of 8,617,083, 8,950,316,
10,919,633, 9,073,716 (unaudited) and 12,175,344 (unaudited), respectively.

Unaudited Pro Forma Presentation

Under the terms of the Company's restated certificate of incorporation, all
outstanding preferred stock will be converted automatically into shares of
common stock upon the closing of the Company's initial public offering. Also,
upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 60,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated. The unaudited pro forma stockholders' equity information at June 30,
2000 and the unaudited pro forma net loss per common share information for the
year ended 1999 and for the six months ended June 30, 2000 reflects the
conversion of all series of preferred stock outstanding at June 30 into
10,082,174 shares of common stock and 454,546 shares of Series F Preferred Stock
issued in September 2000 at $11 per share with estimated net proceeds of $4.9
million as if the issuance and subsequent conversion had occurred on January 1,
1999, or date of issuance, if later.

Unaudited Interim Financial Information

The interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited and has been prepared on the
same basis as the audited financial statements. In the opinion of management,
such unaudited information includes all
F-12
<PAGE> 79
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the interim information. Operating results for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000.

3. INVENTORY:

Inventory consists of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.......................... $1,391,815 $2,496,798 $3,370,989
Work in-process........................ 398,978 429,455 981,871
Finished goods......................... 287,382 1,195,703 693,550
Valuation allowance.................... (105,881) (542,630) (535,033)
---------- ---------- ----------
$1,972,294 $3,579,326 $4,511,377
========== ========== ==========
</TABLE>

4. FIXED ASSETS:

Fixed assets consist of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............ $ 1,884,622 $ 2,797,604 $ 3,276,961
Computer equipment................. 1,123,483 1,123,127 1,251,586
Furniture and office equipment..... 299,569 338,847 346,803
Leasehold improvements............. 368,873 394,661 394,661
Demonstration units................ 192,369 802,627 883,501
----------- ----------- -----------
3,868,916 5,456,866 6,153,512
Less, Accumulated depreciation and
amortization..................... (1,308,255) (2,052,985) (2,641,021)
Add, Construction-in-progress...... 142,896 20,026 14,868
----------- ----------- -----------
$ 2,703,557 $ 3,423,907 $ 3,527,359
=========== =========== ===========
</TABLE>

5. INTANGIBLE ASSETS:

Intangible assets consist of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Patents................................ $756,670 $ 938,425 $1,058,229
Trademarks............................. 78,081 124,350 151,978
-------- ---------- ----------
834,751 1,062,775 1,210,207
Less, Accumulated amortization......... (72,876) (116,125) (146,195)
-------- ---------- ----------
$761,875 $ 946,650 $1,064,012
======== ========== ==========
</TABLE>

F-13
<PAGE> 80
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. ACCRUED LIABILITIES:

Accrued liabilities consist of the following as of:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll costs.......................... $ 496,445 $ 545,328 $ 767,482
Warranty reserve....................... 275,288 202,882 240,820
Legal fees............................. -- 122,557 191,380
Commissions............................ -- -- 300,000
Other.................................. 237,963 149,026 59,900
---------- ---------- ----------
$1,009,696 $1,019,793 $1,559,582
========== ========== ==========
</TABLE>

7. LONG-TERM DEBT

During May 1997, the Company entered into a Loan and Security Agreement
(the "Agreement") with Comerica Bank (the "Bank") pursuant to which it could
borrow up to a maximum of $2,285,000. The Agreement included an equipment line
of up to a maximum of $1,750,000. The equipment line expired on April 30, 1998
at which time the amounts outstanding were converted to an installment note,
payable in 48 equal monthly principal payments, plus interest at the Bank's Base
Rate plus 1.5% (9.25% and 10% at December 31, 1998 and 1999, respectively). As
of December 31, 1998 and 1999, $1,458,333 and $1,020,833, respectively, were
outstanding under the installment note. The Agreement also included a working
capital line of up to a maximum of $250,000. The working capital line was never
used and expired on July 15, 1998. The Agreement further included a letter of
credit facility of up to a maximum of $285,000, of which $265,582 had been
issued but not drawn upon as of December 31, 1998. No amounts were ever drawn
and the letter of credit facility expired on May 2, 1999. In connection with
entering into the Agreement, the Company issued to the Bank a warrant to
purchase 10,000 shares of the Company's common stock at an exercise price of
$3.00 per share. The fair value of the warrant was nominal at its date of
issuance. The warrant is exercisable at any time through its expiration on May
1, 2004.

In April 1999, the Company entered into an amended Loan and Security
Agreement with Comerica Bank that included an additional equipment line pursuant
to which the Company could borrow up to a maximum of $2,500,000 for equipment
purchases. Interest at the prime rate plus 1.25% was payable monthly on
advances. The equipment line draw period expired on December 31, 1999, at which
time the amounts outstanding were to be converted to an installment note,
payable in 48 equal monthly principal payments, plus interest at the prime rate
plus 1.25% (9.75% at December 31, 1999). As of December 31, 1999, $1,418,452 was
outstanding on the equipment line prior to its conversion to an installment note
in early January 2000. The entire Agreement, as amended, is collateralized by
substantially all of the assets of the Company, requires the Company to maintain
certain financial ratios and covenants and prohibits the declaration or payment
of cash dividends by the Company.

In July 1999, the Company opened a standby letter of credit with Comerica
Bank for up to $50,000 in connection with implementing a Corporate American
Express Program. The letter of credit has never been drawn upon and expires on
July 15, 2000.

F-14
<PAGE> 81
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

At December 31, 1999, Principal payments required on both installment notes
for each of the years ending December 31 are as follows:

8. REDEEMABLE PREFERRED STOCK:

Series A, Series B, Series C, Series D, Series E, and Series F

Between December 1997 and April 1998, the Company sold 2,054,516 shares of
Series E Preferred Stock at a price of $9 per share raising proceeds of
$17,339,997, net of offering costs of $1,150,647.

During October 1998, one of the Series C Preferred Stock shareholders sold
its investment in Masimo Corporation to an outside party. As a result of this
transaction, the Company received $2,740,349 in cash, without issuing any new
shares, in exchange for its assistance in facilitating the transaction. Such
amount has been included in Series C Preferred Stock.

In September and October 1999, the Company sold 1,633,512 shares of Series
F Preferred Stock at a price of $11 per share raising proceeds of $16,730,728,
net of offering costs of $1,237,904. In December 1999, the Company issued 45,455
shares of Series F Preferred Stock valued at $11 per share in connection with an
asset acquisition.

Dividends

Holders of Series A Preferred Stock are entitled to receive annual
non-cumulative preferred cash dividends on each outstanding share at a rate of
$.09 per share if declared by the Board of Directors. Holders of Series B
Preferred Stock are entitled to receive annual cumulative (from November 21,
1992) preferred cash dividends on each outstanding share at a rate of $.144 per
share, increasing to $.156 per share on and after December 21, 1993, upon
declaration by the Company's Board of Directors. Holders of Series C, Series D,
Series E and Series F Preferred Stock are entitled to receive annual cumulative
preferred cash dividends on each outstanding share at a rate of $.2934,
increasing to $.4635 after September 18, 1998, $.63, $.81, and $.99 per share,
respectively, upon declaration by the Company's Board of Directors. As of
December 31, 1999, no dividends have been declared. Total dividends in arrears
on Series B Preferred Stock at December 31, 1998 and 1999 were $993,222 and
$1,168,722, respectively. Total dividends in arrears on Series C Preferred Stock
at December 31, 1998 and 1999 were $2,228,435 and $3,085,093, respectively.
Total dividends in arrears on Series D Preferred Stock at December 31, 1998 and
1999 were $2,232,564 and $3,177,564, respectively. Total dividends in arrears on
Series E Preferred Stock at December 31, 1998 and 1999 were $1,648,828 and
$3,312,986, respectively. Total dividends in arrears on Series F Preferred Stock
at December 31, 1999 were $466,633.

Voting

The holders of Series A Preferred Stock and Series B Preferred Stock,
voting as one class, are entitled to elect one director. The holders of Series C
Preferred Stock, voting as one class, are entitled to elect one director. The
holders of preferred stock and common stock, voting as

F-15
<PAGE> 82
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

one class, elect the remaining directors; however, the holders of Series C and
Series E Preferred Stock have agreed to vote for the nominees designated by the
majority of the outstanding common stock. On all other matters, all of the
shares of Series A, Series B, Series C, Series D, Series E, and Series F
Preferred Stock will be voted with the shares of common stock as one class.

Liquidation

In the event of voluntary or involuntary liquidation of the Company,
holders of Series F Preferred Stock will be entitled to receive, prior to any
distribution to common and Series A, Series B, Series C, Series D and Series E
Preferred stockholders, an amount equal to $11.00 per Series F Preferred Share,
plus all unpaid, accumulated cumulative dividends. Holders of Series C, Series
D, and Series E Preferred Stock will be entitled to receive, as one class, prior
to any distribution to common and Series A and Series B Preferred stockholders,
an amount equal to $5.15 per Series C Preferred Share, $7.00 per Series D
Preferred Share, and $9.00 per Series E Preferred Share, plus all unpaid,
accumulated cumulative dividends. Holders of Series B Preferred Stock will be
entitled to receive, prior to any distribution to common and Series A Preferred
stockholders, an amount equal to $1.73 per Series B Preferred Share, plus all
unpaid, accumulated cumulative dividends. Holders of Series A Preferred Stock
will be entitled to receive, prior to any distribution to common stockholders,
an amount equal to $1.10 per Series A Preferred Share plus an amount equal to 9%
per annum, cumulative from the date the first Series A Preferred Share was
issued. A consolidation or merger of the Company with or into any other
corporation or corporations, or the sale, transfer or other disposition of all
or substantially all of the assets of the Company in which more than 50% of the
voting power of the Company (a "Sale Transaction") is disposed of shall be
deemed to be a liquidation, dissolution or winding up of the Company; provided,
however, such liquidation preference shall not apply to any Sale Transaction for
a total value greater than (i) $150 million with respect to Series F, (ii) $100
million with respect to Series E, (iii) $75 million with respect to Series D,
(iv) $40 million with respect to Series C and (v) $20 million with respect to
Series B.

Conversion

Each share of Series A, Series B, Series C, Series D, Series E, and Series
F Preferred Stock is convertible, at the option of the holder or automatically
at the closing of an initial public offering, into common stock at an initial
conversion rate of one-to-one. The conversion rate is subject to adjustment upon
the occurrence of certain equity transactions, as defined.

Mandatory Redemption

On December 10, 2003, 2004 and 2005, the Company will be obligated to
redeem one-third, respectively, of any outstanding Series B, Series C, Series D,
Series E, and Series F Preferred Stock at a per share redemption price of $1.73,
$5.15, $7.00, $9.00, and $11.00, respectively, plus any accrued and unpaid
dividends. The Company records the incremental increase in per share redemption
price through periodic additions to Series B, Series C, Series D, Series E, and
Series F Preferred Stock and charges to additional paid in capital-common stock
and, for amounts in excess of additional paid in capital-common stock, to the
accumulated deficit over the period from issuance to December 10, 2003.

F-16
<PAGE> 83
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. COMMON STOCK:

Certain stockholders, both common and preferred, have preemptive rights to
purchase any of the Company's capital stock except in the event of an initial
public offering. No cash dividends shall be paid to common stockholders unless
an equal dividend is paid to all preferred stockholders in an amount for each
share of preferred stock equal to the aggregate amount of such dividend for all
common stock into which each such share of preferred stock could then be
converted. The holders of common stock, voting as one class, are entitled to
elect two directors.

At December 31, 1999, the Company has reserved 9,173,083 shares of common
stock for issuance upon conversion of the Series A, Series B, Series C, Series
D, Series E and Series F Preferred Stock.

10. STOCK OPTION PLAN:

The Company's 1989 Incentive Stock Option, Nonqualified Stock Option, and
Restricted Stock Purchase Plan (the "1989 Plan") provides for the issuance of
options to purchase up to 1,000,000 shares of the Company's common stock to
eligible officers, key employees, non-employee directors and consultants of the
Company at prices not less than the fair market value of the common stock on the
date the option is granted, as determined by the Board of Directors. The options
vest over 5 years, unless otherwise provided, and expire five or ten years from
the date of grant. In May 1996, the Company adopted the 1996 Incentive Stock
Option, Nonqualified Stock Option, and Restricted Stock Purchase Plan (the "1996
Plan"), which provides for the issuance of options to purchase up to 200,000
shares of the Company's common stock, with basically the same terms as the 1989
Plan. The Board of Directors approved increases in the number of shares
available for grant under the 1996 Plan to 1,200,000 shares in December 1997 and
to 1,400,000 shares in August 1999.

The Company may terminate the 1996 Plan at any time. The 1989 Plan
terminated on September 26, 1999, however, the Board of Directors voted in
October 1999 to amend the 1996 Plan to increase the number of shares authorized
for issuance to include the unissued options from the 1989 Plan prior to its
expiration, as well as any additional options that would become available
through future forfeitures. If not terminated sooner, the 1996 Plan terminates
on May 4, 2006.

F-17
<PAGE> 84
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The number and weighted average exercise price of options issued and
outstanding under the 1989 and 1996 Plans, at exercise prices of between $.60
and $8.00 per share, are as follows:

<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
YEAR ENDED AVERAGE ENDED AVERAGE YEAR ENDED AVERAGE ENDED AVERAGE
MARCH 31, EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE JUNE 30, EXERCISE
1998 PRICE 1998 PRICE 1999 PRICE 2000 PRICE
---------- -------- ------------ -------- ------------ -------- ------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period...... 705,700 $2.25 1,146,300 $3.12 1,446,200 $3.42 1,736,550 $3.78
Granted (exercise price
equals fair value)..... 556,850 3.99 455,950 4.00 28,500 4.00 199,690 7.33
Granted (exercise price
less than fair
value)................. 452,900 4.59 231,930 5.95
Canceled................. (69,100) 2.93 (127,850) 3.29 (128,650) 4.13 (43,250) 5.18
Exercised................ (47,150) 0.56 (28,200) .91 (62,400) .76 (41,750) 2.04
--------- --------- --------- ---------
Options outstanding, end of
period................... 1,146,300 $3.12 1,446,200 $3.42 1,736,550 $3.78 2,083,170 $4.37
========= ========= ========= =========
Options exercisable, end of
period................... 216,966 $2.03 295,426 $2.43 479,454 $3.09 697,928 $3.62
========= ========= ========= =========
</TABLE>

The difference between the exercise price and the fair market value of the
options at the dates of grant is accounted for as unearned compensation and
amortized to expense over the related vesting period. During the year ended
March 31, 1998, $10,720 of unearned compensation related to grants in previous
years was reversed due to the cancellation of certain unvested options and
$44,375 was amortized to expense. During the nine months ended December 31,
1998, $19,863 of unearned compensation related to grants in previous fiscal
years was reversed due to the cancellation of certain unvested options and
$27,984 was amortized to expense. During the year ended December 31, 1999,
$605,175 of unearned compensation related to grants in 1999 was recorded and
$149,753 was amortized to expense. In addition, $35,323 of compensation related
to option grants in 1999 to consultants was expensed. Options granted to
consultants in 1999 were valued at the date of grant using the Black-Scholes
model with a dividend yield of 0%, an expected volatility of 67%, an average
risk-free rate of 6.086%, and an expected life of 7 years. Unrecorded deferred
compensation related to these options to consultants of approximately $139,000
at December 31, 1999 will be recorded as compensation expense over the vesting
terms of the related options.

For options granted with an exercise price less than fair value, the
weighted average per share fair value of options granted during 1999 and for the
six months ended June 30, 2000 were $6.09 and $6.94, respectively.

F-18
<PAGE> 85
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant date for awards during the year ended March 31,
1998, the nine months ended December 31, 1998, and the year ended December 31,
1999 consistent with the provisions of SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS YEAR ENDED
MARCH 31, ENDED DECEMBER 31, DECEMBER 31,
1998 1998 1999
----------- ------------------ ------------
<S> <C> <C> <C>
Net loss
As reported......................... $(6,529,841) $ (7,916,964) $(13,171,425)
=========== ============ ============
Pro forma for SFAS 123.............. $(6,672,210) $ (8,220,878) $(13,678,749)
=========== ============ ============
Net loss applicable to common
stockholders
As reported......................... $(9,041,365) $(10,828,454) $(18,022,393)
=========== ============ ============
Pro forma for SFAS 123.............. $(9,183,734) $(11,132,368) $(18,529,717)
=========== ============ ============
Basic and diluted net loss per common
share
As reported......................... $ (3.16) $ (3.75) $ (6.12)
=========== ============ ============
Pro forma for SFAS 123.............. $ (3.21) $ (3.85) $ (6.30)
=========== ============ ============
Pro forma basic and diluted net loss
per common share (unaudited)
As reported......................... $ (1.21)
============
Pro forma for SFAS 123.............. $ (1.25)
============
</TABLE>

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

<TABLE>
<S> <C>
Year ended March 31, 1998: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 5.782%,
and expected life of 7 years.
Nine months ended December 31, 1998: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 5.196%,
and expected life of 7 years.
Year ended December 31, 1999: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 6.086%,
and expected life of 7 years.
</TABLE>

Because the determination of the fair value of all options granted includes
the factors described in the preceding paragraph, and because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects of net income or loss for future years.

F-19
<PAGE> 86
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The schedule below reflects the number and weighted average exercise price
of outstanding and exercisable options as of December 31, 1999 segregated by
exercise price ranges:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE REMAINING LIFE OF EXERCISE
EXERCISE PRICE OPTIONS PRICE (YRS) OPTIONS PRICE
-------------- --------- -------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.60................. 58,850 $0.60 1.02 43,500 $0.60
$3.00................. 426,400 $3.00 6.59 303,860 $3.00
$4.00................. 1,005,850 $4.00 8.13 117,094 $4.00
$5.00................. 245,450 $5.00 9.82 15,000 $5.00
--------- -------
1,736,550 $3.78 7.75 479,454 $3.09
========= =======
</TABLE>

11. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

The Company leases its facility and certain office equipment under
operating lease agreements expiring at various dates through March 2003. The
facility lease is subject to price escalations tied to the consumer price index.
Future minimum lease payments under operating leases for each of the years
ending December 31 are as follows:

Rental expense related to operating leases for the year ended March 31,
1998, the nine months ended December 31, 1998, and the year ended December 31,
1999 was $226,068, $186,066 and $255,080 respectively.

Employee Benefit Plan:

In fiscal 1996, the Company adopted the Masimo Retirement Savings Plan (the
"Plan") which is a 401(k) plan covering all of the Company's full-time employees
who meet certain eligibility requirements. The Company may contribute to the
Plan on a discretionary basis. As of December 31, 1999, the Company has never
contributed to the Plan.

Employment Agreements:

In May 1996, the Company revised existing employment agreements with two of
its officers. These agreements initially provided for aggregate annual base
salaries of $295,000, plus other benefits, with annual increases at the
discretion of the Board of Directors or its Compensation Committee. As of
December 31, 1999, aggregate annual base salaries were $392,000. The agreements
provide for annual bonuses based on the Company's attainment of certain
operating income. The agreements had an initial term of three years, with
automatic renewal, and may be terminated by the Company with or without cause as
defined in the agreements. If either of these agreements is terminated by the
Company without cause, the Company's severance liability is two years of base
salary. If such termination occurs on or after

F-20
<PAGE> 87
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1998, the Company shall immediately vest all of the individual's then
outstanding stock options and issue such related stock to the individual as
additional compensation.

Concentrations of Risk:

The Company is exposed to credit loss for the amount of cash deposits with
financial institutions in excess of federally-insured limits. The Company
invests its excess cash deposits in government securities and money market cash
portfolios with major financial institutions.

While the Company and its contract manufacturers rely on sole source
suppliers for certain components, steps have been taken to minimize the impact
of a shortage or stoppage of shipments such as maintaining excess inventory and
designing software that may be easily modified to use a different component.

Four customers represent the majority of product sales for the year ended
March 31, 1998. Four customers represent 87% of net accounts receivable at
December 31, 1998 and three customers represent 61% of product sales for the
nine months ended December 31, 1998. Three customers represent 60% of net
accounts receivable at December 31, 1999 and 52% of product sales for the year
ended December 31, 1999.

Litigation:

In October 1999, the Company filed a patent infringement lawsuit against
one of its competitors. The complaint seeks a preliminary and permanent
injunction prohibiting the sale of the infringing products as well as damages,
costs, expenses, legal fees, and treble damages for willful infringement. As the
lawsuit is in the early stages, no assurances can be given that the lawsuit will
be successful in limiting or restricting the sale of the competitive products.
If the competitor is allowed to continue to sell its products, such sales could
have a material adverse effect on the Company's future revenue. In response to
this lawsuit, the competitor filed a patent infringement lawsuit against the
Company in November 1999. Management believes that the Company is not violating
any of the competitor's patents. Therefore, the Company intends to vigorously
defend itself with respect to this lawsuit. However, due to the early stage of
the case, no assurances can be given that the Company will be successful in its
defense and an unfavorable outcome would likely have a material adverse effect
on the financial position, results of operations, and cash flows of the Company.

12. SEGMENT INFORMATION AND ENTERPRISE REPORTING

The Company follows SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company operates in one reportable
segment as it has one family of pulse oximetry related products. The Company
does not disaggregate financial information by product or geographically, other
than export sales by region and sales by product, for management purposes.
Substantially all of the Company's assets are located within the U.S. All of the
Company's products are manufactured in the U.S.

F-21
<PAGE> 88
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Product sales by geographic destination and as a percentage of total
product sales is as follows:

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1998 1999 2000
-------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geographic Area by
Destination
Domestic............. $152,158 20% $ 840,090 50% $4,494,588 68% $3,833,987 72%
International........ 601,720 80% 837,877 50% 2,154,548 32% 1,463,807 28%
-------- ---------- ---------- ----------
Total Product Sales.... $753,878 100% $1,677,967 100% $6,649,136 100% $5,297,794 100%
======== === ========== === ========== === ========== ===
</TABLE>

13. INCOME TAXES:

The following table presents the current and deferred provision for income
taxes:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal.................................
State................................... $823 $800 $800
---- ---- ----
823 800 800
Deferred:
Federal.................................
State...................................
---- ---- ----
$823 $800 $800
==== ==== ====
</TABLE>

The temporary differences that give rise to the deferred tax provision
(benefit) consist of:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Property, plant and equipment...... $ (67,089) $ (133,070)
Capitalized start-up costs......... $ 78,088 88,927 39,244
Capitalized research and
development costs................ (724,799) (686,886) (477,837)
Tax credits........................ (304,517) (319,779) (428,839)
Deferred revenue................... (59,441) (34,679) (82,209)
Acquired intangibles............... (208,750)
Accrued liabilities................ (122,224) (195,149) (81,580)
Other.............................. (30,451) (26,218) (23,856)
Net operating losses............... (1,701,203) (2,190,490) (4,045,498)
Change in valuation allowance...... 2,864,547 3,431,363 5,442,395
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>

F-22
<PAGE> 89
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:

<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Statutory regular federal income tax
rate..................................... (34.0)% (34.0)% (34.0)%
Change in federal valuation allowance...... 36.2 35.7 34.5
Other...................................... (2.2) (1.7) (0.5)
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>

The components of the deferred tax asset are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Property, plant and equipment..................... $ 106,925 $ 239,995
Capitalized start-up costs........................ 39,244
Capitalized research and development costs........ 3,519,692 3,997,529
Tax credits....................................... 1,045,144 1,473,983
Deferred revenue.................................. 94,120 176,329
Acquired intangibles.............................. 208,750
Net operating losses.............................. 5,681,309 9,726,807
Accrued liabilities............................... 355,837 437,417
Other............................................. 39,198 63,054
------------ ------------
10,881,469 16,323,864
Valuation allowance............................... (10,881,469) (16,323,864)
------------ ------------
$ -- $ --
============ ============
</TABLE>

As of December 31, 1999, the Company has federal and state research and
experimentation credit carryforwards of approximately $716,000 and $563,000,
respectively. These carryforwards expire beginning in 2007 for federal purposes
and carry forward indefinitely for state purposes. In addition, the Company has
state manufacturers' investment tax credit carryforwards of approximately
$195,000 which expire beginning in 2006.

As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $25,335,000 and $12,589,000, respectively,
which expire beginning in 2010 and 2000, respectively.

The utilization of net operating loss and tax credit carryforwards may be
limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.

14. SUBSEQUENT EVENTS (UNAUDITED):

In March 2000, the Board of Directors approved an increase to the number of
shares reserved for issuance under the 1996 Stock Option Plan to 2,400,000
shares.

In May 2000, the Company sold 909,091 shares of Series F Preferred Stock to
one investor at a price of $11 per share raising gross proceeds of $10,000,001.

In September 2000, the Company sold 454,546 shares of Series F Preferred
Stock to one investor at a price of $11 per share raising gross proceeds of
$5,000,000. The Company also

F-23
<PAGE> 90
MASIMO CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

issued 90,909 warrants to purchase common stock at an exercise price of $11 per
share in connection with this transaction.

The Company amended its cross-licensing agreement with Masimo Labs to
extend the funding period from two years to three years and increase the not to
exceed amount to $2,500,000, effective March 2000.

F-24
<PAGE> 91

[RADICAL LOGO]

[THE WORDS "SIGNAL EXTRACTION PULSE OXIMETER"]

[THE WORDS, " RADICAL DELIVERS THE ACCURACY AND RELIABILITY OF MASIMO SET
TECHNOLOGY WITH MULTI-FUNCTIONALITY, EASE OF USE AND A CONVENIENT UPGRADE PATH
FOR EXISTING MONITORS."]

[THE WORDS "RADICAL UPGRADES INSTALLED CONVENTIONAL MONITORS
THE UPGRADE CAPABILITY IS ENABLED BY OUR PATENTED SATSHARE FEATURE. SATSHARE
ENABLES A CONVENTIONAL MONITOR TO UPGRADE TO MASIMO SET TECHNOLOGY THROUGH A
SIMPLE CABLE CONNECTION FROM THE BACK OF RADICAL TO THE SENSOR INPUT PORT OF THE
CONVENTIONAL MONITOR."]

[THE WORD "UPGRADE" AND A PHOTOGRAPH OF A RADICAL UPGRADE TO THE RIGHT OF THE
ABOVE NOTED WORDS]

[THE WORDS "RADICAL IS A STANDALONE PULSE OXIMETER
IN ITS MOST BASIC CONFIGURATION, RADICAL CAN BE USED AS A SINGLE PARAMETER,
STANDALONE PULSE OXIMETER FOR BEDSIDE MONITORING. THE RADICALSCREEN FEATURE
AUTOMATICALLY RECONFIGURES THE DISPLAY FOR A VERTICAL OR HORIZONTAL
ORIENTATION.]

[THE WORD "STANDALONE" AND A PHOTOGRAPH OF A RADICAL STANDALONE UNIT TO THE
RIGHT OF THE ABOVE NOTED WORDS]

[THE WORDS, "RADICAL IS A BATTERY OPERATED HANDHELD PULSE OXIMETER
RADICAL HAS A DETACHABLE MODULE WHICH FUNCTIONS AS A BATTERY OPERATED HANDHELD
PULSE OXIMETER. THE HANDHELD MODULE CAN BE CONNECTED INTO ANY OTHER RADICAL BASE
STATION, WHICH ALLOWS RADICAL TO STAY WITH THE PATIENT, ENABLING CONTINUOUS AND
RELIABLE ARTERIAL OXYGEN SATURATION MONITORING AS PATIENTS ARE TRANSPORTED AND
MOVED WITHIN THE HOSPITAL."]

[THE WORD "HANDHELD" AND A PHOTOGRAPH OF A RADICAL HANDHELD UNIT TO THE RIGHT OF
THE ABOVE NOTED WORDS]
<PAGE> 92

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary............................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements and Industry
Data.............................. 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 29
Management.......................... 41
Certain Transactions................ 51
Principal Stockholders.............. 53
Description of Capital Stock........ 55
Shares Eligible for Future Sale..... 58
Underwriting........................ 60
Legal Matters....................... 62
Experts............................. 62
Where You Can Find More
Information....................... 62
Index to Financial Statements....... F-1
</TABLE>

Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

[MASIMO LOGO]

COMMON STOCK

DEUTSCHE BANC ALEX. BROWN

CHASE H&Q

U.S. BANCORP PIPER JAFFRAY

PRELIMINARY PROSPECTUS

, 2000
<PAGE> 93

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Set forth below are the expenses in connection with the issuance and
distribution of the securities being registered hereby other than the
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission registration fees, the NASD filing fees and
the Nasdaq National Market listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $18,216
Nasdaq National Market listing fee..........................
NASD fee.................................................... 7,400
Legal fees and expenses (other than Blue Sky fees and
expenses).................................................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Accounting fees and expenses................................
Transfer Agent and Registrar fees and expenses..............
Miscellaneous...............................................
-------
Total.................................................. $
=======
</TABLE>

Masimo will bear all of the foregoing fees and expenses.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our certificate of incorporation and bylaws provide a right to
indemnification to the fullest extent permitted by law for expenses, attorney's
fees, damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by any person whether or not the
indemnified liability arises or arose from any threatened, pending or completed
proceeding by or in our right by reason of the fact that such person is or was
serving as a director or officer at our request, as a director, officer,
partner, venturer, proprietor, employee, agent, or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. Our certificate of incorporation and bylaws provide for the
advancement of expenses to an indemnified party upon receipt of an undertaking
by the party to re-pay those amounts if it is finally determined that the
indemnified party is not entitled to indemnification. In addition, we have
entered into indemnification agreements with each of our directors and executive
officers.

Our bylaws authorize us to take steps to ensure that all persons entitled
to the indemnification are properly identified, indemnified, including, if the
board of directors so determines, purchasing and maintaining insurance.

We have entered into indemnification agreements with each of our directors
and officers. Pursuant to the indemnification agreements, we have agreed to
indemnify each director officer, to the maximum extent provided by applicable
law, from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by each director officer in or arising out
of such person's capacity as our director, officer employee and/or agent or any
other corporation of which such person is a director or officer at our request.
In addition, each director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.

To the extent that our board of directors or the stockholders may in the
future wish to limit or real our ability to provide indemnification as set forth
in the certificate of incorporation, such repeal or limitation may not be
effective as to directors and officers who are parties to the

II-1
<PAGE> 94

indemnification agreements, because their rights to full protection would be
contractually assured by the indemnification agreements. We anticipate entering
similar contracts, from time to time, with out future directors.

In addition, the Form of Underwriting Agreement filed as Exhibit 1.1 to
this registration statement provides for indemnification by the underwriters of
us and our officers and directors, and by us of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since January 1, 1997, the Registrant has sold the following securities:

1. In December 1997, January 1998 and April 1998, the Registrant issued and
sold an aggregate of 1,056,737, 964,446, and 33,333 shares of its Series
E Preferred Stock, respectively, in each case to a group of investors at
a purchase price of $9.00 per share.

2. In September and October 1999, the Registrant issued and sold an
aggregate of 1,420,328 and 213,184 shares of its Series F Preferred
Stock, respectively, in each case to a group of investors at a purchase
price of $11 per share.

3. In December 1999, the Registrant issued and sold 45,455 shares of its
Series F Preferred Stock to Vital Insite, Inc. in exchange for certain
assets valued at $500,000.

4. In May 2000, the Registrant issued and sold 909,091 shares of its Series
F Preferred Stock to funds associated with Franklin Templeton at a
purchase price of $11 per share.

5. In September 2000, the Registrant issued and sold 454,546 shares of its
Series F Preferred Stock and warrants to purchase 90,909 shares of its
Common Stock to GE Marquette Medical Systems, Inc. at a purchase price
of $11 per share.

6. Between January 1, 1997 and June 30, 2000, we granted options to
purchase an aggregate of 2,076,020 shares of common stock at exercise
prices ranging from $3.00 to $8.00 per share with a weighted exercise
price of $4.59 per share.

The sales and issuance of common stock made pursuant to the exercise of
stock options granted to our officers, directors and employees as described in
paragraph 6 above were made in reliance on Rule 701 as promulgated under the
Securities Act.

The sales and issuance as described above were made in reliance upon
exemptions from registration under the Securities Act of 1933 in reliance on
Section 4(2) of such act as transactions by an issuer not involving any public
offering. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2 Certificate of Amendment of Certificate of Incorporation, as
currently in effect.
3.3 Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering.
3.4 Amended and Restated Bylaws, as currently in effect.
3.5 Amended and Restated Bylaws to be effective upon the closing
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Arter & Hadden LLP as to legality of securities
being registered.
</TABLE>

II-2
<PAGE> 95

<TABLE>
<S> <C>
10.1+ Purchasing and Licensing Agreement, dated September 9, 1997, between Atom Medical Corporation and
Masimo.
10.2+ Restated Purchasing and Licensing Agreement, dated August 19, 1997, between Datascope Corp. and
Masimo.
10.3+ Purchasing and Licensing Agreement, dated April 17, 1997, between Zoll Medical Corporation and
Masimo.
10.4 Loan and Security Agreement, dated April 9, 1999, between Comerica Bank -- California and Masimo.
10.5 Employment Agreement, dated May 4, 1996, between Joe E. Kiani and Masimo.
10.6 Amendment to Employment Agreement, dated April 2, 1998, between Joe E. Kiani and Masimo.
10.7 Employment Agreement, dated May 4, 1996, between Mohamed Diab and Masimo.
10.8 Amendment to Employment Agreement, dated April 2, 1998, between Mohamed Diab and Masimo.
10.9 Standard Industrial/Commercial Single-Tenant Lease, dated April 25, 1997, between Hoffman Associates
No. 5 and Masimo.
10.10+ Cross-Licensing Agreement, dated May 2, 1998, between Masimo Laboratories and Masimo.
10.11 Amendment to Cross-Licensing Agreement, dated March 20, 2000, between Masimo Laboratories and Masimo.
10.12 Fifth Amended and Restated Registration Rights Agreement, dated September 14, 1999, between Masimo
and the parties on the signature pages thereto.
10.13 Form of Indemnification Agreement to be entered into between Masimo and its officers and directors.
10.14 Incentive Stock Option Nonqualified Stock Option and Restricted Stock Purchase Plan -- 1989.
10.15 Amendment No. 1 to Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan -- 1989.
10.16 Third Amended and Restated 1996 Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan.
10.17 Amendment Number One to Third Amended and Restated 1996 Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan.
10.18 2000 Employee Stock Purchase Plan.
23.1* Consent of Arter & Hadden LLP (included in their opinion filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Knobbe, Martens, Olson & Bear LLP
24.1 Power of Attorney (included in signature page hereto)
27.1 Financial Data Schedules
</TABLE>

---------------
* To be filed by amendment.

+ Confidential treatment has been requested with respect to certain provisions
of this agreement.

II-3
<PAGE> 96

(b) Financial Statement Schedules

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders of
Masimo Corporation

Our audits of the financial statements of Masimo Corporation referred to in
our report dated March 17, 2000 appearing in this registration statement on Form
S-1 also included an audit of the financial statement schedule listed in Item
(16)(b) of this Form S-1. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.

PricewaterhouseCoopers LLP

Costa Mesa, California
March 17, 2000

II-4
<PAGE> 97

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BEGINNING CHARGED TO ENDING
BALANCE EXPENSE DEDUCTIONS BALANCE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1998
Allowance for doubtful accounts....... $ 0 $ 20,000 $ 0 $ 20,000
Inventory valuation allowance......... $ 0 $130,000 $ 0 $130,000

NINE MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts....... $ 20,000 $203,900 $ (3,900) $220,000
Inventory valuation allowance......... $130,000 $239,311 $(263,430) $105,881

YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts....... $220,000 $ 29,363 $(174,991) $ 74,372
Inventory valuation allowance......... $105,881 $521,677 $ (84,928) $542,630
</TABLE>

No other financial statement schedules of Masimo Corporation are included
in Part II of this registration statement because the information required to be
set forth therein is not applicable or is shown in the Financial Statements or
the Notes thereto.

II-5
<PAGE> 98

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Masimo pursuant to the foregoing provisions, or otherwise, Masimo has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Masimo of expenses incurred
or paid by a director, officer or controlling person of Masimo in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder Masimo will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by Masimo pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(2) For purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-6
<PAGE> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
Masimo has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on September 12, 2000.

MASIMO CORPORATION

By: /s/ JOE E. KIANI
------------------------------------
Joe E. Kiani
President, Chief Executive Officer
and
Chairman of the Board of Directors

POWER OF ATTORNEY

Know all persons by these presents that each individual whose signature
appears below constitutes and appoints Joe E. Kiani and Bradley Langdale and
both of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462 promulgated under the Securities Act, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on the 12th day of September, 2000,
below by or on behalf of the following persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ JOE E. KIANI Chairman of the Board, Chief Executive Officer
--------------------------------------------------- and President (Principal Executive Officer)
Joe E. Kiani

/s/ MOHAMED DIAB Chief Technical Officer and Director
---------------------------------------------------
Mohamed Diab

/s/ BRADLEY LANGDALE Executive Vice President, Finance (Chief
--------------------------------------------------- Financial Officer and Secretary)
Bradley Langdale

/s/ ROBERT COLEMAN, PH.D. Director
---------------------------------------------------
Robert Coleman, Ph.D.

/s/ JACK LASERSOHN Director
---------------------------------------------------
Jack Lasersohn

/s/ H.J.C. SWAN, M.D., PH.D. Director
---------------------------------------------------
H.J.C. Swan, M.D., Ph.D.

/s/ EDWARD CAHILL Director
---------------------------------------------------
Edward Cahill
</TABLE>

II-7
<PAGE> 100

REGISTRATION STATEMENT
SIGNATURE PAGE AND POWER OF ATTORNEY
(CONTINUED)

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ FREDERICK A. ROBERTSON, M.D. Director
---------------------------------------------------
Frederick A. Robertson, M.D.
</TABLE>

II-8
<PAGE> 101

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2 Certificate of Amendment of Certificate of Incorporation, as
currently in effect.
3.3 Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering.
3.4 Amended and Restated Bylaws, as currently in effect.
3.5 Amended and Restated Bylaws to be effective upon the closing
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Arter & Hadden LLP as to legality of securities
being registered.
10.1+ Purchasing and Licensing Agreement, dated September 9, 1997,
between Atom Medical Corporation and Masimo.
10.2+ Restated Purchasing and Licensing Agreement, dated August
19, 1997, between Datascope Corp. and Masimo.
10.3+ Purchasing and Licensing Agreement, dated April 17, 1997,
between Zoll Medical Corporation and Masimo.
10.4 Loan and Security Agreement, dated April 9, 1999, between
Comerica Bank -- California and Masimo.
10.5 Employment Agreement, dated May 4, 1996, between Joe E.
Kiani and Masimo.
10.6 Amendment to Employment Agreement, dated April 2, 1998,
between Joe E. Kiani and Masimo.
10.7 Employment Agreement, dated May 4, 1996, between Mohamed
Diab and Masimo.
10.8 Amendment to Employment Agreement, dated April 2, 1998,
between Mohamed Diab and Masimo.
10.9 Standard Industrial/Commercial Single-Tenant Lease, dated
April 25, 1997, between Hoffman Associates No. 5 and Masimo.
10.10+ Cross-Licensing Agreement, dated May 2, 1998, between Masimo
Laboratories and Masimo.
10.11 Amendment to Cross-Licensing Agreement, dated March 20,
2000, between Masimo Laboratories and Masimo.
10.12 Fifth Amended and Restated Registration Rights Agreement,
dated September 14, 1999, between Masimo and the parties on
the signature pages thereto.
10.13 Form of Indemnification Agreement to be entered into between
Masimo and its officers and directors.
10.14 Incentive Stock Option Nonqualified Stock Option and
Restricted Stock Purchase Plan -- 1989.
10.15 Amendment No. 1 to Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan -- 1989.
10.16 Third Amended and Restated 1996 Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase
Plan.
10.17 Amendment Number One to Third Amended and Restated 1996
Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan.
10.18 2000 Employee Stock Purchase Plan.
23.1* Consent of Arter & Hadden LLP (included in their opinion
filed as Exhibit 5.1)
</TABLE>
<PAGE> 102

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 Consent of PricewaterhouseCoopers, LLP
23.3 Consent of Knobbe, Martens, Olson & Bear LLP
24.1 Power of Attorney (included in signature page hereto)
27.1 Financial Data Schedules
</TABLE>

---------------
* To be filed by amendment.

+ Confidential treatment has been requested with respect to certain provisions
of this agreement.